IBM stock is currently trading at $85 per share. How much is the fair price of an instrument, which pays $100 on the first day in the future when the price of IBM hits $100? (“Fair price” means a price which does not allow for arbitrage.) If the price of IBM never hits 100, the instrument never pays anything. Assume that interest rates and dividends are zero now and forever, and that you can go long and short anything you want, in any amount that you want, without any fees and transactions costs.
Explanation required and NOT simply the numerical answer, even if it is correct. Give as much detail as you can. You don’t need to consider any other instruments that may be traded in the market. Use the space below.Get Finance homework help today
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