(Coin market) There is a market for bets on the outcome of a coin toss. The poss
ID: 1170588 • Letter: #
Question
(Coin market) There is a market for bets on the outcome of a coin toss. The possible outcomes are heads, tails, and edge. There are three assets traded in that market. Asset A pays $1 independent of the outcome. A:isci, B pays $1 50 for a head and $0 for lail:; aucl $ l if l bc (xin lands (? its odly. Asset C pays $10 if and only if the coin lands on its edge (and S0 otherwise). The prices of these assets are constant and fixed at S1. We assume that the payments to the winning bidders take place immediately after the outcome is determined. (a) What is the implied risk-free rate of return (for the length of time of the bid) in this market?Explanation / Answer
risk free rate of return means that rate of return which is independent of market conditions or outcomes.In the given case only assest A is given uniform return in the all the cases of outcomes that is HEAD,TAIL,OR EDGE there for return of aseet A IS imlied rate of return which is caluclated as under .
rate of retun= retun/investment*100 0/1*100=0%
working- 1) retun=inflow-outflow that is =1-1=0
2) investment=price of the asset that is 1$
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