1.4 Exercises from Mathematics of Finance: An Intuitive Introduction In the Olympic finals, only three teams are represented; USA, England, and China. Svetlana believes the USA will win and offers even odds of 1:1. Roberto is supporting England and is offering 2:1 odds. (So, if Engla
1.4 Exercises from Mathematics of Finance: An Intuitive Introduction
In the Olympic finals, only three teams are represented; USA, England, and
China. Svetlana believes the USA will win and offers even odds of 1:1. Roberto
is supporting England and is offering 2:1 odds. (So, if England wins, Roberto
keeps his money. If one of the other teams wins, Roberto pays $2 for each
dollar bet.) Finally, Jeff supports China as given by his 5:4 odds. Determine the
optimal way of dividing $100 to bet that ensures the largest winning.
A message from this example is that whenever exuberance causes individuals to offer strong odds, such as during a political campaign, arbitrage is
available. To see the arbitrage opportunities from this example, if a third of
the money is bet with each person, only one can win; the winnings from one
other bet cover the loss and winnings from the third are profit.
But this exercise, as with the gender example, also emphasizes the importance of understanding the provided information. When betting with one of
these individuals, such as Jeff, is the bet whether China will or will not win, or
does the bet require you to put forth a team and you win money only if your
team wins. The difference is huge; the intent is the first, but, as a challenge, can
the second be handled?
Thanks!
Trending now
This is a popular solution!
Step by step
Solved in 2 steps with 2 images
