What is the minimum amount that you would accept

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Question - Suppose that you own an asset with the following characteristics: after two years the asset will pay you either $10,000,000 or $2,000,000. Each outcome is equally likely and payoff is guaranteed (e.g., the asset is backed by the government).

1: Assume you decide to hold the asset for two years and sell the asset just before the payoff is revealed. (Holding the asset is not at all risky since the asset is guaranteed by the government.) Based on what you know today, what is the minimum amount that you would accept in exchange for the asset just before the payoff is revealed?

2: Assume instead that you decide to sell the asset now, when it still has two years to 'maturity'.  What is the minimum acceptable selling price to you?

Reference no: EM133106839

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