FBE559.slides.07

# Example hedging usc football risk suppose you are

This preview shows page 1. Sign up to view the full content.

This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Before we get to this, lets see how we can apply the two-period binomial pricing idea in other settings. Example: Hedging USC Football Risk Suppose you are considering buying a permit to sell USC Trojan t-shirts at the Rose Bowl game in January 2014. It will cost you \$1000 to buy the permit and you must decide now. If USC makes it to the Rose Bowl, you ﬁgure that you will make a proﬁt of \$5500 selling t-shirts. However, if USC does not make it to the game, you will only make \$500. USC has a decent chance to make the game, and a reputable betting house is oﬀering 3:1 odds so that you can bet \$100 in order to win \$400. Alternatively, you can put your money into a savings account and get 0% interest. Do you: 1 Buy the permit 2 Don’t buy the permit 3 It depends on what you feel the chances are for USC making the game Example: Hedging USC Football Risk The payoﬀs for the permit, bet, and savings look like: Permit: 1000 5500 500 Bet: 0 400 -100 Save: 100 100 100 If we short-sell 10 bets on USC (∆ = 10), we fully hedge our risk. We will...
View Full Document

{[ snackBarMessage ]}

Ask a homework question - tutors are online