How is it zero expected value if the corporation doesn’t get to use their knowledge in the bet? If the true chance that they pay is P and they have to pay as if it is 0, they lose money proportional to (P−0) (I think).
I don’t understand what you mean. Specifically, I don’t understand what you are using ‘0’ for.
If the chance of paying is p, then the betting odds will reflect this with the assumption that the market is reasonably efficient.
For a simple fixed rate bet, for each dollar the company stakes, they win an additional p/(1−p) if they don’t payout over the time period (again assuming betting odds reflect the underlying probability).
Expected value (for the 1 dollar bet) is then:
(1−p)∗(p/(1−p))−p∗1=0
Of course, there is possibility for adverse selection/asymmetric information which could make the market somewhat less efficient.
How is it zero expected value if the corporation doesn’t get to use their knowledge in the bet? If the true chance that they pay is P and they have to pay as if it is 0, they lose money proportional to (P−0) (I think).
I don’t understand what you mean. Specifically, I don’t understand what you are using ‘0’ for.
If the chance of paying is p, then the betting odds will reflect this with the assumption that the market is reasonably efficient. For a simple fixed rate bet, for each dollar the company stakes, they win an additional p/(1−p) if they don’t payout over the time period (again assuming betting odds reflect the underlying probability).
Expected value (for the 1 dollar bet) is then: (1−p)∗(p/(1−p))−p∗1=0
Of course, there is possibility for adverse selection/asymmetric information which could make the market somewhat less efficient.