Hence if you price the 50% contract at any value other than ¥10 000, you can be arbitraged if you act on your preferences (neglecting transaction costs).
I don’t need to price (contract B, when I already have contract A) the same as (contract A, when I have nothing).
I haven’t done the math to see if this solves the problem or not – if the two willingnesses to pay have to sum to 20000, for any increasing utility function – but there must be a solution; expected utility shouldn’t ever produce circular preferences.
I don’t need to price (contract B, when I already have contract A) the same as (contract A, when I have nothing).
I haven’t done the math to see if this solves the problem or not – if the two willingnesses to pay have to sum to 20000, for any increasing utility function – but there must be a solution; expected utility shouldn’t ever produce circular preferences.