Mars buys shares that pay out 5 million Dogecoin if there is not a coup
Suppose the prior implied probability of a regime change is 0.20. Mars can buy its shares for 1 million Dogecoin, pocketing a risk-free net utility equivalent to 4 million Dogecoin.
I’m confused—if the prior probability of a coup is 20% and Mars is buying shares that pay out if no coup, Mars would pay 4M?
A prior implied probability of 20% that there will be a coup means Mars would pay 0.2 for shares that pay out 1.0 if there is a coup. Multiply both sides of the equation by M (1 million). It costs Mars 0.2M to buy shares that pay out 1M if there is a coup. Multiply both sides of the equation by another 5. It costs Mars 1M to buy shares that pay out 5M if there is a coup.
If Mars pays 1M to buy shares that pay out 5M if there is a coup then Mars pockets 5M − 1M = 4M.
I’m confused—if the prior probability of a coup is 20% and Mars is buying shares that pay out if no coup, Mars would pay 4M?
A prior implied probability of 20% that there will be a coup means Mars would pay 0.2 for shares that pay out 1.0 if there is a coup. Multiply both sides of the equation by M (1 million). It costs Mars 0.2M to buy shares that pay out 1M if there is a coup. Multiply both sides of the equation by another 5. It costs Mars 1M to buy shares that pay out 5M if there is a coup.
If Mars pays 1M to buy shares that pay out 5M if there is a coup then Mars pockets 5M − 1M = 4M.
Yes, but you said they’re buying the no-coup shares, which subsidizes a coup. Article contradicts itself.