I. Physics, Mathematics and finance: Bachelier and the Brown-movements » More!
II. Game: How much does the” FAIN IT!” token worth? » More!
III. Options » More!
IV. Options positions » More!
V. Price fluctuation on the financial markets » More!
VI. Buying volatility, sending volatility » More!
VII. Covering the options undertaking » More!
VIII. The pricing of options » More!
IX. Some edification » More!
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II. Game: How much does the” FAIN IT!” token worth?
Let's check our willingness to take the risk! At the beginning of the game each player gets a yellow, green or blue token. Depending on whether the coin is head or tail the players will gain the sum of money written on the token (-1 means that the player must pay the sum!). The anticipated sum is 1 for every token.
2nd illustration
Before throwing the players can change coins between each other. The majority of people prefer the yellow token and the least preferred is the blue one. The hedgers are those how would mostly change to yellow ones (in order to minimize their risks), and the speculators search for the papers that have the highest risk. (2nd illustration).
Before the throw the price of the yellow token is 1. Let us assume that the price of the blue one is S, which is a little smaller than 1. The lower purchase price shows a surplus yield. Its aim is to have the investor take the risk. Let's take a look at the next illustration! Is it possible that the prices shown be there at the same time?
3rd illustration
The answer is: no. If a married couple had a yellow and a blue token, they would leave with the same amount of money as those who have two green ones. With the prices shown before the first token-pair worth's 1,7 when the other 1,8. In this case an investor who is on the ball could have the following idea: he buys the blue and the yellow tokens from the first couple for 1,7, and then sells to the other for 1,8. This investor is an arbitrager: he acquires profit by purchasing and selling something at the same time. 1,8-1,7=0,1 is the windfall. That is why the title of this site is windfall.
4th illustration
Prices of the same positions should be equal as well. We will use this reasoning in some other situations as well.
5th illustration
The blue token would be more attractive if there was given a pink one with it, with writing on it:” FAINT IT!” (I get out of the game), and the other players were obliged to accept it. The pink token gives us a guarantee that we won't suffer the unpleasant consequences while taking a bigger risk with the blue one. Obviously, we wouldn't get out of the game – by using our saving token – until the coin falls on its “good” side.
