Question

Returning to a possible class quiz, Sue believes there will be a quiz and offers 3:2 odds, Torik does not and offers 3:1 odds. The odds Torik is offering are enticing, and you have $200 where you can afford to lose up to $20. Now, one possibility is to bet $20 only with Torik; if there is not a quiz, he wins and keeps your $20. If there is quiz, you win and he owes you $60. But, by hedging, you can bet more without incurring any greater risk. Explain what to do and how much you can earn if there is a quiz.

Answer 1

Answer and explanation:

The hedging strategy is one where an individual is able to hold two opposing positions such that he is able to protect either position from profit or loss as each move in opposite directions. For example in this situation, if Sue wants to hedge her bets here, she would need to place a bet that there will be a quiz and also place a bet that there will be no quiz. In this way she uses up to $40, $20 for no quiz and $20 for a quiz. If for instance it goes in Torik's favour and there is no quiz, Sue loses $20 but also gets that $20 back. If it goes in Sue's favour, then she makes $60