Group-stage contracts summing to less than two
Question
Four teams play in a group from which exactly two qualify. A contract on each team pays if it qualifies and otherwise. Prices: team 1 at , team 2 at , team 3 at , team 4 at . You can buy or sell any contract and buy or sell bonds paying , with zero interest. What up-front credit can you lock in with an arbitrage?
Short answer
. Holding one of every contract always pays exactly , so the four prices should total ; they total . Buy all four and short two bonds: you receive now, and the payoffs cancel at the end.
Adapted from QuantQuestions.io; question and answer rewritten by SelfMadeQuant.com.
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