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Suppose someone offers you the following gamble: You pay $7 and toss a coin. If the coin comes up heads, he pays you $10, and if tails comes up, he pays you $5. You in turn get the idea of offering another person a coin toss in which he pays you $7 and tosses another coin. You tell him that if heads comes up, you will pay him $9, and if tails comes up, you will pay him $5. You think you see an opportunity to earn an arbitrage profit by engaging in both transactions at the same time. Why is this not an arbitrage opportunity? How could you make it one assuming that you could get two people to engage in these gambles?

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Financial Management, Finance

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