Fair Value of a Binary Payoff

Fair value is the expected terminal value.

Weight each payoff by its probability.

1. 1. Expectation

   Weight the two outcomes.

   $$0.3(120)+0.7(80)=36+56=92$$

2. 2. Key idea

   Under the stated convention, fair value is just the expectation; risk aversion enters only through spreads and sizing.

Answer: 92