Binary Payout Fair Value

Under risk-neutral zero-rate pricing, fair value is simply the expected payoff.

Compute $0.6\times 100+0.4\times 0$.

1. 1. Apply risk-neutral pricing

   With zero interest rates, fair value equals the expected payoff: $E[\text{payoff}]=0.6(100)+0.4(0)$.

   $$E[\text{payoff}]=0.6(100)+0.4(0)=60$$

2. 2. Conclude

   The fair value of the contract is $\text{\$}60$.

Answer: $60