Learn / Library / Market making

Colour revealed

Market makingEasy

One card is drawn from a well-shuffled standard $52$ -card deck. A contract pays $10$ dollars if the card is a heart and $0$ otherwise. You learn that the card is red. What is the new fair value in dollars?

Checking an answer needs JavaScript. The hint and the solution open without it.

Hint

Among red cards, what fraction are hearts?

Solution

The deck has $26$ red cards, of which $13$ are hearts.
Given red, the probability of a heart is $\frac{13}{26} = \frac{1}{2}$ .
The new fair value is $10 \times \frac{1}{2} = 5$ .

Answer: $5$

Next question Back to the library