Suppose that a financial contract that promises to pay a from partyB to party A at maturity date T , and nothing before
date T where . The payoff may be positive or negative, i.e. the
contract may be either an asset or a liability to each party. All
calculations are from the perspective of party A.
At time T , there are a total of four () possible states shown in
Table 1. The risky value of the contract is the discounted expectation
of the payoffs and is given by the following proposition.
Proposition 3: The bilateral risky value of the
single-payment contract is given by