Assume that securitization combined with borrowing and irrational exuberance in

Question

Assume that securitization combined with borrowing and irrational exuberance in Hyperville have driven up the value of existing financial securities at a geometric rate, specifically from $4 to $8 to $16 to $32 to $64 to $128 over a six-year time period. Over the same period, the value of the assets underlying the securities rose at an arithmetic rate from $4 to $6 to $8 to $10 to $12 to $14.

If these patterns hold for decreases as well as for increases, by how much would the value of the financial securities decline if the value of the underlying asset suddenly and unexpectedly fell by $10?

PLease help i really dont get it..

Explanation / Answer

The right answer is :

From the pattern in the value of assets and securitiesIf asset value falls from $7 by $5, it has a value of 7-5 = $2at the asset value of $2, the security is valued at 2$So security will fall from 64 to 2This would be by 64-2/64 *100% = 96.875%

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