What is the price today of the zero maturing at time 1

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Reference no: EM132028466

At time 0.5, the price of $1 par of a zero maturing at time 1 will be either $0.97 or $0.99. Consider two other assets.

Asset A pays off $1 at time 0.5 if the price of the zero maturing at time 1 is $0.97 and pays off 0, otherwise.

Asset B pays off $1 at time 0.5 if the price of the zero maturing at time 1 is $0.99 and pays off 0, otherwise. The price today of Asset A is $0.48 and the price of Asset B is $0.49.

This information is summarized below.

a) What is the price today of the zero maturing at time 1 in the absence of arbitrage?

b) What is the price today of the zero maturing at time 0.5 in the absence of arbitrage?

c) What are the risk-neutral probabilities of the two possible time 0.5 values of the zero maturing at time 1?

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Reference no: EM132028466

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