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There are two possible states of nature, s = 1, and s = 2, over the next period.There are two securities i and j) whose current prices are $10 and $15, respectively.Security i has a payoff of $10 in state s = 1, and $16 in state s = 2, while security j provides $25 in state s = 1 and $8 in state s = 2.
-What are the prices of the Arrow-Debreu securities in the two states?
A)0.25 in state s = 1 and 0.675 in state s = 2.
B)0.3 in state s = 1 and 0.6 in state s = 2.
C)0.4 in state s = 1 and 0.75 in state s = 2.
D)0.5 in state s = 1 and 0.3125 in state s = 2.
E)insufficient information.

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Quizplus · Accepted Answer

The Arrow-Debreu security prices can be found by solving the system of equations derived from the payoffs and current prices of the securities. Solving the equations: 10 = 10p1 + 16p2 and 15 = 25p1 + 8p2, we get p1 = 0.5 and p2 = 0.3125.

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