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?
