a) What is the meaning of complete markets? What is an Arrow security? Briefly explain how they work, in theory, to handle risk.

b) Suppose you are considering buying a share with price $100. Two states of the world are possible tomorrow: good and bad. You know that if tomorrow the state is good the share price will be $105; if the state tomorrow is bad the share price will be $98. What do you need to know in order to decide whether $100 is a fair price or not?

c) Two Arrow securities are available, the first paying one in the good state and zero in the bad state, tomorrow, while the second pays zero in the good and one in the bad state, again tomorrow. The current prices of the two Arrow securities are 40 cents and 60 cents respectively. What does this new information tell you and what can you say about the current share price?