Consider an asset priced at 40 that can go up to 45 or down to

37.5 with probabilities 0.56 and 0.44, respectively. The risk-

free rate is 2.5%. Find the following:

a. The prices of the two pure securities that pay 1 unit of the

asset in each of the two states.

b. The price of an asset that will assure that you can buy the

asset at a price of 40.

c. The price of an asset that will assure you that you can sell

the asset at a price of 40