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Problem 4 Consider a world with two states of nature State 1 and State 2 at each date t. This means that at each point

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Problem 4 Consider a world with two states of nature State 1 and State 2 at each date t. This means that at each point in time the economy can either be in State 1 or in State 2. The following matrix gives the one-period Arrow-Debreu prices (at each date t) Time t +1 State 1 State 2 0.45 0.51 0.43 0.49 Timet State 1 State 2 For example, assume that at time t we are in State 1. Then, the price at time t of an Arrow Debreu security paying 1 unit at time t + 1 if State 2 occurs is 0.51. Similarly, assume that at time t we are in State 2. Then, the price at time t of an Arrow Debreu security paying 1 unit at time t+1 if State 1 occurs is 0.43. Construct the term structure of interest rates over three periods, from t to t +3. Problem 4 Consider a world with two states of nature State 1 and State 2 at each date t. This means that at each point in time the economy can either be in State 1 or in State 2. The following matrix gives the one-period Arrow-Debreu prices (at each date t) Time t +1 State 1 State 2 0.45 0.51 0.43 0.49 Timet State 1 State 2 For example, assume that at time t we are in State 1. Then, the price at time t of an Arrow Debreu security paying 1 unit at time t + 1 if State 2 occurs is 0.51. Similarly, assume that at time t we are in State 2. Then, the price at time t of an Arrow Debreu security paying 1 unit at time t+1 if State 1 occurs is 0.43. Construct the term structure of interest rates over three periods, from t to t +3

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