State Prices

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• The Arrow-Debreu Price for a state
  • the present cost of obtaining $1 if and only if that state occurs

• One-period
  • two states
  • two prices

• n-period outcomes
  • 2ⁿ states
  • 2ⁿ prices (but not all different)
  • price for $1 in ending state s = P_s