the price of such an asset, assuming no-arbitrage. What is the riskless interest rate in this
c) Now suppose a riskless bond (say T-bills) yields an interest rate of 5% in the next
period when the dispute is solved. Is there an arbitrage opportunity? If the answer is yes,
outline how you would trade to exploit it.
For the last part of this problem, suppose the riskless bond in part c) no longer exists.
d) Suppose investors choose their portfolios to optimize their expected utility over wealth
in each state,
. Suppose also that the two states of the world are similar for investors
in the sense that they have the same wealth in each state. Given this information, can you
calculate investors±assessment for the probability that A will win the lawsuit? If your answer
is yes, calculate the probability. If your answer is no, explain why not.