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# Risk-neutral probability

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At time 0.5, the price of \$1 par of a zero maturing at time 1 will be either \$0.96 or \$0.98. The risk-neutral probability of the each outcome is 50%. The current price of \$1 par of a zero maturing at time 0.5 is 0.97.

Time 0 Time 0.5
1
Zero maturing at time 0.5 0.97 0.96
Zero maturing at time 1 ?
1
0.98
What is the price at time 0 of the zero maturing at time 1 in the absence of arbitrage?
Multiple choice question. Pick one answer.

Question: Which of the two zeroes above has the higher true expected return from time 0 to time 0.5?

Answer 1: The 0.5-year zero.
Answer 2: The 1-year zero.
Answer 3: They have the same true expected return.
Answer 4: There is not enough information provided to tell.

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\$2.19