Computing the Set of State Prices

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• Assume LLPW

• Properties of state prices
  • ln(P) = a - b*ln(W)
  • S_s P_s = 1 / 1.02¹⁰
  • S_s P_s *W_s = 1

• Solve non-linear equation to find a and b
  • determines the price for each state

• State prices can be used to value any set of payoffs in states