In the following situation, assume there are only two possible states in future and the prices of the two assets in future will be as shown. Today A1 = 60 A2=45, In Future State 1 A1 =90 A2 = 60 State 2 A1 =150 A2 = 100
Will the two prices come nearer to each other or the opposite ? Explain
In this situation, the prices of the two assets (A1 and A2) are currently quite far apart - A1 is priced at 60 and A2 is priced at 45. However, in the future states, the prices of both assets increase, with A1 increasing to 90 in State 1 and 150 in State 2, and A2 increasing to 60 in State 1 and 100 in State 2.
Based on this information, it can be inferred that the prices of the two assets will come closer to each other in the future. This is because even though both assets are increasing in price, the rate of increase for A1 is greater than the rate of increase for A2. As a result, the gap between the prices of the two assets will likely decrease over time.
In summary, the prices of the two assets will come nearer to each other in the future based on the given information.