Two stocks S and Z are traded today at prices as indicated in the following table. In one year from now, the prices of these stocks may move to three states. The risk-free rate is 5 percent per year.

Security |
Time 0 |
Year 1 |
Security |
Time |
Year 1 |

$128 |
$125 |
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S |
$99.40 |
$110 |
Z |
$101.90 |
$106 |

$75 |
$92 |

- Compute the risk-neutral probabilities and state prices.
- A portfolio manager bought a call on S at a strike price of $105 and sold a put on Z at a strike price of $107. What is his net cash flow today? Compute the probability with which the call will be exercised. Compute the probability with which the put will be exercised.