Past exam of the mathematics course of the University of Cambridge / 2003 / iii / Paper 32 / 1 / a / ii / Solution

The same pricing relation gives $x^{\top }{A}_0\ge 0$ whenever the terminal payment is nonnegative. Therefore negative initial cost also contradicts a strictly positive state-price density, even if the terminal payment is identically zero.

This second form is needed for directions invisible in the terminal payments. Let $L$ be the linear span of the essential values of $A_1$, equivalentlyIf $A_0\notin L$, let $v$ be its nonzero orthogonal projection on $L^{\perp }$ and set $x=-v$. Then $x^{\top }{A}_1=0$ almost surely while $x^{\top }{A}_0=-\Vert v{\Vert }^2<0$. Hence the second form exists in this case. Part (b) handles all remaining cases.