If the asset price is less than 38, Peter will make a profit. The cost of setting up the bear spread is the net cost, which is the difference between the cost of the two options, i.e., USD 5 - USD 3 = USD 2. When the asset price is less than 35, the payoff is 40 - 35 = USD 5. After subtracting the cost of setting up the bear spread, we have a profit of USD 5 - USD 2 = USD 3. When the asset price lies between 35 and 40, the payoff is 40 - S (where S is the asset price). This payoff must be greater than 2 (the cost of setting up the bear spread) in order to make a profit. Therefore, when the asset price is less than 38, we have a profit of 40 - S - 2. Thus, Peter will make a profit when the asset price is less than 38.

Choice A is incorrect. Although the asset price being less than 40 would result in both options being in-the-money, it does not guarantee a profit for Peter. The total cost of the options is USD 8 (USD 3 + USD 5). Therefore, to realize a profit, the asset price must be sufficiently below USD 40 such that the combined payoff from both options exceeds this cost.

Choice C is incorrect. If the asset price lies between USD 38 and USD 40 at expiration, only one of Peter's put options (the one with a strike price of USD 40) will be in-the-money. The payoff from this option may not cover the total cost of both options (USD 8), resulting in a loss for Peter.

Choice D is incorrect. If the asset price is greater than USD 38 at expiration, neither of Peter's put options will be in-the-money and they will expire worthless. This means that he would lose his entire initial investment on purchasing these two put options.