1. a. Explain the difference between American and European options. (7 marks)

b. A 5-year bond has face value $1,000 (paid at maturity) and annual coupon rate 6% (paid in arrears at the end of the year). The yield-to-maturity is 5.5%. What is the duration of the bond? (9 marks)

c. You wish to create a financial instrument that has a payoff in 6 months' time equal to the maximum value of $2,000 and $2,000 + $0.5*(S&P Index in 6 months' time - 3,200). The 6-month call and put options with strike price 3,200 is trading at 120 and 110, respectively. What is the cost of your instrument?

1. a. Explain the difference between American and European options. (7 marks)

b. A 5-year bond has face value $1,000 (paid at maturity) and annual coupon rate 6% (paid in arrears at the end of the year). The yield-to-maturity is 5.5%. What is the duration of the bond? (9 marks) c. You wish to create a financial instrument that has a payoff in 6 months' time equal to the maximum value of $2,000 and $2,000 + $0.5*(S&P Index in 6 months' time - 3,200). The 6-month call and put options with strike price 3,200 is trading at 120 and 110, respectively. What is the cost of your instrument?