1. At time t=0 Mr. Anderson sets up a riskless portfolio by taking a position in an option and in the underlying asset. Explain what Mr. Anderson needs to do at time t=1 to keep his portfolio risk neutral and why.

(5 marks)

2. A stock price is currently $100 and at the end of four months it will be St . A derivative written on this stock pays off [St^(1/3)] in four months. Given that u = 1.15, d = 0.87, and that the risk-free interest rate is 10% p.a. (continuously compounded), answer the following questions using a one-period binomial model (show all the details of your calculations and display the results with four decimal places):
   1. Calculate the value of

(5 marks)

2. Calculate the current value of the derivative.

(5 marks)