Derivative Securities

A stock and a riskless bond are tradable assets. The stock price is currently $80. Over the next three-month period it is expected to go up by 10% in the "up" state or down by 10% in the "down" state. The risk-free interest rate is 10% per annum with continuous compounding A) A new asset X has $1 payoff in the "up" state and $0 payoff in the "down" state. Use the binomial tree model to determine the price of asset X. (2 marks) B) A new asset Y has $0 payoff in the "up" state and $1 payoff in the "down" state. Explain in detail how to use stock and riskless bond to replicate the payoffs of asset Y. {3 marks] C] What is the economic interpretation of the sum of prices of assets X and Y? {1 mark]