Question 2 only! Question 1 here for information. Thank you so much.

1. Marie Claire wants to buy a financial product linked to the potential market appreciation of the SPY ETF. The financial product (the ``note'') expires in 1 year. The payoff of the note is:

$100+$100 Min {max(()(0)1,0),0.10)} (1)

Here, S(T) is the value of SPY in one year, and S(0) is the value of SPY at inception (now). Sketch carefully the payoff as a function of the ratio S(T)/S(0). Show that the payoff consists of $100 in cash (like a bond), plus an additional ``coupon'', or payment, linked to the 1-year return of SPY capped at 10% of the notional amount (i.e. $10).

2. Show that the payoff proposed in problem 4 is the same of the payoff of cash plus a portfolio of 1-year European options on SPY. Describe the options in detail.