You hold a stock with price $100 that can increase by 10% or decrease by 10% m a year. The interest rate is 5%

a) Suppose that you want to ensure that you'll get a minimum of $I00 in a year regardless of the evolution of the

stock price. Which derivative security will you have to purchase to ensure that your financial position will be at least $100 m

a year? Be precise

(Note You are allowed to purchase just one derivative securin' Please describe the simplest securin' that allows you to get a

minimum of $100 regardless of what happens to stock X Also, please ignore the cost of purchasing such securin', i.e.,

assume that in a year you want to have $100 gross of the cost of acquiring such securin'. )

b) Value the derivative securin' described in a).

c) Suppose that there is no derivatives market but that bonds and the stock can be traded (and short-sold if needed).

Design a portfolio position in stock and T-bills that ensures you a payoff similar to the derivative securin' described in a)