Question: a explain the difference between american and european options b...
a. Explain the difference between American and European options.
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?
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?