An investor wishes to purchase a floating-rate bond that pays a coupon rate equal to LIBOR. However, she is worried that interest rates are going to fall, leading to her receiving a lower coupon payment. How could the investor trade a cap or a floor to ensure that her coupon rate never falls below 5%? Should the investor be long or short this derivative?

3. [15 points] A stock price is currently $100. In any year, the price can increase by a factor of 1.10, or fall by a factor of 0.90. The stock pays no dividends. Find the value of a European put option with strike price 105 and time to expiration of two years. The risk-free rate is 5%.

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