a. Some banks have offered their customers an unusual type of time deposit. The deposit does not pay any interest if the market falls, but instead the depositor receives a proportion of any rise in the Standard & Poor's Index. What implicit option do the investors hold? How should the bank invest the money in order to protect itself against the risk of offering this deposit?
b. You can also make a deposit with a bank that does not pay interest if the market index rises but makes an increasingly large payment as the market index falls. How should the bank protect itself against the risk of offering this deposit?