1. Explain why a regular European call option is the sum of a down-and-out European call and a down-and-in European call. Is the same true for American call options?
2. What is the value of a derivative that pays off $100 in 6 months if the S&P 500 index is greater than 1,000 and zero otherwise? Assume that the current level of the index is 960, the risk-free rate is 8% per annum, the dividend yield on the index is 3% per annum, and the volatility of the index is 20%.