Consider a five-year zero-coupon cash-and-call position on


Question: Consider a five-year zero-coupon cash-and-call position on the S&P 500 index that has an initial cost of $1,000 and offers $1,000 principal protection (ignoring counterparty risk). The product's payout will be the greater of $1,000 and $1,000∗(1 + r), where r is the total return (non-annualized) of the underlying index over the five-year life of the product. If the riskless market interest rate is 5% (compounded annually), what is the value of the call option and the cash that replicates this product as a cash-and-call strategy (ignoring dividends)? Assuming that the position is efficiently priced and that the riskless market interest rate is 5% (compounded annually), the present value of the minimum $1,000 payout is $783.53. Thus, the cash position at the start of the investment is $783.53. The remaining value of the structured product ($216.47) is attributable to the call option with a strike price of $1,000.

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Finance Basics: Consider a five-year zero-coupon cash-and-call position on
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