Suppose the 3 year interest rate is 2% with continuous compo…
Suppose the 3 year interest rate is 2% with continuous compounding, meaning that $1,000 exp(-0.02×3) = $941.76 with grow to $1,000 in 3 years. Suppose a stock portfolio is worth $1,000 with a 3-year European call option on it with an exercise price of $1,300 can be purchased at $58.24. Use the given information, explain how you construct a principal protected note worth $2,000 with zero-coupon bonds and call options. What are the returns of such investment if the the stock portfolio is $1,000, $1,200, and $1,400 at the end of the third year, respectively?