What is the profit of the investment bank on the product

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An investment bank is marketing a savings deposit where if an investor puts in $X for 2 years, there is a guarantee of a minimum yearly compounded return rate of 1%. Over the same 2 years, if the stock market index has risen by a positive total return rate of Y%, then the investor will receive at maturity $ X max ( [1+Y%] , 1.012 ). At the same time, the market is selling a 2-year European put on the stock market index with strike price 2040.2 at $20. At maturity, the payoff on this put option is $ max (0, 2040.2 - index at end of 2 years). Current market stock index is 2000. A forward contract on this market index that matures in 2 years is priced at $2040. The payoff for a long position on this forward contract at the end of 2 years is $ index at end of 2 years - 2040. A risk-free zero coupon bond for 2 years maturity is selling at 95%. What is the profit of the investment bank on this product in terms of X?

Reference no: EM13868145

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