1. Accelerated Return Notes provide payoffs at maturity that depend on the value of an under-lying stock and the notional N . Assume the stock pays no dividends. If the ending value of the underlying is below or at the starting value the note will pay N (ending value/ starting value). If the ending value is greater than the starting value then the payoff is given by

min [N 1.2, N + N 2 ((ending value - starting value)/ starting value)] .

(a) Draw the payoff diagram for the Accelerated Return Note and explain the payoff profile in your own words. Use a notional of N = 100 and an initial value of the underlying of $50. The maturity of the note is in one year.