A firm decides to issue the following contract, to raise funds. The contract promises to pay 1,000 times the price of oil in 5 years time, or $40,000, whichever is higher. However, a cap of $60,000 is placed on the payout.

a) Plot the payout of the contract offered as a function of the price of oil in 5 years.

b) Show how the value of this contract can be represented by positions in oil and in options. Clearly define the terms of each of these options.