An oil company has zero coupon notes outstanding that mature one year from now. That is, each note promises to make a single payment of $1000 one year from now with no coupon payments between now and then. Unlike ordinary zeros, the note also promises investors a bonus payment equal to 15 times the amount by which the prevailing oil price on the maturity date exceeds $60 per barrel (for example, if the oil price is $62 at maturity, the holder receives $1000 plus 15 x $2 or $1030 in all; if the price of oil is below $60, the holder receives only $1000). The oil companys investment bankers estimate that the oil company could instead have issued a conventional one year zero at a yield of about 8%. Suppose also that investors are convinced that the price of oil one year from now will be either $50 or $70 per barrel. Annual risk free rate is 3% and the current oil price per barrel is $60.

a) Explain how you could characterize each note as a combination of a conventionalzero coupon note and an option. What kind of option is it, and who owns the option?