Capital One is an investment bank domiciled in New York, United States. On November 9th, 2018,Capital One considers offering its customers a principal-guaranteed structured productoffering exposure to the U.S. stock market. The structured note will be offered at the price of 1,000.00 U.S. dollars. If the management accepts the product idea, the note will be offered to its customers on December 3rd, 2018, and it will mature in one year, i.e., on December 3rd, 2019. Upon maturity, the principal value will be repaid, and the customers will receive a coupon payment amounting to 25% of the return on the S&P500 index. For example, if the return on S&P500 is 20%, the customers will receive 1,000.00 USD + 25%*20%*1,000.00 USD = 1,050.00 USD. Furthermore, the principal of the note will be guaranteedfor the customers. As a result, even if the S&P500 records a negative return, the customers will be repaid the full 1,000.00 USD.

What is the market value of the option built into the product? Please estimate its value using any method you want. Please explain what model you use and attach it (e.g., the Excel file) along with the responses to these questions. If you use some public online tool, please provide screenshots of the model along with the relevant website link. Please explain and justify all the inputs to the option pricing model you use.

TIP #2: If necessary, you may find the relevant historical data, such as historical risk-free rates, U.S. LIBOR rates, and the S&P500 values, at the FRED website (https://fred.stlouisfed.org/).

TIP #3: You may treat the embedded option strategy as if it was based on an artificial asset with the strike price = market price = 1,000.00 USD, and the volatility equal to the volatility of the S&P500 index.

TIP #4: The product may assume buying multiple options or a fraction of an option. For example, if the product offers you 200% of the asset return, it may contain two options. On the other hand, 50% of the return on some asset may mean that the product has only half of an option.