In June 1999, Charles Schwab offered investors an Equity-linked Certificate of Deposit (CD).

This product offered:

(i) A guaranteed minimum repayment of invested amount($10000) plus $200 at the end of

5 years

(ii) plus, 75% of the simple appreciation in the S&P 500 index over that time (during the 5years from investment) on the invested amount, should the index appreciate.

In other words, in addition to preserving the principal invested, this product allows the investor to participate in any appreciation of the stock market in the next 5 years, without penalizing her for any market downturn. Suppose the S&P 500 index is 1500 at the time you invest $10000 in the CD. Also, assume the annual effective interest rate to be 6%.

a) Break this product down in terms of a portfolio of lending and options. Put another way, identify what kind of (and how many) options are embedded in this product.