Your brother-in-law works at a credit union and he just sold you a principal-protected note for $10 000. He explained to you that this investment is actually made up of:

1. One 10-year zero coupon bond with a principal value of $10 000. The current yield to maturity is 4% per year (continuously compounded).

2. Three 10-year European call options on a stock index. Those options are currently exactly at-the-money and the current index level is 1800. The premium is $761.56 per option.

a) What is the profit of this sale for your brother-in-law?

b) What is the index level required at expiration for you to realize an effective annual return of 8% on your investment?