Question: A principal-protected note is being offered by a bank. For this product, by investing the face value of $1000, the investor can receive any gains

A principal-protected note is being offered by a bank. For this product, by investing the face value of $1000, the investor can receive any gains equivalent to the increase in the value of the overall stock market above a gain of 10%, and if the value of the market increases by less than 10% the investor will receive the principal of $1000 back.

You are given the following characteristics: Six years to maturity

Risk-free rate of 4%

Underlying asset (stock or stock market) volatility of 18%

An expected dividend yield of 1.40%

Considering the value of the embedded option, what is the value of this principal-protected note?

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