Consider the equity-linked CD example in Section 15.3. a. What happens to the value of the CD
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a. What happens to the value of the CD as the interest rate, volatility, and dividend yield change? In particular, consider alternative volatilities of 20% and 40%, interest rates of 0.5% and 7%, and dividend yields of 0.5% and 2.5%.
b. For each parameter change above, suppose that we want the product to continue to earn a 4.3% commission. What price participation, γ, would the CD need to have in each case to keep the same market value?
Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...
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