3) Recall the index-linked GIC that we discussed in class. The GIC has a maturity of...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
3) Recall the index-linked GIC that we discussed in class. The GIC has a maturity of 3 years and its payoff per a $100 investment is as follows. Suppose the S&P/TSE 60 is currently 800. For an investment of $100, you'll get: TSE 60 in 3 years (IT) Less than 800 800 ≤ (IT) ≤ 1,040 Greater than 1,040 Payoff $100 $100+ {100-[(IT-800)/800]} = $100+ 0.125.(IT-800) $130 Suppose that the TSE 60 index follows a geometric Brownian motion with an expected return of 8% p.a. and a standard deviation of 20% p.a. Suppose also that the dividend yield on the index is zero (i.e., no dividend), and that the risk-free rate is 4% p.a. for all terms. (a) (3 points) Is this GIC fairly priced? (b) (2 points) What is the real-world probability that the payoff in 3 years will be greater than $100 but less than $130? 3) Recall the index-linked GIC that we discussed in class. The GIC has a maturity of 3 years and its payoff per a $100 investment is as follows. Suppose the S&P/TSE 60 is currently 800. For an investment of $100, you'll get: TSE 60 in 3 years (IT) Less than 800 800 ≤ (IT) ≤ 1,040 Greater than 1,040 Payoff $100 $100+ {100-[(IT-800)/800]} = $100+ 0.125.(IT-800) $130 Suppose that the TSE 60 index follows a geometric Brownian motion with an expected return of 8% p.a. and a standard deviation of 20% p.a. Suppose also that the dividend yield on the index is zero (i.e., no dividend), and that the risk-free rate is 4% p.a. for all terms. (a) (3 points) Is this GIC fairly priced? (b) (2 points) What is the real-world probability that the payoff in 3 years will be greater than $100 but less than $130?
Expert Answer:
Answer rating: 100% (QA)
Step 11 a Yes this GIC is fairly priced b The realworld probabilit... View the full answer
Related Book For
Advertising & IMC Principles & Practice
ISBN: 978-0132163644
9th Edition
Authors: Sandra Moriarty, Nancy Mitchell, William Wells
Posted Date:
Students also viewed these accounting questions
-
Suppose a bond has a maturity of 3 years, annual coupon payments of $5, and a face value of $100. a. If the interest rate is 4 percent, is the price of the bond higher or lower than the face value?...
-
A firm's bonds have a maturity of 10 years with a $1,000 face value, have an 11% semiannual coupon, are callable in 5 years at $1,183, and currently, sell at a price of $1,328.89. What is their...
-
A newly issued bond has a maturity of 10 years and pays a 7% coupon rate (with coupon payments coming once annually). The bond sells at par value. a. What are the convexity and the duration of the...
-
Determine the force in member GC of the truss and state if this member is in tension or compression. Units Used: kip = 103 lb Given: F1 = 1000 lb F2 = 1000 lb F3 = 1000 lb F4 = 1000 lb a = 10 ft =...
-
Breeze Toothpaste Company has been having a problem with some of the tubes of toothpaste leaking. The tubes are packed in containers with 100 tubes each. Ten containers of toothpaste have been...
-
What translation method should be used for a subsidiary that operates in a highly inflationary environment? Why?
-
Environmental Concerns Limited (ECL) issued \$500,000 of 10-year, 6\% bonds payable at maturity (par) value on May 1, 2008. The bonds pay interest each April 30 and October 31, and the company ends...
-
Presented below is information related to Farr Company. Retained earnings, December 31, 2010 ............. $ 650,000 Sales ........................... 1,400,000 Selling and administrative expenses...
-
Taking a look at the current real estate development environment, please read: Tishman Speyer announced that it has acquired The Eddy, a recently-constructed, high-rise apartment tower located on the...
-
A special case of a normal family is one in which the mean and the variance are related, the n(, ) family. If we are interested in testing this relationship, regardless of the value of , we are again...
-
What information from the banking and insurance department on a producer is available to the public? What represents a reduced paid-up non-forfeiture option? A group life face amount is sometimes...
-
List a few times when you had trouble communicating with someone. Do you see a pattern? Consider language, cultural, attitudinal, emotional, and other barriers described in the chapter. Which...
-
A friend, Janet, has accepted a job as the general manager of a local company. During a meeting you attended, an accountant mentioned to Janet that she would be responsible for internal control...
-
A petty cash fund of $100 was established on 1 June 2016 by Green Ltd. Disbursements were made during June as follows: Reimbursement cheques were drawn on 16 June and 30 June.Prepare journal entries...
-
List the main components of internal control.
-
Dragon Designs Ltd had the following general ledger accounts for last year, using the T-account format. All the company's sales are on credit to retail stores across the country. The first amount in...
-
INCOME STATEMENT Net sales Membership & other income Total revenues Cost of sales Gross Margin Selling, general & administrative expenses Operating Income BALANCE SHEET Assets Cash & cash equivalents...
-
Wholesalers Ltd. deals in the sale of foodstuffs to retailers. Owing to economic depression, the firm intends to relax its credit policy to boost productivity and sales. The firms current credit...
-
Draw up a list of guidelines to use in designing a website.
-
What is a print ad layout? What are the most common types of layouts?
-
What role does targeting, branding and positioning play in the development of message strategy?
-
What are the main advantages and disadvantages that should be considered when deciding between a sole proprietorship and a partnership?
-
Do you think that accounting reports should be understandable to those who have not studied accounting?
-
To illustrate this last point, let us assume that a manager has to sell a custom-built machine owned by the business and has recently received a bid for it. This machine is very unusual and there is...
Study smarter with the SolutionInn App