A friend tells you he is interested in a market-linked GIC (MLGIC) offered by Canadian Bank...

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A friend tells you he is interested in a market-linked GIC (MLGIC) offered by Canadian Bank of the Empire. This MLGIC has the following terms • It is a 3 year non-redeemable product • A guaranteed return of 2% • It allows you to fully participate in the return (price appreciation) of the TSX 60 index up to 13% The current level of the TSX 60 index is 950.33. The index has a dividend yield of 1.5% and its volatility (standard deviation of returns) is 16%. Canadian Bank of the Empire also offers a plain vanilla 3 year non-redeemable GIC that pays 2% p.a. Assume a $1,000 investment and a risk free rate of 1.1%. (Do not round intermediate calculations. Round your final answers to 2 decimal points. Use the BS calculator excel spreadsheet I provided you with where necessary.) a. The plain vanilla product dominates the MLGIC product by b. If the MLGIC had a 50% participation rate (that is you only got 50% of the price appreciation over 2%) and no maximum upside, the value of the MLGIC would be dollars. dollars. A friend tells you he is interested in a market-linked GIC (MLGIC) offered by Canadian Bank of the Empire. This MLGIC has the following terms • It is a 3 year non-redeemable product • A guaranteed return of 2% • It allows you to fully participate in the return (price appreciation) of the TSX 60 index up to 13% The current level of the TSX 60 index is 950.33. The index has a dividend yield of 1.5% and its volatility (standard deviation of returns) is 16%. Canadian Bank of the Empire also offers a plain vanilla 3 year non-redeemable GIC that pays 2% p.a. Assume a $1,000 investment and a risk free rate of 1.1%. (Do not round intermediate calculations. Round your final answers to 2 decimal points. Use the BS calculator excel spreadsheet I provided you with where necessary.) a. The plain vanilla product dominates the MLGIC product by b. If the MLGIC had a 50% participation rate (that is you only got 50% of the price appreciation over 2%) and no maximum upside, the value of the MLGIC would be dollars. dollars.

Answer rating: 100% (QA)

a To compare the two products we need to calculate the expected return of the MLGIC If the TSX 60 index returns less than or equal to 2 the MLGIC return is 2 If the TSX 60 index returns between 2 and ... View the full answer