3) Recall the index-linked GIC that we discussed in class. The GIC has a maturity of...
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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?
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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
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