A Financial Institute (FI) offers investors a deposit instrument that guaranteed the instrument buyer a 6-month...

 

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A Financial Institute (FI) offers investors a deposit instrument that guaranteed the instrument buyer a 6-month return which will be the greater of (a) zero and (b) 40% of the return on a specific Index. The annual risk-free rate is 8% with continuous compounding; the Index pays 3% annual dividend payout ratio; the Index return VOL is 25%. Describe the cash flow of the above instrument as an option on the index. An investor invests $100,000 in the instrument. Calculate the current value of this instrument to the investor. A Financial Institute (FI) offers investors a deposit instrument that guaranteed the instrument buyer a 6-month return which will be the greater of (a) zero and (b) 40% of the return on a specific Index. The annual risk-free rate is 8% with continuous compounding; the Index pays 3% annual dividend payout ratio; the Index return VOL is 25%. Describe the cash flow of the above instrument as an option on the index. An investor invests $100,000 in the instrument. Calculate the current value of this instrument to the investor.

Answer rating: 100% (QA)

Answer To describe the cash flow of the instrument as an option on the index we can break it down in... View the full answer