Mr. Bluespan believes that the recent market volatility will end soon and that equity markets are...

Transcribed Image Text:

Mr. Bluespan believes that the recent market volatility will end soon and that equity markets are close to perfectly priced. He does not expect prices to move much over the next 12 months, in fact, he doesn't see the major indices moving more than +/-5% over the next year. Mr. Bluespan has the bulk of his assets invested in t-bills yielding 0.5%, he would like to improve this yield and is not averse to putting some of his capital at risk so he seeks the advice of his bankers as to how he can improve the yield by buying equity- linked yield notes. a. Assuming you work for the bank, structure and discuss the details and workings of 3 significantly different yield notes that allow Mr. Bluespan to capitalize on his view of a stable equity market Support your answer with graphs and/or payoff formulas. (60 marks) b. Given the following potential underlying assets for each of the three notes proposed above, which underlying would you choose and why? Ticker Name S&P 500 SPX Advanced Micro Devices AMD Seagate Technology STX Costco COST Dividend Yield 1.60% 0.00% 3.70% 527 0.70% Price 4,230 104.8 87.1 1Y Implied Vol 24.5% 52.4% 45.1% 29.3% 1y Historical Return 7.3% 27.0% -7.1% 59.0% (20 marks) c. Which of these 3 solutions would you recommend and why? Take into account different elements including price, downside risk, upside potential, etc. (20 marks) Mr. Bluespan believes that the recent market volatility will end soon and that equity markets are close to perfectly priced. He does not expect prices to move much over the next 12 months, in fact, he doesn't see the major indices moving more than +/-5% over the next year. Mr. Bluespan has the bulk of his assets invested in t-bills yielding 0.5%, he would like to improve this yield and is not averse to putting some of his capital at risk so he seeks the advice of his bankers as to how he can improve the yield by buying equity- linked yield notes. a. Assuming you work for the bank, structure and discuss the details and workings of 3 significantly different yield notes that allow Mr. Bluespan to capitalize on his view of a stable equity market Support your answer with graphs and/or payoff formulas. (60 marks) b. Given the following potential underlying assets for each of the three notes proposed above, which underlying would you choose and why? Ticker Name S&P 500 SPX Advanced Micro Devices AMD Seagate Technology STX Costco COST Dividend Yield 1.60% 0.00% 3.70% 527 0.70% Price 4,230 104.8 87.1 1Y Implied Vol 24.5% 52.4% 45.1% 29.3% 1y Historical Return 7.3% 27.0% -7.1% 59.0% (20 marks) c. Which of these 3 solutions would you recommend and why? Take into account different elements including price, downside risk, upside potential, etc. (20 marks)

Answer rating: 100% (QA)

a As a bank representative I would propose the following three significantly different yield notes for Mr Bluespan to capitalize on his view of a stable equity market 1 Fixed Coupon EquityLinked Note ... View the full answer