Accelerated Return Notes provide payoffs at maturity that depend on the value of an under- lying...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Accelerated Return Notes provide payoffs at maturity that depend on the value of an under- lying stock and the notional N. Assume the stock pays no dividends. If the ending value of the underlying is below or at the starting value the note will pay Nx ending value starting value If the ending value is greater than the starting value then the payoff is given by ending value starting value] starting value min x 1.2, N + N x 2 x (a) Draw the payoff diagram for the Accelerated Return Note and explain the payoff profile in your own words. Use a notional of N=100 and an initial value of the underlying of $50. The maturity of the note is in one year. (b) If the only options traded on the underlying are European calls, how would you replicate the payoff? (c) How would you replicate the note if only European puts were available? (d) Now assume that the underlying stock has a volatility of 35% the (continuously compounded) risk-free rate is given by r = 1%. What is the price of the note in the Black-Scholes-Merton model? (e) Note: If you need values for any other parameters to answer the questions below, make reasonable assumptions and justify these. Simulate the payoff of the Accelerated Return Note in the Black-Scholes-Merton model. Use at least 10,000 simulations of the stock price. What is the average return of investing in the note, as well as the standard deviation of the returns. (f) Using your simulation output, is it more risky to invest into the note than to invest into the stock itself? Justify your answer using your simulation output. (g) Using your simulation output, what is the probability that the return of the note is 20%. Accelerated Return Notes provide payoffs at maturity that depend on the value of an under- lying stock and the notional N. Assume the stock pays no dividends. If the ending value of the underlying is below or at the starting value the note will pay Nx ending value starting value If the ending value is greater than the starting value then the payoff is given by ending value starting value] starting value min x 1.2, N + N x 2 x (a) Draw the payoff diagram for the Accelerated Return Note and explain the payoff profile in your own words. Use a notional of N=100 and an initial value of the underlying of $50. The maturity of the note is in one year. (b) If the only options traded on the underlying are European calls, how would you replicate the payoff? (c) How would you replicate the note if only European puts were available? (d) Now assume that the underlying stock has a volatility of 35% the (continuously compounded) risk-free rate is given by r = 1%. What is the price of the note in the Black-Scholes-Merton model? (e) Note: If you need values for any other parameters to answer the questions below, make reasonable assumptions and justify these. Simulate the payoff of the Accelerated Return Note in the Black-Scholes-Merton model. Use at least 10,000 simulations of the stock price. What is the average return of investing in the note, as well as the standard deviation of the returns. (f) Using your simulation output, is it more risky to invest into the note than to invest into the stock itself? Justify your answer using your simulation output. (g) Using your simulation output, what is the probability that the return of the note is 20%.
Expert Answer:
Answer rating: 100% (QA)
a Payoff diagram for the Accelerated Return Note The payoff diagram for the Accelerated Return Note is shown below The payoff profile is as follows If the ending value of the underlying stock is below ... View the full answer
Related Book For
Investment Analysis and Portfolio Management
ISBN: 978-0538482387
10th Edition
Authors: Frank K. Reilly, Keith C. Brown
Posted Date:
Students also viewed these accounting questions
-
In your own words and using various bond websites, please locate one of each of the following bond ratings: AAA, BBB, CCC, and D. Please describe the differences between the bond ratings. Identify...
-
The estate tax is a tax on the value of property transferred at death. Why is payment of the estate tax not a common event?
-
The following table gives the value of an investment, after intervals ranging from 0 to 7 years, of $20,000 invested at 10%, compounded annually. (a) Develop an exponential model for these data,...
-
The objective of this problem is to design and develop a program for Huffman coding algorithm. The discrete source has an alphabet X = {x1, x2, x3, x4, x5, x6, x7, x8, x9} with corresponding...
-
Reynolds Computer Service offers data processing services to retail clothing stores. The following data have been collected to aid in the preparation of adjusting entries for Reynolds Computer...
-
If you were able to choose the type of incentive pay system your company offered, would you choose an individual, a group, or an organization wide incentive plan? Why?
-
The T accounts below summarize the ledger of Padre Landscaping Company at the end (it the Erst month of operations. Instructions (a Prepare the complete general journal entries (including...
-
Assume that Masters Enterprises uses the following headings on its balance sheet. (a) Current assets. (b) Investments. (c) Property, plant, and equipment. (d) Intangible assets . (e) Other assets....
-
Your company makes outdoor furniture from scratch - that is to say, you currently make all components for the furniture from their raw materials ( sheet metal, paint, nuts & bolts, etc. ) Component "...
-
The operations manager at Sebago Manufacturing is considering three proposals for supplying a critical component for its new line of electric watercraft. Proposal one is to purchase the component,...
-
Sarah has five nonfiction and six fiction books on her reading list When packing for her summer vacation, she decides to pack at least two nonfiction books and at least one fiction book How many...
-
Joshua is traveling to Europe this summer. He wants to take the appropriate precautions to minimize any losses should there be any circumstances that would affect his trip. Joshua's mom has been ill,...
-
Receive 10 annual payments of $1,000; the first payment of $1,000 is made in one year (t=1). Plus receive one "balloon" payment of $25,000 in ten years (t=10). If the interest rate is 15% (EAR), what...
-
Fintech Berhad has requested a RM50 million, 7 years loan from a local bank. The bank is willing to lend on a floating rate at 3-month KLIBOR+1%. Assume the loan will have to be serviced quarterly...
-
- Elaborate on other application layer protocols that are suitable to IoT and how do they compared to HTTP? - List some other HTTP methods and what they are used for. - How are GET/POST command is...
-
Goal Apply kinematics to horizontal motion with two phases. hs SOLUTION Problem A typical jetliner lands at a speed of 160 mi/h and decelerates at the rate of (10 mi/h)/s. If the plane travels at a...
-
Address the following questions in your response: What are the essential elements within the structure of a hypothesis? What are the essential elements within the structure of a research question? Wha
-
What is the order p of a B + -tree? Describe the structure of both internal and leaf nodes of a B + -tree.
-
Specify the major components for the calculation of economic value added. Describe what a positive EVA signifies.
-
Discuss the two major factors that determine the market nominal risk-free rate (NRFR). Explain which of these factors would be more volatile over the business cycle.
-
On February 1, you bought 100 shares of stock in the Francesca Corporation for $34 a share and a year later you sold it for $39 a share. During the year, you received a cash dividend of $1.50 a...
-
Pathgoal theory considers that leadership characteristics are modified by what factors?
-
Why did people not obey Angie initially? Angie was an exceptional catheterization laboratory technician who was respected by her teammates. When the director of the cath lab took another job, Angie...
-
How is servant leadership an extension of transformational leadership?
Study smarter with the SolutionInn App