11. (You are a president) It is August 6 You are the president of a small electronics company The company has some cash reserves that will not be needed for about 3 months, but interest rates are very low. Your chief financial officer (CFO) tells you that a progressive securities firm has an investment that guarantees no losses and allows participation in upward movements of the stock market. In fact, the total rate of return until the third week of November is to be determined by the formula max(0, 25r), where is the rate of return on the S&P 100 stock index during the 3-month period (ignoring dividends). The CFO suggests that this conservative investment might be an ideal alternative to participation in the interest rate market and asks for your opinion. You pick up The Wall Street Journal and make a few simple calculations to check whether it is, in fact, a good deal. Show these calculations and the conclusion Use the data in Table 12.1 (Note that 410c denotes a call with strike price 410.)

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TABLE 12.1 Data for the President S&P 100 index Options S&P index = 414.74 Nov 410c 13 Treasury bills Nov 410p 8 Nov 12: yield = 3.11 Nov 420c 7/ Nov 420p 11 Source: Standard & Poor's, a division of the McGraw-Hill Compa- nies Reprinted with permission