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4. Monte Carlo simulation] XYZ bank is going to offer a range accrual equity-linked structured deposit (RAD) to clients. The RAD is structured as follows.
4. Monte Carlo simulation] XYZ bank is going to offer a range accrual equity-linked structured deposit (RAD) to clients. The RAD is structured as follows. The contract will specify a reference interest rate (10% per annum compounded daily) a reference equity price (stock A) and a range (100% to 130% of the initial stock price). An interest payment will be paid to the depositor by the end of every 3 months but the amount is determined according to the number of days that the underlying equity price falls into the range. Specifically, Interest received = (principal) x -X Number of days in the range Total number of days in 3 months 4 By the end of every 3 months, there is an auto-call condition that if the underlying equity price falls below 90% of the initial asset price, then the contract is terminated and the deposi ted by the preceding formula; otherwise, the contract is carried forward to the next 3 months. When the contract rolls to maturity, then the depositor will give back the principle plus the accrual interest. The total horizon of the contract is 2 years. (a) What are the risks faced by the bank and the clients, respectively? (b) Give a simulation algorithm to determine the present value of this structured deposit. (c) [VBA] Implement your algorithm in VBA/EXCEL with 10,000 sample paths. We assume that the principal is $100, the continuously compounding risk-free interest rate is 3% per annum, the initial asset price is 100, the annualized volatility of the stock is 40% and 30 days a month. 4. Monte Carlo simulation] XYZ bank is going to offer a range accrual equity-linked structured deposit (RAD) to clients. The RAD is structured as follows. The contract will specify a reference interest rate (10% per annum compounded daily) a reference equity price (stock A) and a range (100% to 130% of the initial stock price). An interest payment will be paid to the depositor by the end of every 3 months but the amount is determined according to the number of days that the underlying equity price falls into the range. Specifically, Interest received = (principal) x -X Number of days in the range Total number of days in 3 months 4 By the end of every 3 months, there is an auto-call condition that if the underlying equity price falls below 90% of the initial asset price, then the contract is terminated and the deposi ted by the preceding formula; otherwise, the contract is carried forward to the next 3 months. When the contract rolls to maturity, then the depositor will give back the principle plus the accrual interest. The total horizon of the contract is 2 years. (a) What are the risks faced by the bank and the clients, respectively? (b) Give a simulation algorithm to determine the present value of this structured deposit. (c) [VBA] Implement your algorithm in VBA/EXCEL with 10,000 sample paths. We assume that the principal is $100, the continuously compounding risk-free interest rate is 3% per annum, the initial asset price is 100, the annualized volatility of the stock is 40% and 30 days a month
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