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A 5.5-year bank CD promises to repay initial invested amount plus 70% of the gain in S&P 500 index. Assume $1M is invested when S&P
A 5.5-year bank CD promises to repay initial invested amount plus 70% of the gain in S&P 500 index. Assume $1M is invested when S&P 500 = 1300.
What is the final payoff formulation?
Sketch the payoff vs. S&P 500 index value.
Evaluate your solution to be equivalent to purchasing a ZC + N call option contracts. Determine N, the call option number of contracts, contract premium & strike price.
Assume r=6%
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