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A deposit instrument offered by a bank guarantees that investors will receive a return during a six-month period that is the greater of (a) zero
A deposit instrument offered by a bank guarantees that investors will receive a return during a six-month period that is the greater of (a) zero and (b) 50% of the return provided by a market index. An investor is planning to put $50,000 in the instrument. Describe the payoff as an option on the index. Assuming that the risk-free rate of interest is 5% per annum, the dividend yield on the index is 2% per annum, and the volatility of the index is 20% per annum, what is the fair value of the product?
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