Question
A friend tells you he is interested in a market-linked GIC (MLGIC) offered by Canadian Bank of the Empire. This MLGIC has the following terms
A friend tells you he is interested in a market-linked GIC (MLGIC) offered by Canadian Bank of the Empire. This MLGIC has the following terms
It is a 3 year non-redeemable product
A guaranteed return of 2%
It allows you to fully participate in the return (price appreciation) of the TSX 60 index up to 13%
The current level of the TSX 60 index is 950.33. The index has a dividend yield of 1.5% and its volatility (standard deviation of returns) is 16%.
Canadian Bank of the Empire also offers a plain vanilla 3 year non-redeemable GIC that pays 2% p.a. Assume a $1,000 investment and a risk free rate of 1.1%.
(Do not round intermediate calculations. Round your final answers to 2 decimal points. Use the BS calculator excel spreadsheet I provided you with where necessary.)
a. The Answer plain vanillaMLGIC product dominates the Answer MLGICplain vanilla product
by Answer dollars.
b. If the MLGIC had a 50% participation rate (that is you only got 50% of the price appreciation over 2%) and no maximum upside, the value of the MLGIC would be Answer dollars.
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