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Determine y% so that the time 0 value of the payoff in (1) is equal to P(i.e. break even). 4. An insurance company sells single
Determine y% so that the time 0 value of the payoff in (1) is equal to P(i.e. break even).
4. An insurance company sells single premium annuity contracts with return linked to a non-dividend paying stock index, the time-t value of one unit of which is denoted by S(t). The contracts offer a minimum guarantee return rate of g%. At time 0, a single premium of amount P is paid by the policyholder, and y% of P is deducted by the insurance company. Thus, at the contract maturity date T, the insurance company will pay the policyholder S(T) P(1-y%) . max (0 (why?) S(0) You are given the following information * The contract will mature in one year The minimum guarantee rate of return, g% = 3% S(0) = 100 and the price of a one-year European put option with strike price of $103 on the stock index is $15.21 Determine y% so that the time 0 value of the payoff in (1) is equal to P (ie, break even)Step by Step Solution
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