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The 10-year CD promises to repay initial invested amount plus 70% of the gain in S&P 500 index. Assume $1000,000 is invested when S&P 500
The 10-year CD promises to repay initial invested amount plus 70% of the gain in S&P 500 index. Assume $1000,000 is invested when S&P 500 is 1300.
a. What is the final payoff assuming S&P 500 grows on average 8.5% per year?
b. Plot the payoff vs. S&P 500 index value.
c. Is the portfolio equivalent to a ZC plus a call option? If so, what is the price of the ZC plus the number of shares of the call option contracts.
d. Create a revised version of the portfolio such that the payoff would be at least 20% higher.
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