Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Question 4 (10 points) You saw an advertisement on the website of ABC Bank about a new product called Best Protection Deposits. The information about

image text in transcribed

Question 4 (10 points) You saw an advertisement on the website of ABC Bank about a new product called Best Protection Deposits. The information about the product is listed below: Deposits Required 1080 Guaranteed Interest rate (EAR) 0% Equity Linked XYZ Inc. Strike 90 Time to Maturity 1 The product does not pay an interest to the deposits. However, if the stock price of XYZ Inc. is higher than the strike price, investor will be able to use the deposits to buy XYZ Inc. with the strike price. If the stock price of XYZ Inc. drops below the strike price, then the investors can get back their deposits. (a) Find out the payoff of the investor at 1 year later if i. Share price of Banana Inc. (Si)=110. ii. Si=60 iii. Draw the payoff diagram of the investment product (y-axis: payoff of the investor, x-axis: Si) (b) What is the option (call or put) embedded in Best Protection Deposits? What is the position (long or short) of the option? (c) Given that the risk-free interest rate is 4% p.a. effectively. Find out the value of the option premium (per option) embedded in Best Protection Deposits. Assume each option give you the right to buy sell 1 unit of stock. (Hint: You may consider a replicating portfolio method.) Question 4 (10 points) You saw an advertisement on the website of ABC Bank about a new product called Best Protection Deposits. The information about the product is listed below: Deposits Required 1080 Guaranteed Interest rate (EAR) 0% Equity Linked XYZ Inc. Strike 90 Time to Maturity 1 The product does not pay an interest to the deposits. However, if the stock price of XYZ Inc. is higher than the strike price, investor will be able to use the deposits to buy XYZ Inc. with the strike price. If the stock price of XYZ Inc. drops below the strike price, then the investors can get back their deposits. (a) Find out the payoff of the investor at 1 year later if i. Share price of Banana Inc. (Si)=110. ii. Si=60 iii. Draw the payoff diagram of the investment product (y-axis: payoff of the investor, x-axis: Si) (b) What is the option (call or put) embedded in Best Protection Deposits? What is the position (long or short) of the option? (c) Given that the risk-free interest rate is 4% p.a. effectively. Find out the value of the option premium (per option) embedded in Best Protection Deposits. Assume each option give you the right to buy sell 1 unit of stock. (Hint: You may consider a replicating portfolio method.)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Fundamentals Of Corporate Finance

Authors: Stephen A Ross, Randolph W Westerfield, Bradford D Jordan

7th Edition

0073134295, 9780073134291

More Books

Students also viewed these Finance questions

Question

What are the costs of shortages? Describe them.

Answered: 1 week ago

Question

Be relaxed at the hips

Answered: 1 week ago