uw close is your calculated value to the traded price of the optu! b. Your answer to part() will not exactly match the traded price. Experime de price. Experiment with differ- ent values for the standard deviation until realelated values match the prices of the Faded options as closely as possible What are these implied volatilities? What do the implied volatilities say about investors forecasts of future volatility? MINI-CASE.... Bruce Honiball's Invention It was another disappointing year for Bruce Honiball, the manager of retail services at the Gibt River Bank. Sure, the retail side of Gibb River was making money, but it didn't grow at all in 2017. Gibb River had plenty of loyal depositors but few new ones. Bruce had to figure out som new product or financial service something that would generate some excitement and attention Bruce had been musing on one idea for some time. How about making it easy and safe for Gibt River's customers to put money in the stock market? How about giving them the upside of invest ing in equities-at least some of the upsidebut none of the downside? Bruce could see the advertisements now: How would you like to invest in Australian stocks completely risk-free? You can with the new Gibb River Bank Equity-Linked Deposit. You share in the good years, we take care of the bad ones. Here's how it works. Deposit A$100 with us for one year. At the end of that period, you get back your AS100 plus ASS for every 10% rise in the value of the Australian All Ordinaries stock index. But, if the market index falls during this period, the Bank will still refund your A$100 deposit in full There's no risk of loss. Gibb River Bank is your safety net. Bruce had floated the idea before and encountered immediate skepticism, even derision: "Heads they win, tails we lose is that what you're proposing, Mr. Honiball?" Bruce had no ready answer. Could the bank really afford to make such an attractive offer? How should it invest the money that would come in from customers? The bank had no appetite for major new risks. Bruce has puzzled over these questions for the past two weeks but has been unable to come up with a satisfactory answer. He believes that the Australian equity market is currently fully valued, but he realizes that some of his colleagues are more bullish than he is about equity prices Fortunately, the bank had just recruited a smart new MBA graduate, Sheila Liu. Sheila was sure that she could find the answers to Bruce Honiball's questions. First she collected data Australian market to get a preliminary idea of whether equity-linked deposits could work data are shown in Table 21.3. She was just about to undertake some quick calculation received the following further memo from Bruce: some quick calculations when she Chapter 21 Valuing Options 589 Sheila, I've got another idea. A lot of our customers probably share my view that the market is overvalued. Why don't we also give them a chanse to make some money by offering a "bear market deposit"? If the market goes un, they would just get back their ASICO deposit. If it goes down, they get their AS1OO back plus 55 for each 10% that the market falls. Can you figure out whether we could do something like this? Bruce. QUESTION 1. What kinds of options is Bruce proposing? How much would the options be worth? Would the equity-linked and bear-market deposits generate positive NPV for Gibb River Bank? Interest Year Rate Market Return Dividend Yield Market Return Dividend Yield Interest Rate 6.6 7.3 > TABLE 21.3 Australian interest rates and equity returns. 1995-2017 8.0% 4.0 20.2% 14.6 43 Year 2007 2008 2009 2010 4.1 1995 1996 1997 1998 1999 6.8 5.5 122 3.7 32 5.0 3.6 11.6 19.3 18.0 -404 39.6 3.3 -114 18.8 19.7 2011 2000 5.9 5.0 10.1 -8.1 15.9 2.8 2.5 4.6 2012 2013 2014 2015 2016 2017 2001 2002 2003 2004 2005 2006 2.1 5.4 27.6 21.1 1.8 1.5 3.8 11.6 12.5 3.8 3.8 5.9 25.0 uw close is your calculated value to the traded price of the optu! b. Your answer to part() will not exactly match the traded price. Experime de price. Experiment with differ- ent values for the standard deviation until realelated values match the prices of the Faded options as closely as possible What are these implied volatilities? What do the implied volatilities say about investors forecasts of future volatility? MINI-CASE.... Bruce Honiball's Invention It was another disappointing year for Bruce Honiball, the manager of retail services at the Gibt River Bank. Sure, the retail side of Gibb River was making money, but it didn't grow at all in 2017. Gibb River had plenty of loyal depositors but few new ones. Bruce had to figure out som new product or financial service something that would generate some excitement and attention Bruce had been musing on one idea for some time. How about making it easy and safe for Gibt River's customers to put money in the stock market? How about giving them the upside of invest ing in equities-at least some of the upsidebut none of the downside? Bruce could see the advertisements now: How would you like to invest in Australian stocks completely risk-free? You can with the new Gibb River Bank Equity-Linked Deposit. You share in the good years, we take care of the bad ones. Here's how it works. Deposit A$100 with us for one year. At the end of that period, you get back your AS100 plus ASS for every 10% rise in the value of the Australian All Ordinaries stock index. But, if the market index falls during this period, the Bank will still refund your A$100 deposit in full There's no risk of loss. Gibb River Bank is your safety net. Bruce had floated the idea before and encountered immediate skepticism, even derision: "Heads they win, tails we lose is that what you're proposing, Mr. Honiball?" Bruce had no ready answer. Could the bank really afford to make such an attractive offer? How should it invest the money that would come in from customers? The bank had no appetite for major new risks. Bruce has puzzled over these questions for the past two weeks but has been unable to come up with a satisfactory answer. He believes that the Australian equity market is currently fully valued, but he realizes that some of his colleagues are more bullish than he is about equity prices Fortunately, the bank had just recruited a smart new MBA graduate, Sheila Liu. Sheila was sure that she could find the answers to Bruce Honiball's questions. First she collected data Australian market to get a preliminary idea of whether equity-linked deposits could work data are shown in Table 21.3. She was just about to undertake some quick calculation received the following further memo from Bruce: some quick calculations when she Chapter 21 Valuing Options 589 Sheila, I've got another idea. A lot of our customers probably share my view that the market is overvalued. Why don't we also give them a chanse to make some money by offering a "bear market deposit"? If the market goes un, they would just get back their ASICO deposit. If it goes down, they get their AS1OO back plus 55 for each 10% that the market falls. Can you figure out whether we could do something like this? Bruce. QUESTION 1. What kinds of options is Bruce proposing? How much would the options be worth? Would the equity-linked and bear-market deposits generate positive NPV for Gibb River Bank? Interest Year Rate Market Return Dividend Yield Market Return Dividend Yield Interest Rate 6.6 7.3 > TABLE 21.3 Australian interest rates and equity returns. 1995-2017 8.0% 4.0 20.2% 14.6 43 Year 2007 2008 2009 2010 4.1 1995 1996 1997 1998 1999 6.8 5.5 122 3.7 32 5.0 3.6 11.6 19.3 18.0 -404 39.6 3.3 -114 18.8 19.7 2011 2000 5.9 5.0 10.1 -8.1 15.9 2.8 2.5 4.6 2012 2013 2014 2015 2016 2017 2001 2002 2003 2004 2005 2006 2.1 5.4 27.6 21.1 1.8 1.5 3.8 11.6 12.5 3.8 3.8 5.9 25.0