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YKU Corp. wants to invest its cash surplus of $20 million in a GIC (certificate of deposit) for a period of 6 months (this
YKU Corp. wants to invest its cash surplus of $20 million in a GIC (certificate of deposit) for a period of 6 months (this can be seen as lending money to the bank with no default risk). The best GIC rate that it could find is 2.20% continuously compounded (note that this is not necessarily the risk-free rate). The company's treasurer has asked you to explore the possibility of creating a synthetic lending transaction. As an option expert, you gathered the following information about the TSX index: Index level is 15,450 and its estimated dividend yield is 1.8%. 6-month European 15,400-strike call sells at $410. 6-month European 15,400-strike put sells at $280. Based on the above observations, will YKU Corp. be better off with the GIC or the synthetic lending? Show all details and explain clearly your steps. (4 marks)
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