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Assignment_6_Answers - Assignment 6 Answers Johnson...

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Assignment 6 Answers Johnson Graduate School of Management Equity Derivatives and Related Products Due on November 9, 2010 Professor Mark Zurack Question 1 An Equity Linked Note is being offered with the following terms: Cost (Notional) - $100 Maturity – 6 years Coupon – 0 Index – S&P 500 Index on Trade Date – 100 Payoff at Maturity = If index closes below 100, 100, otherwise 100 plus Index Return times Participation Rate times 100 Participation Rate – 100% Index Return = (Index at Maturity / Index on Trade Date) - 1 For each $100 invested in the note, please answer the questions below assuming that the issuer’s 6 year financing rate is 5% (on an annually compounded basis); and the dividend yield on the S&P 500 is 2.0%. a) How much money is needed (per $100) by the issuer’s Treasury desk to provide principal protection? Answer: b) How much money was left to buy options assuming a Commission of 0.5% of Notional? Answer: 88 c) What was the implied volatility of the option? Please show all inputs into the options model used.
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