Describe the payoff as an option on the index

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A deposit instrument offered by a bank guarantees that investors will receive a return during a 6-month period that is the greater of (a) zero and (b) 40% of the return provided by a market index. An investor is planning to put $100,000 in the instrument.

Describe the payoff as an option on the index.

Assuming that the risk-free rate of interest is 8% per annum, the dividend yield on the index is 3% per annum, and the volatility of the index is 25% per annum, is the product a good deal for the investor?

Reference no: EM131237911

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