A bank offers a $100 certificate which redeems a variable amount after 5 years calculated as follows: $108and: $+1.08 for every percent that XYZ index went up, or: -$1.08 for every percent that XYZ index went down. For example, if XYZ index goes up 10% over 5 years, the certificate reddems 108+1.08*10= 118.80. If XYZ index goes down 5%, the certificate redeems 108-1.08*5=102.6. Note that fractions of percentage points are allowed, and that the certificate may redeem less than $100.
Q: a. draw the redemption amount of the certificate as function of index performance (percentage change) PLZ indicate all remarkable values on your axes.
b. In what market scenario would the certificate redeem $120? what is the corresponding annualized return on investment(with annual compounding)?
c. what is the max theoretical loss on the certificate ?
d. using the information below calculate the profit made by the bank on each $100 certificate. plz show and explain. - The IR is 5% p.a, i.e a $1 deposit grows to $1.05 after one year. - The current price of XYZ index is 20$ - The 5-year forward price of XYZ index is $21.60.