We Wish to Cap Participation in a 3-Year Equity-Linked Option

question 17

Multiple Choice

We wish to cap participation in a 3-year equity-linked option at 50.0% return.Our profit alpha is 3.0%.The S&P 500 price = 950,div = 0.015,σ = 0.22,and interest rates are 4.8%.What is the implied participation rate?

• A) 0.66
• B) 0.76
• C) 0.96
• D) 1.16

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Definitions:

Consumer Debt

Debt that is incurred by an individual primarily for personal, family, or household purposes.

Bankruptcy Proceedings

The legal process through which individuals or entities unable to pay their debts can seek relief from some or all of their financial obligations.

Insolvent

The condition of being unable to pay debts as they fall due, or having liabilities that exceed assets.

Preferential Payment

A payment made to a creditor before bankruptcy that unfairly prioritizes that creditor over others, which can be reclaimed by the bankruptcy trustee.