An Investment Bank Has Come Up with a New Product

question 89

Essay

An investment bank has come up with a new product on the S&P 500 index.It offers an appreciation share,the owner of which is entitled to all price appreciation over 10% in the first two years and over 20% in the next three years after that.If the current index value is 250,the riskless rate is 8%,the dividend yield on the index is 3%,and the annualized standard deviation of the index is 20%,what is the value of this share? (Hint: There might be more than one option in this share.)

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Definitions:

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