Ivan buys a fixed indexed annuity for $1,000 with the following features: In any year, if the return on the S&P500 is between 0% and 13%, Ivan's account gets credited with the actual return earned by the S&P 500. If the return on S&P500 is greater than 13% (the cap), Ivan's account gets credited with a 13%. On the other hand, if S&P 500 earns a negative return, Ivan's account gets credited with a 0% interest rate. Assuming S&P500 trades at 1,000 today. The insurance company that guarantees Ivan's money decides to buy an European call option with a strike price of $1,000 with an expiry date of 1 year from now. The premium for the call option is $20. If the S&P500 at the end of the year trades at $900 The call option is not exercised and the insurance company loses the call premium of $20 O The call option is exercised and the insurance company makes $500 gross profit (profit without considering the payment for the call premium)
Ivan buys a fixed indexed annuity for $1,000 with the following features: In any year, if the return on the S&P500 is between 0% and 13%, Ivan's account gets credited with the actual return earned by the S&P 500. If the return on S&P500 is greater than 13% (the cap), Ivan's account gets credited with a 13%. On the other hand, if S&P 500 earns a negative return, Ivan's account gets credited with a 0% interest rate. Assuming S&P500 trades at 1,000 today. The insurance company that guarantees Ivan's money decides to buy an European call option with a strike price of $1,000 with an expiry date of 1 year from now. The premium for the call option is $20. If the S&P500 at the end of the year trades at $900 The call option is not exercised and the insurance company loses the call premium of $20 O The call option is exercised and the insurance company makes $500 gross profit (profit without considering the payment for the call premium)
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Qd 232.
Transcribed Image Text:Ivan buys a fixed indexed annuity for $1,000 with the following features: In any year, if the return
on the S&P500 is between 0% and 13%, Ivan's account gets credited with the actual return
earned by the S&P 500. If the return on S&P500 is greater than 13% (the cap), Ivan's account
gets credited with a 13%. On the other hand, if S&P 500 earns a negative return, Ivan's account
gets credited with a 0% interest rate.
Assuming S&P500 trades at 1,000 today. The insurance company that guarantees Ivan's money
decides to buy an European call option with a strike price of $1,000 with an expiry date of 1 year
from now. The premium for the call option is $20. If the S&P500 at the end of the year trades at
$900
The call option is not exercised and the insurance company loses the call premium of $20
The call option is exercised and the insurance company makes $500 gross profit (profit without
considering the payment for the call premium)
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