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Spotting the option. Think of it this way.

Whatever happens to Australian share prices, depositors under your scheme get back their initial investment of $A100 at the end of the year. If share prices rise by y percent, they also receive a bonus of .5y ( $A100. For example, if prices rise by 10 percent, the bonus is .5 ( .10 ( $A100 = $A5. If share prices fall, depositors do not receive any bonus. Thus

Share prices fall Share prices rise by y%

Repayment of deposit $A100 $A100

Bonus zero .5y ( $A100

The key questions are: Is this a good deal for Gibb Bank depositors? If it is, can we afford to offer it to them? We can answer these questions by considering an alternative investment strategy that generates the same results. Valuing the option. Suppose an investor buys a 1-year call option on the market index with an exercise price equal to its current level. Lets call the current level of the index 100. The payoff on this call option is:

Share prices fall Share prices rise by y%

Payoff on call zero y (( $A100

In other words, the bonus payment on the equity-linked deposit is exactly half the payoff on an option to buy the market index at its current level of 100. Now it is easy to see how to value the equity-linked deposit. Value is equal to the present value of $A100 received at the end of the year plus half the present value of a call option. To value the payment of $A100, we simply discount at the current interest rate. For example, if the interest rate is 5

Mini -Case : Bruce Honiball Whatever happens with the Australian share prices , customers will get their deposits back at the end of the year. Rising stock prices by y % , they will also receive a " bonus" of 0.5 y x deposit. Example : Deposit of AUD 100 10 % price rise Back 100 + 100 x 0.5 x 0.10 = AUD 105 Example : Deposit of AUD 100 10 % fall Back AUD 100 If we distinguish between deposits ( customer irrespective get left ) and bonus ( as the customer get only if the market rises and equals 0.5 x rise ), we can see the bonus as an option: Falling market option is worthless , ladders alone, nor is it in the money by 0.5 y x AUD 100 The value of the deposit linked to the stock market is nerdien of the deposit that you receive whatever the end of the year and the present value of the option. The value of the deposit after one year is AUD 100 discounted at the interest rate of 5.9 % : AUD 100/ 1059 = AUD 94.43 . To appreciate the option , we use the Black Scholes Option Pricing Model C = N ( d1 ) - PV (K ) x N ( d2 ) with the following assumptions: Index : 100 Utvningspris call option: 100 Interest rate: 5.9% Time: 1 year Volatility : 15.67 % To calculate the volatility we started the return in the australeske market over the last 20 years . The average yield was 12.48 % . The variance Var ( R) = t = 1TRt - Ravg2 = 2.46% and the standard deviation / volatility = Var ( R) = 15.67 % . With these assumptions, the option is worth AUD 9.37 . Only half of this value , the customer . This means that the value of the deposit linked to the stock market is equal to 94.43 + 0.5 x 9.37 = AUD 99.12 . For each AUD 100 deposit will thus customer receive AUD 99.12 for one year .

Bank NPV of the deposit will be + 100-99.12 = AUD 0.88 . The defined contribution plan is thus profitable for the bank, but not the customer. To hedge position the bank can invest the present value of the deposit (AUD 94.43 ) in safe government securities yields the risk- free interest rate ( 5.9%) , so that we can pay back the deposit (AUD 100 ) a year Other solution
Bruce, Creo que puedes ser un ganador con los depositos asociados a renta variable aun que mis calculus sugieres que o podemos darnos el lujo de ser tan generosos con lo que propones. La opcion que tu propones, esta basada en depositos a rena variable, piensalo de esta manera: Pase lo que pase con el precio de las acciones Australians los depositantes bajo tu esquema van a recuperar su inversion inicial de 100 a finales de ano, si los precios en X% tembien reiben un bono y sus 100 dolares. Ademas de todo eso Bruce, hay que tener en cuenta el valor de la opcion. Vamos a suponer que un inversionista compra una opcion de ejercicio igual a su nivel actual. Llamaremos el el nivel actual del index 100. En otras palabras, el pago del bono en el deposito vinculado a acciones es exactamente la mitad del pago de una opcion para comprar el indice de Mercado en su nivel actual de 100. El valor de lo anterior es igual al valor presente de $100 recibida en el extremo del ano mas la mitad del valor actual de una opcion de compra. Para valorar el pago de $100,simplemente se descuenta en la tasa de interes del pago es 100/1.05que es igual a 95.24. Entonces, para poder valorar la opcion de compara. Utilizaremos la romula black Scholes. Inputs El nivel actual del index 100 Precio del ejercicio de opcion de compara 100 Tasa de interes del 5% Plazo 1 ano Volatilidad del index 25% (porcentaje estimado segun la desviacion estandar de los retornos de los utlimos anos.) Utilizando la formula sabemos que la opcion de compra tiene un valor de %12.28, por lo tanto, el valor del deposits es de 95.24 + (12.28*0.5)=101.38

Si esta estimacioin es correcta, estariamos ganando 100 de los depositantes ofreciendoles acombio una inversion por valor de 101.38, en otras palabras, cada uno de los depositos de 100, tendria un vpn para nosotros de %1.38 Ah! Tendriamos un VPN De $1.38 por inertidos! Que Buena noticia ! Pero Sheila, Como podemos reducer el riesgo? Mira Bruce, esto dependera de como invirtamos el dinero de los depositantes. Analizando la deuda del gobierno australino, me di cuenta de que nos proporcionaria un ambiente seguro con un retorno de alrededor del 5% pero no nos protegera si los precios e las acciones se disparan Y nos abligarian a pagarles grandes bonos a los depositantes.

English.. Bruce, I think you can be a winner with the deposits associated with equities even suggest that my calculus it or can afford to be so generous with what you propose. The option that you propose, is based on variable rena tanks, think of it this way: Whatever the price of the stock happens Australians depositors under your scheme will recover their initial investment of 100 at the end of year, if prices are reiben Tembien X% bonus and $ 100. Bruce Besides all that, we must take into account the value of the option. Let's assume that an investor buys a call option exercise equal to its current level. Call the current level of 100 index. In other words, the payment of the deposit bonus shares is linked to exactly half of the payment of an option to buy the market index at its current level of 100. The value of this is equal to the present value of $ 100 received at the end of the year plus half the current value of a call option. To rate payment of $ 100, simply deducts the interest rate payment is 100/1.05que equals 95.24. So in order to assess the option compare. We use the Black Scholes Romula. Inputs The current level of the index 100 Exercise price of option compared 100 Interest rate 5% Term 1 year Volatility index 25% (estimated according to the standard deviation of returns of years tlimos percentage.) Using the formula we know that the call option has a value of 12.28%, therefore, the value of the deposits is 95.24 + (12.28 * 0.5) = 101.38 Estimacioin If this is correct, we would be winning 100 acombio depositors by offering an investment worth 101.38, in other words, each of the reservoirs 100, would have a vpn for us to 1.38%

Ah! We would have a NPV $ 1.38 From $ 100 invested filth! That is good news! But Sheila, How can the risk reducer? Look Bruce, this will depend on how we invest the money of depositors. Analyzing australino government debt, I realized that we would provide a safe environment with a return of around 5% but will protect us if the prices and shares soar And abligarian us to pay large bonuses to depositors.

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