Advanced Financial Management Individual Coursework- Optionality in Defined Returns Plan

Optionality in Defined Returns Plans?

 

We are in 2010. A large investment house is launching an aggressive campaign  to encourage  “long-term”  stock  investments  among  private UK  investors.  Using  information  from  the  quotes  and  catalogue sections  below  (herein  pp.3-6),  prepare  a  report  (in  no  more  than

2000 words) answering the following questions. Marks for the various parts of the report are indicated in parentheses.

 

 

 

1) Discuss the various risks involved if you’re an investor undertaking the 5 years defined returns plan.                                                               (15%)

 

2) Explain embedded (and type of) optionality, if any, for each of the 4 years and 6 years plans respectively.                                                      (20%)

 

3) Determine the value of the option embedded in the 4 years defined returns  plan,  discuss  input  parameters  and  explain  overall  approach (e.g. cite relevant literature, etc.).                                                           (45%)

 

4)  If  no  costs  are  incurred  by  existing  customers  at  contract origination,  under what conditions  will it be appropriate  to sell their 4 years defined returns plan before maturity assuming a 9.8% penalty is deducted from their original investment?                                               (20%)

 

Maximum word length excluding appendices containing spreadsheet results  and  calculations  is  2000  words.  The  submission  deadline  is

25th March 2015 at 15.30. Although you can work in groups, the assignment  will  be  marked on  an  individual  basis (i.e.  one  report

per person).

 

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