Find the fair market value of one unit of gic

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Calls on a stock are selling for $25 (X= $ 110, T=1 year). Risk free rate is 10% per year. You are an investment banker and you want to sell a 'guaranteed investment contract (GIC)'. This is the newest fancy acronym of your creation. Such a package will allow the buyer to enjoy all the upside benefits of a stock while the downside is limited to $ 110. For example if buy 1 unit of GIC, and the stock price is say $ 200 (one year from today), will receive $ 200 for one unit of GIC. However, if the stock price is below $ 110 (one year from today), you provide a guarantee that will receive $ 110 for one unit of GIC. Your guarantee is iron-clad with zero risk of default. Ignore transaction costs, fees, commissions etc.

Problem 1: Find the fair market value of one unit of GIC.

Reference no: EM132912642

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