Risks For Five Year Plan

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Plan description In 2010, there is a large investment house company that wants to launch an aggressive campaign to encourage long-term stock investments among private UK investors. This defined returns plan draws attract investors who look for higher returns than available in deposit accounts, but also want to be concerned that at least the capital that they invested could be repaid. In general, this plan provides with different investment terms over four, five, six years, whose returns are 24%, 37.5%, and 45% respectively. At the end of each term, investors could get a fixed return if the level of the FTSE 100 index is not lower than the level on 11 January 2010 (initial index level). Note that the level index should use closing…show more content…
In other words, it is better to grasp some information about product’s issuer in case of the firm may go bankrupt in the future. After all, this security contract will expire after five years. Opportunity cost risk. Briefly, individuals could not withdraw a plan easily before maturity date because not all of the capital will be refund. Therefore, people cannot reinvest if a good project appears and the yield of the new one is the opportunity cost for investors. Liquidity risk. It means that an asset cannot be traded rapidly enough in the market to avoid a loss. Obviously, investors could get back the money if they could sell the plan as quick as possible, otherwise they will make a great loss especially when expiration date is approaching. Inflationary risk. When inflation happens, it will undermine the performance of investment. The capital will be shrink since actual return is not as high as the nominal return. Although investors will receive money on maturity, the asset would be depreciated. The types of option Based on different characteristics about plans, four years and six years plan should be cash or nothing option and barrier option respectively. Note that there are two assumptions: 1. Investors will not withdraw plan before maturity, so this option is European option 2. This is a call option because investors hope that final index is greater than initial index. That is, the calls could offer profits when
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