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Case Study-CITIBANK EQUITY LINKED CD
Solution
In this present paper, we will discuss the newspaper advertisement of Citibank in which the bank promises for stock market returns with zero risk to principal. The paper describe the payoff to the investor, cost of the investor, comparison of Stock Index Insured Account with S&P 500 index fund and commercial deposits, reason of interest in product, risk exposure in offering the product, and difference between the option that truly underline the commercial deposit and options with simplifies version (Mahayni et al., 2015).
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The cost of buying the product is $10,000. The investors lose in investing stock index account as compassion to the commercial deposits includes long-term investment of five years whereas the commercial deposits have the range from one month to five years. The commercial deposits have fixed returns because of fixed interest rate whereas in the investment of Stock Index Insured Account the return is based on the stock market movement over the complete five years. The loss of investing in Stock Index Insured Account as a comparison to investing in S&P 500 Index Fund is that it does not include major economies of the Unites states, S&P 500 Index Fund comprises of several index funds which are not comprised in the Stock Index Insured Account.
The prime reason of attracting towards the investment in Stock Index Insured Account is zero risk of principal because the investors are risk averse so they don't want to take any risk, so the surety of principal attracts the consumers. Secondly, the percent of gain will be double with the growth of the stock market. Thirdly it helps to take advantage of long-term market trends. Fourthly there are no management fee and sales charges.
The risk exposure to the bank from offering Stock Index Insured Account product includes credit risk, systematic risk, and foreign currency risk. The bank can hedge the risk exposure through option, futures, real estate investment and others. The Citibank must offer such product in order to develop the habit of investment among the people . Secondly it helps the company to grow by investing the investor's fund in the large portfolio which helps to generate higher profits for the company and investors as well (Chan et al., 2013).
The fixed deposit options are the options which underline the commercial deposits. It is defined as the option in which the investor will receive the fixed rate of returns so the risk related to this option whereas in the simple options there is a call option and put option which is mainly used by the hedgers to hedge the risk (Miao et al., 2014). In the call option if the strike price is lower than the market price than it is the situation of in of the money, so the option will be executed whereas if the market price is lower than the strike price then the option will not be executed and if both the market price and strike price is equal then it is a buyer indifferent. In the put option if the strike price is higher than the market price then the option will be executed.
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Mahayni, A. B., & Muck, M. (2015). The Benefit of Life Insurance Contracts with Capped Index Participation When Stock Prices are Subject to Jump Risk. Available at SSRN 2667038.4
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Chan, K., Kot, H. W., & Tang, G. Y. (2013). A comprehensive long-term analysis of S&P 500 index additions and deletions. Journal of Banking & Finance, 37(12), 4920-4930.
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Miao, X. (2014). The Stability of Commercial Bank Deposits and Long-term Liquid Management. Management & Engineering, (16), 49.
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