alternative volatilities

1. Compute ? if the dividend on the CD is 0, the initial price is $1300, and the payoff is $1200 + ? × max(0, S5.5 – 1300).
2. Consider the equity-linked CD example in Section 15.3.
a. What happens to the value of the CD as the interest rate, volatility, and dividend yield change? In particular, consider alternative volatilities of 20% and 40%, interest rates of 0.5% and 7%, and dividend yields of 0.5% and 2.5%.
b. For each parameter change above, suppose that we want the product to continue to earn a 4.3% commission. What price participation, ? , would the CD need to have in each case to keep the same market value?