Friday Afternoon Financial Problem

[donjuan]

A bank is offering you an 18.75% return on your deposit over an 18 month period. However, there is a catch. You only get the interest if the S&P 500 doesn't go up or down 20% over that 18 month period. If the S&P goes up or down more than that amount, you get your deposit back with no interest earned after the 18 month period. What is the expected annualized ROI for this investment?*

*Ignore default risk.

[SlickFazzer]

Why would a bank offer this? what bank?

[donjuan]

Come up with the answer and you'll see part of the reason why. The other reason would be that it acts as a hedge against volatility.

[SlickFazzer]

I need help DonJuan, i can't get it.

[donjuan]

Hint: take a look at the VIX.

[SlickFazzer]

Without pulling it up...i know volatility has been through the roof lately...