FRM Part I · FRM Exam Part I · Trading Strategies
An investor buys a 2-year principal-protected note with face value USD 10,000. The note pays the principal plus 80% of the percentage gain in an index, if positive. The index rises from 2,000 to 2,600 over the two years. What is the total payoff at maturity?
The payoff is USD 12,400. The index gains 30%, the note passes through 80% of that, which is 24%, giving USD 2,400 on the USD 10,000 face value, which is added to the returned principal.
- AUSD 12,400Correct
- BUSD 13,000
- CUSD 10,000
- DUSD 14,000
Explanation
Index gain = (2,600 − 2,000)/2,000 = 30%. Participation 80% gives 24%, so the gain is 0.24 × 10,000 = USD 2,400. Total payoff = 10,000 + 2,400 = USD 12,400. USD 13,000 uses 100% participation, ignoring the 80% rate.
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