| Investment Knowledge |
 |
 |
 |
 |
|
GIC Option A valuation model is presented for pricing a pool of GICs with an embedded redemption option. The model covers • pricing of a closed (non-redeemable) GIC, • penalty calculation for Redeemable and Premium GIC, • embedded option valuation, • numerical convergence of the embedded option pricing procedure. A closed GIC periodically pays a fixed coupon and pays the principal at maturity One month after inception till maturity (up to 7 years), the holder has an option to redeem the principal and accrued interest less a penalty based on the "call" rate specified by the exercise schedule; the schedule may include up to six contiguous windows with individual call rates. This GIC has three year maturity. During the two 30 day windows starting on inception anniversary dates, the holder has an option to redeem the principal and accrued interest less a penalty based on the call rates assigned to the respective windows. A one year maturity GIC whose holder has an option to redeem the principal and accrued interest without any penalty from one month after inception till maturity. If the holder chooses to redeem the GIC within the first 30 days after inception, a zero call rate is applied.
|