Citibank Equity Case

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Citibank Equity Case In the Citibank case, the bank intends to stock the market returns with a zero risk to the principal. There need to consider the implications of investing in SIIA. As such, the paper attempts to unveil the possible payoff that the investor will obtain, the costs that are likely to be shouldered by the investor, risk exposure associated with the investment, comparison of Stock Index Insured Account with S&P 500 index fund and commercial deposits and the differences between options that simplifies version and those that underline the commercial deposit.

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Going by our projections, the product is likely to be bought at about $9000. The commercial deposits may run for a time between one month and five years. The chances are high that the investors may end up losing their money when they invest in a stock index account. The commercial deposits are deemed to be long-term investments. An investment in Stock Index Insured Account will yield returns in line with the movement of the stock market for five years.

Fixed returns characterize the commercial deposits because of the fixed interest rates. Investment of Stock Index Insured Account may lead to some losses as compared to when the investment is made in S&P 500 Index Fund because it does not entail the major economies in the U.S. S&P 500 Index Fund entails several index funds, which may not necessarily be part and parcel of the Stock Index Insured Account (Chan, Kot & Tang, 2013).

In this case, the investors are risk-averse and will want to avoid risks as much as possible.

Fortunately, Stock Index Insured Account is associated with the zero risk principal. The chances are high that the surety of the principal will attract the clients. Again, the magnitude of the gain is likely to be twice the stock market's growth level. It will also make it possible to explore and benefit from the long term market trends. Finally, it is not associated with the sales charges as well as the management fee.

Some risk exposures are pertinent with offering Stock Index Insured Account product.

The risks here include foreign currency risk, systematic risk, and credit risk. The bank is in a better position to hedge the risk of exposure through investment in real estate, futures, and options, among others. Citibank is likely to face the market risk, which is associated with the fluctuations of the credit spreads, interest rates, and the equity markets. The risk can be hedged

by Citibank taking the initiative to long a call option on the S&P 500. Even if the market does not go up, there is no chance that the bank will lose in SIIA because it can still opt not to execute

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the option. The bank can buy the underlying asset at a much lower price. Citibank must offer the product so that it can inculcate the cultural investment. The company will also be strategically placed to grow so that it can invest in investor's funds in the large portfolio, which will help generate higher profits for the investors and the company at large (Chan, Kot & Tang, 2013).

As for the fixed deposit option, the investor is supposed to get fixed rates of returns.

There are a put option and call option for the simple options, which the hedgers use to hedge the risk. The put option is in such a way that the strike price is higher than the market price, and it may be viable to execute the option (Miao, 2014).

Amid the existing risks, there is a sense in which SIIA is a viable option because it will create room for the investors to shun the unexpected market downturn and short-term market volatility. The chances of earning stable cash flows from the investment can also be guaranteed.

As mentioned earlier, the S&P 500 index returns can be reaped only at fixed times, while the SIIA will emanate returns from the month-end values for years. Despite the downturns, the investors are well cushioned because the spot price will be higher than the average (Miao, 2014).

Those who are keen on investment from a long-term perspective will also look at this more positively as the return is also more likely to double the difference.

When the CD is compared with the SIIA, the CD is characterized by more initial deposit, while the SIIA does not have any limitation related to the initial deposit. Even though the CD exhibits low risk and stable return, which makes it more appropriate for the risk-averse investors, SIIA remains the better option. The higher the risk, the better the returns. The SIIA Investors may not have much money, yet they stand a chance to get better yields. As such, Citibank SIIA is the most viable product.

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References 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.

Miao, X. (2014). The Stability of Commercial Bank Deposits and Long-term Liquid Management. Management & Engineering, (16), 49.