The Optimal Choice of Index-Linked GICs: Some Canadian Evidence

Authors

  • Moshe Arye Milevsky Schulich School of Business, York University, Toronto, Ontario, M3J lP3, Canada;
  • Sharon Kim Schulich School of Business, York University, Toronto, Ontario, M3J lP3, Canada

DOI:

https://doi.org/10.1016/S1057-0810(97)90005-6

Abstract

Indexed Linked Guaranteed Investment Certificates (ILGICs), also known as equity linked term deposits, have become quite popular over the last few years. From the consumer’s point of view, there are two basic categories of Indexed Linked GIG, the Capped ILGIC and the Participating ILGIC. This paper compares the relative value and appeal of the two ILGIC products from the perspective of the individual investor, using valuation techniques from option pricing theory. We compute the Value per Pre- mium Dollar invested in an ILGIC. Our main conclusions are that ILGICs become less attractive the longer the time horizon of the investor. In addition, participating ILGlCs are preferable to capped ILGICs for short-term maturities and vice versa for longer maturities. A detailed analysis of two particular Canadian products is provided as an application of the basic concepts. We conclude by demonstrating that Values per Pre- mium Dollar range from 94% - 98%. corresponding to a 2%~6% total expense ratio on Index Linked GICs.

Downloads

Published

1997-12-30

How to Cite

Milevsky, M. A., & Kim , S. (1997). The Optimal Choice of Index-Linked GICs: Some Canadian Evidence. Financial Services Review, 6(4), 271–284. https://doi.org/10.1016/S1057-0810(97)90005-6

Issue

Vol. 6 No. 4 (1997): Financial Services Review

Section

New Original Submission

License

Copyright (c) 1997 JAI Press Inc.

Creative Commons License

This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.

Author(s) retain copyright and grant the Journal right of first publication with the work simultaneously licensed under a Creative Commons Attribution-NonCommercial 4.0 International License that allows to share the work with an acknowledgment of the work's authorship and initial publication in this Journal.

This license allows the author to remix, tweak, and build upon the original work non-commercially. The new work(s) must be non-commercial and acknowledge the original work.