4) Suppose your portfolio mirrors S&P500 index and is valued currently at $1,000

Question

4) Suppose your portfolio mirrors S&P500 index and is valued currently at $1,000,000. The S&P 500 index is currently at 2,000. What action is needed to provide protection against the value of the portfolio falling below $950,000 in 6 months?

A) Buy 1,000 6-month S&P500 put options with strike price of 1800.

Buy 500 6-month S&P500 put options with strike price of 1800.

Buy 500 6-month S&P500 put options with strike price of 1900.

Buy 1,000 6-month S&P500 put options with strike price of 1900.

A) Buy 1,000 6-month S&P500 put options with strike price of 1800.

Buy 500 6-month S&P500 put options with strike price of 1800.

Buy 500 6-month S&P500 put options with strike price of 1900.

Buy 1,000 6-month S&P500 put options with strike price of 1900.

Explanation / Answer

C) Buy 500 6-month S&P500 put options with strike price of 1900..

By doing the above transaction, the total value of the put options on S&P 500 becomes = 500*$1900 = $950,000

So even if the portfolio value goes doen below $950,000 due to the index movements, the manager is protected by having the right to sell the 500 underlying at a strike price of 1900 for a total value of $950,000.

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