Suppose your portfolio mirrors S&P500 index and is valued currently at $1,000,00
ID: 2754146 • Letter: S
Question
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? 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 1900. Buy 1,000 6-month S&P500 put options with strike price of 1900. Buy 500 6-month S&P500 put options with strike price of 1800.
Explanation / Answer
d). Each index value= 1000000/2000=$500
since fall is $50,000 in 6 months
500 6 month S&P 500 put option with strike price of 1900 the fall in value =(2000-1900)*500= 500,000
Which is same as fall in index value.
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