Suppose your portfolio mirrors S&P500 index and is valued currently at $1,000,00

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?

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

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

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

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

**** Please explain why???

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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