A portfolio manager in charge of a portfolio worth $10 million is concerned that

Question

A portfolio manager in charge of a portfolio worth $10 million is concerned that the market might decline rapidly during the next six months and would like to use options on the S&P 100 to provide protection against the portfolio falling below$9.5 million. The S&P 100 index is currently standing at 500 and each contract is on 100 times the index. a. If the portfolio has a beta of 1.0, how many put options should be purchased? b. If the portfolio has a beta of 1.0, what should the strike prices of the put options be?

Explanation / Answer

a) 1 x (10 000 000/100 x 500) = 200 contracts

b) 9,500,000/ 100 x 200 = $475

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