Even IT all or thne work yol have done so Tar is correct, yol may hot have compl

Question

Even IT all or thne work yol have done so Tar is correct, yol may hot have completed everything value 1.25 points Imagine you are a provider of portfolio insurance. You are establishing a four-year program. The portfolio you manage is currently worth $170 million, and you promise to provide a minimum return of 0%. The equity portfolio has a standard deviation of 25% per year and T-bills pay 5.8% per year. Assume for simplicity that the portfolio pays no dividends (or that all dividends are reinvested). a-1. What percentage of the portfolio should be placed in bills? (Input the value as a positive value. Round your answer to 2 decimal places.) Portfolio in bills 23.75 2 % a-2. What percentage of the portfolio should be placed in equity? (Input the value as a positive value. Round your answer to 2 decimal places.) Portfolio in equity 76.25 % b-1. Calculate the put delta and the amount held in bills if the stock portfolio falls by 3% on the first day of trading, before the hedge is in place? (Input the value as a positive value. Do not round intermediate calculations. Round your answers to 2 decimal places.) Put delta Amount held in bills 25.68 9% 591 9 million b-2. What action should the manager take? (Enter your answer in millions rounded to 2 decimal places.) The manager must sell bills 42.346 million of equity and use the proceeds to buy

Explanation / Answer

S0= 170 (current value of portfolio)

X= 100 (floor promised to clients, 0% return)

= .25 (volatility)

r= .058 (risk-free rate)

T= 4 years (horizon of program)

Part A

Put delta = N(d1) - 1

Put delta = 0.7624 - 1

Put delta = 23.75% in bills

% in equity = 1 - 23.75%

% in equity = 76.25%

Part B

New value of Portfolio = 170 * (1 - 3%)

New value of Portfolio = 164.90 million

New Put delta = 0.7431 - 1

New Put delta = 25.69%

The amount held in bills should be: ($164.90 million * 0.2569) = $42.35 million.

Part - B2

The manager must sell $1.98 million (42.35 - 170 * 23.75%) of equity and use the proceeds to buy bills

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