A fund manager has a well diversified portfolio that mirrors the performance of the S P 500 and is worth $360 million The value of the S P 500 is 1,200, and the portfolio manager would like to buy insurance against a reduction of more than 5 in the value of the portfolio over the next six months Th...

The fund is worth 300000 times the value of the index When the value of the portfolio falls by 5 to ...

A fund manager has a well-diversified portfolio that mirrors the performance of the S&P 500 and is

Question:

A fund manager has a well-diversified that mirrors the performance of the S&P 500 and is worth $360 million. The value of the S&P 500 is 1,200, and the manager would like to buy insurance against a reduction of more than 5% in the value of the over the next six months. The risk-free interest rate is 6% per annum. The yield on both the and the S&P 500 is 3%, and the volatility of the index is 30% per annum.
a) If the fund manager buys traded European put options, how much would the insurance cost?
b) Explain carefully alternative strategies open to the fund manager involving traded European call options, and show that they lead to the same result.
c) If the fund manager decides to provide insurance by keeping part of the in risk-free securities, what should the initial position be?
d) If the fund manager decides to provide insurance by using nine-month index futures, what should the initial position be? Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their... Portfolio
A portfolio is a grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and closed funds. A portfolio can also consist of non-publicly...