Dosley Endowment Fund, which supports the activities of the Dosley Charitable Trust, is relatively new and small in terms of assets under management. The trustees of the endowment have adopted a conservative investment strategy: at the current time, all of the $700 million in assets are equally invested in an S&P 500 Index tracking fund and U.S. Treasury bonds. Right now, the annual dividend yield on the S&P 500 Index fund is 3.0 percent, whereas the annual coupon rate is 4.0 percent for the T-bonds. As the fund manager, you expect that over the next three months the market will be very volatile.
Given that the priority of the trustees is to preserve the value of the endowment fund, you are required to use various derivative strategies to protect the assets under management.
The current level of S&P 500 is 1,000, and the price of U.S. T-bonds is 100. Assume that the current three-month T-bill rate is 1.2 percent.
a. Using the derivative information listed below, discuss the details of two derivative strategies that could be employed to protect the endowment's current asset value.

b. Applying the put-call parity relationship, which derivative strategy should you recommend and why? Recall that the put and futures prices are as follows:
Put Price = Call Price ˆ’ Security Price + Present Value of Exercise Price + Income on the Underlying Security
Futures Price = Underlying Security Price + (Treasury Bill Income ˆ’ Income on the UnderlyingSecurity)

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Contract size Expiration S&P 500 Index Current price Strike price Call option Put option Future $45,000 45,000 250,000 3 months later 3 months later 3 months later $ 21.00 18.00 1,007.00 $1,000 1,000 U.S. Treasury Bonds 3 months later 3 months later 3 months later Call option Put option $100,000 100,000 100,000 $ 6.00 100 100 103.00