An investment management firm ALPHA is concerned about the risk level of a clients equity portfolio. In June 2020, the client has 60% of this portfolio invested in two equity positions: ABC and EFG stocks. ALPHAs research provides the following views on the two stocks.

• ABCs share price is very likely to go down in the next 3 months;
• EFG does not have immediate substantial downside risk but its upside potential is likely to be limited.

Although the client refuses to sell her shares in either company, she has agreed to use option strategies to manage these concentrated equity positions over the next 3 months. The options available to construct the positions are shown in the table below.

Stock	Shares	Stock Price in June	European Options	Option Premium
ABC	325,000	$24.20	September 23.00 put	$0.80
			September 27.50 call	$0.65
EFG	280,000	$33.00	September 31.50 put	$0.85
			September 34.00 call	$1.20

1. Choose between covered call and protective put strategies to manage the risk exposure of ABC based on ALPHA's research. Then calculate the maximum profit and loss and the breakeven price. (3 marks)

2. Choose between covered call and protective put strategies to manage the risk exposure of EFG based on ALPHA's research. Then calculate the maximum profit and loss and the breakeven price. (3 marks)

ALPHA also wishes to increase the beta for one of its portfolios under management from 0.95 to 1.20 for a 3-month period. The portfolio has a market value of $175,000,000. The investment firm plans to use a futures contract priced at $105,790 in order to adjust the portfolio beta. The futures contract has a beta of 0.98.

3. Calculate the number of futures contracts that should be bought or sold to achieve an increase in the portfolio beta. (2 marks)

4. At the end of three months, the overall equity market is up 5.5%. The stock portfolio under management is up 5.1%. The futures contract is priced at $111,500. Calculate the value of the hedged stock portfolio ending value and the effective beta of the portfolio. (4 marks)

5. Explain whether the above three strategies based on option and futures incur any credit risk? (3 marks)