I need to undertand this exercise step by step, please provide in each answer how did you get the results. For example answer b:

Scenario? 1: Market drops by 20?%

Hedging using a? 6-month put with a strike price of $2,150

Net profit= $732,000 * (-20%) + $125,000= -$21,400 (How can I get the $125,000?)

Hedging using a? 6-month put with a strike price of $2.075

Net Profit = $732,000 * (-20%) + $102,000= $44,200(How can I get the $102,000?)

Nick Fitzgerald holds a? well-diversified portfolio of? high-quality, large-cap stocks. The current value of? Fitzgerald's portfolio is $732,000?, but he is concerned that the market is heading for a big fall? (perhaps as much as? 20%) over the next three to six months. He? doesn't want to sell any of his stocks because he feels they all have good? long-term potential and should perform nicely once stock prices have bottomed out. As a? result, he's thinking about using index options to hedge his portfolio. Assume that the? S&P 500 currently stands at 2,200 and among the many put options available on this index are two that have caught his? eye: (1) a? six-month put with a strike price of 2,150 ?that's trading at ?$77.50?, and? (2) a? six-month put with a strike price of 2,075 ?that's quoted at ?$59.50.

a. How many? S&P 500 puts would Nick have to buy to protect his ?$732,000 stock? portfolio? How much would it cost him to buy the necessary number of puts with a $2,150 strike? price?

How much would it cost to buy the puts with a ?$2,075 strike? price?

b. ?Now, considering the performance of both the put options and? Nick's portfolio, determine how much net profit? (or loss) Nick will earn from each of these put hedges if both the market? (as measured by the? S&P 500) and? Nick's portfolio fall by 20?% over the next six months. What if the market and? Nick's portfolio fall by only 10?%? What if they go up by 15?%?

c. Do you think Nick should set up the put hedge? and, if? so, using which put? option? Explain.

d. ?Finally, assume that the DJIA is currently at 17,550 and that a? six-month put option on the Dow is available with a strike price of 174, and is currently trading at $8.03

How many of these puts would Nick have to buy to protect his? portfolio, and what would they?cost? Would Nick be better off with the Dow options or the? S&P 2,150 ?puts? Briefly explain.

Here is the answer: