Imagine you are a provider of portfolio insurance. You are establishing a four-year program. The portfolio you manage is currently worth $50 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 4.2% 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?

Portfolio in bills%

a-2.What percentage of the portfolio should be placed in equity?

Portfolio in equity%

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?

Put delta%

Amount held in bills$million

b-2.What action should the manager take?

Buy or Sell

Amount ?