one question about international capital markets in finance

QUESTION 4 A. Assume that you are a provider of portfolio insurance and that you are establishing a 3-year program. The portfolio you manage is currently worth E120 and you aim to provide a minimum return of 0%. The equity portfolio has a standard deviation of 30% per year and the risk-free rate is 2% per year. For simplicity, the portfolio pays no dividends. 4.1 To hedge, how much money should be placed in the risk-free assets? How much in equity? (Hint: Use Black-Scholes for the value of the option needed and the delta for asset allocation) (8%) 4.2 If the value of the stock portfolio falls by 2% on the first day of trading, what should the manager do? (5%) 4.3 The example above (4.1-4.2) is called dynamic hedging. What is it and Explain briefly. why is it difficult to maintain a perfectly hedged portfolio using options? (5%) B. Joe White has just purchased a stock index fund, currently selling at $1,200 per share. To avoid downside risk, Joe also purchased an at-the-money European put option on the fund for E60, with exercise price $1,200 and 3- month time to expiration. Sally Black is Joe's financial advisor and she says that Joe spends a lot of money on the put. She notes that 3-month puts with strike prices of E1, 170 cost only $45 and advises that Joe use the cheaper put. 4.4 Draw the profit diagrams for both stock-plus-put strategies at expiration. What are the break-even points for each strategy? put (10%) 4.5 Does Sally's strategy always do better than Joe's? Which strategy has greater systematic risk? (5.3%) (TOTAL 33.3%) END