Part 1. On MARCH 1, a portfolio manager expects a market down turn in the next 4 months and decides to use the JUN puts on the S&P500 index in order to protect the portfolio value, currently at $10,000,000. The current S&P500 index value is 1,291 and the index $ multiplier is $100.

The current annual risk-free rate in the U.S. economy is 5% and the annual dividend payout ratios are 3% for his portfolio and 4% for the S&P500 index.

The manager calculates the portfolios beta with the S&P500 index:

b = 1.61375.

1.1 Determine the number of JUN puts to buy.

1.2 Calculate, separately, the exercise prices that are associated with the following hedges:

[EV1/V0]* = 1.0;

0.95;

Part 2. The manager from Q1. decides to use the JUN, K = 1,250 puts, priced at 15.5. Calculate the total cost of buying the puts.