Part A. You have decided to buy protective put options to protect the U.S. stock holdings of Global Advisors Companys (GAC) portfolio from a potential price decline over the next three months. You have researched Russell 300 index options and have assembled the following information: Russell 300 is currently at $365 and a premium of at-the-money 3 month. Russell 300 put option is $10.25 ______. The beta of GACs portfolio is 1.05.

What is the approximate total amount you have to spend on the Russell 300 puts to protect GACs portfolio from loss if GACs portfolio is currently worth $7,761,700.

A) $240,900

B) $575,000

C) $723,250

D) $932,350

Part B. Continuing the previous question, suppose in addition to 3 month Russell 300 put options, you also have access to 3 month S&P 300 put options. Just like Russell 300, suppose the S&P 300 index is currently at $365 and 3 month at-the-money S&P 300 put premium is $10.25. Further, the beta of the S&P is also 0.95. The only difference between Russell 300 and S&P 300 is that the correlation between Russell 300 and GACs portfolio is 0.76 while the correlation between S&P 300 and GACs portfolio is 0.9.

To protect GACs portfolio, Which among the following index option portfolios would you prefer?

A) Use Russell 300 put options

B) Use S&P 300 put options

C) Use a portfolio with 50% Russell 300 put options and 50% S&P 300 put options

D) Use a portfolio with 75% Russell 300 put options and 25% S&P 300 put options