Question 4 (10 marks). (a) While covered calls and protective puts are used to manage risks, there is misconception about the use of these two. For example, some considers that covered calls offer a guaranteed return. Explain with examples the suitability of covered calls and protective puts in managing equity risks. Show calculations and graphs. (5 marks) (b) A fund manager wishes to fully immunize a current liability by investing in a bond portfolio comprising of the following two bonds: Characteristics Bond A Bond B Face value $1,000 $1,000 Settlement 1 July 2020 1 July 2020 Maturity 30 June 2027 30 June 2025 Coupon rate (per annum) Zero 4 percent Yield to maturity (per annum) 6 percent 6 percent Frequency of coupon Semi-annual Semi-annual If the modified duration of the liability is 5.45, what should be the bond portfolio composition (i.e., weight of each bond in the portfolio)? (5 marks) Question 4 (10 marks). (a) While covered calls and protective puts are used to manage risks, there is misconception about the use of these two. For example, some considers that covered calls offer a guaranteed return. Explain with examples the suitability of covered calls and protective puts in managing equity risks. Show calculations and graphs. (5 marks) (b) A fund manager wishes to fully immunize a current liability by investing in a bond portfolio comprising of the following two bonds: Characteristics Bond A Bond B Face value $1,000 $1,000 Settlement 1 July 2020 1 July 2020 Maturity 30 June 2027 30 June 2025 Coupon rate (per annum) Zero 4 percent Yield to maturity (per annum) 6 percent 6 percent Frequency of coupon Semi-annual Semi-annual If the modified duration of the liability is 5.45, what should be the bond portfolio composition (i.e., weight of each bond in the portfolio)