Question:

You are a provider of portfolio insurance and are establishing a 4-year program. The portfolio you manage is worth $130 million, and you hope to provide a minimum return of 0%. The equity portfolio has a standard deviation of 24% per year, and T-bills pay 5% per year. Assume that the portfolio pays no dividends.

Required:

a-1. What is the delta of the implicit put option conveyed by the portfolio insurance?

a-2. How much of the portfolio should be sold and placed in bills?

b-1. What is the delta if the new portfolio falls by 4% on the first day of trading?

b-2. Complete the following: Assume the portfolio does fall by 4%, the manager should sell ___ in stock.

Note: Do not round intermediate calculations. Negative amount should be indicated by a minus sign. Round your answer to 4 decimal places.