Suppose that a portfolio is worth $60 million and the S&P 500 is at 2400.

If the value of the portfolio mirrors the value of the index, what options on the S&P 500 should be purchased to provide protection against the value of the portfolio falling below $57 million in six months time? Recall that the options pay off $100 per index point.

Buy _______ puts/calls (circle which type) with a strike price of ____________

Nowsupposethattheportfoliohasabetaof1.6,therisk-freeinterestrateis 2% per annum, the dividend yields are 1% per annum on the portfolio and 3% per annum on the index. What options should be purchased to provide protection against the value of the portfolio falling below $57 million in six months time?

Buy _______ puts/calls (circle which type) with a strike price of ____________

Calculate the cost of buying this insurance on the assumption that the index has a volatility of 15%.

Cost of insurance: $ _______________.