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The Evergrande Group is the second largest real estate company in China and it is publicly listed in the HK exchange. Evergrande has made headlines

The Evergrande Group is the second largest real estate company in China and it is publicly listed in the HK exchange. Evergrande has made headlines in the past several months as it is on the edge of default (the default may have happened by the date when you take this exam). The total debt amount of Evergrande is estimated to be between $90 billion and $300 billion. Most of its debts are bank loans collateralized by the land, some other debts are in the form of corporate bonds and other borrowings. In the past 10 months from January to October, the stock price has dropped from $1.82 to $0.34, and the average bond price has also dropped from around $100 to $30. Evergrande's credit rating was downgraded to 'C' in September.

The credit downgrading of Evergrande caused a 6.6% drop in the Hang Seng Index in the HK exchange on September 19, 2021. Assume you are a hedge fund trader who is short selling the Hang Seng Index. You manage a portfolio with short position in an Exchange-Traded Fund (ETF) that mimics the Hang Seng Index with identical returns and dividend yield. The value of your short position is valued at $100 million. The sudden drop of Hang Seng Index made you a fortune, but you are concerned that the follow up possible central bank intervention and bailout attempt on Evergrande may lift up the Hang Seng Index in the next three months. You are considering a portfolio insurance strategy using options. The Hang Seng Index is currently 25,000. Both European call and put options on the index with a strike price of 25,000 can be purchased. The price of one call option is $5,000, and the price of one put option is $6,000. Each index point is worth $40.

Design a portfolio insurance strategy. Please show the position, number of options and the insurance cost.

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