U Seal Question 4 In May 2020, an investor holds a portfolio strongly correlated with the S&P 500 index. The portfolio value amounts at $1,050,000. The investor is worried about a potential significant drop in the US financial market over the following three months. In May the S&P 500 stands at $3500, and it is expected to either increase or decrease by 15% over the next three months. The investor has learned that the options market may be a suitable way for him to hedge his underlying risk. On the market there are available S&P 500 index options with exercise price $ 3500, and expiration in July 2020. The S&P 500 index options have a $100 multiplier. 1. As a financial analyst recommend a suitable hedging strategy for the above investor. 10 marks 2. Suppose the monthly risk-free return is 0.5%, use the binomial model to determine the value of a put option. 30 marks 3. Explain why an investor might prefer an option contract to a forward contract. 10 marks