You hold a portfolio of the 30 stocks that make up the Dow Jones Industrial Average (DJIA). Your broker has just called you with the following offer. He can provide you with insurance that will guarantee that the value of your portfolio will not fall below an indexed level of 32,000. This insurance is evaluated at the end of each quarter and costs $500 per quarter. A quick search of the CBOE web site shows that the Dow is currently trading at an indexed level of 34,996, and that a three-month put option on the DJIA with a strike price of 32,000 is trading at $229.

1. Should you accept the insurance contract offered by your broker? Explain.
2. Explain how you can provide your own insurance for your portfolio.
3. What is the cost of this insurance?
4. What is the maximum loss on your insured portfolio?