You wish to insure a portfolio for 1 year. Suppose that S = $100, = 30%,

Question:

You wish to insure a for 1 year. Suppose that S = $100, σ = 30%, r = 8%, and δ = 0. You are considering two strategies. The simple insurance strategy entails buying one put option with a 1-year at a that is 95% of the stock price. The rolling insurance strategy entails buying one 1-month put option each month, with the strike in each case being 95% of the then-current stock price.
a. What is the cost of the simple insurance strategy?
b. What is the cost of the rolling insurance strategy?
c. Intuitively, what accounts for the cost difference? Strike Price
In finance, the strike price of an option is the fixed price at which the owner of the option can buy, or sell, the underlying security or commodity. Maturity
Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist. The term is commonly used for deposits, foreign exchange spot, and forward transactions, interest... Portfolio
A portfolio is a grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and closed funds. A portfolio can also consist of non-publicly...