1.
A portfolio manager in charge of a portfolio worth $10
million is concerned that the market might decline rapidly during the next six
months and would like to use options on the S&P 100 to provide protection
against the portfolio falling below$9.5 million. The S&P 100 index is
currently standing at 500 and each contract is on 100 times the index.(i)
If the portfolio has a beta of 1 how many put option
contracts should be purchased? _ _ _ _ _
_(ii)
If the portfolio has a beta of 1 what should the
strike price of the put options be? _ _ _ _ _ _(iii)If
the portfolio has a beta of 0.5 how many put options should be purchased?_ _ _ _ _
_ (iv)If
the portfolio has a beta of 0.5 what should the strike prices of the put
options be? Assume that the risk-free rate is 10% and the dividend yield on
both the portfolio and the index is 2%. _ _ _ _ _ _