31. A portfolio manager in charge of a portfolio worth $10 million is concerned that stock prices might decline rapidly during the next six months and would like to use options on an index to provide protection against the portfolio falling below $9.5 million. The index is currently standing at 500 and each contract is on 100 times the index. What position is required if the portfolio has a beta of 1

Question

Zechariah Alvarez

Business

23 April, 15:28

31. A portfolio manager in charge of a portfolio worth $10 million is concerned that stock prices might decline rapidly during the next six months and would like to use options on an index to provide protection against the portfolio falling below $9.5 million. The index is currently standing at 500 and each contract is on 100 times the index. What position is required if the portfolio has a beta of 1

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Answers (1)

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Memphis Kemp · Answer 1

200

Explanation:

Base on the scenario been described in the question, the position required if the portfolio has a beta 1 is been calculated as follows.

number of contracts required is

Number of contract = 10,000,000 / (500*100)

Number of contract = 10,000,000/50,000

Number of contract = 200.

A long put position is needed because the contracts must provide a positive payoff when the market reduces.