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Q1. Suppose you are managing a stock portfolio that is currently valued at $2,000,000. You expect the stock market will be bullish in the next 3 months. But you are also aware of a small chance of market crash and you want to insure that your portfolio value will be at least $1,700,000 in 3 months even in a market crash. In other words, you don’t want to suffer more than 15% loss in the next 3 months. Assume your stock portfolio has a beta of 1.4, the current S&P 500 level is 2,000 and the risk-free rate is 3% per annum.

How would you hedge against your portfolio value dropping below $1.7M in 3 months? Be specific with your strategy. If you are using options, specify what the underlying asset is, the strike price, time to expiration. whether it’s a call or a put and how many units to buy or short.

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Patrina Schowalter
Patrina SchowalterLv2
28 Sep 2019

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