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solution

You are a provider of portfolio insurance and are establishing a four-year program. The portfolio you manage is currently worth $140 million, and you promise to provide a minimum return of 0%. The equity portfolio has a standard deviation of 25% per year, and T-bills pay 6.4% per year. Assume that the portfolio pays no dividends.

Required:

a-1.How much of the portfolio should be sold and placed in bills? (Input the value as a positive value. Do not round intermediate calculations and round your final percentage answer to 2 decimal places.)

a-2.How much of the portfolio should be sold and placed in equity? (Input the value as a positive value. Do not round intermediate calculations and round your final percentage answer to 2 decimal places.)

b-1.Calculate the put delta and the amount held in bills if the stock portfolio falls by 3% on the first day of trading, before the hedge is in place? (Input the value as a positive value. Do not round intermediate calculations. Round your answers to 2 decimal places.)

b-2.What action should the manager take? (Enter your answer in millions rounded to 2 decimal places. Do not round intermediate calculations.)

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