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24 November, 21:11

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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  1. 24 November, 22:19
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    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.
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