Question;Q1. Suppose your stock portfolio's beta is 1.40 and it's;currently valued at $1 million. The S&P 500 index is currently at 2,000.;The risk?free rate is 4% per annum and the dividend yield on both the index and;your portfolio is 0%. What action is needed to provide protection against the;value of your portfolio falling below $800,000 in 3 months?;If your answer involves options, be specific about (1);whether to buy or short, (2) call or put, (3) expiration, (4) strike price, and;(5) how many option contracts are needed.;Hint: Example 15.2;Part B.;On 5/30/2014, The Dow Jones Industrial Average (DJIA) closed;at 16,717 and the price of the September 170 put was $6.10. Assume the;risk?free rate is 1%, the dividend yield is 2%. Note that this put option is on;DJIA level divided by 100, the strike price is 170 and expires on 9/20/2014.;Q2. Use Derivagem to calculate the implied volatility of the;put option. For this homework, you can either use # of trading days/252 or # of;calendar days/365 to calculate the time to expiration. Please include DG;output.;Q3. Use put?call parity for European index options to find;the arbitrage?free price of a September 170 call.;Q4. Given the call price answered in Q3, use Derivagem to;find the implied volatility of the call option.;Q5. Are the implied volatilities in Q2 and Q4 the same? What;do you conclude about put?call parity and the implied volatility of European;call and put options?;Q6. Would you expect the volatility of a stock index to be;greater or less than the volatility of a typical stock? Explain your answer.;Q7. Does the cost of portfolio insurance increase or;decrease as the beta of a portfolio increases? Explain your answer.
Paper#48921 | Written in 18-Jul-2015Price : $27