13.11 Example 1 Portfolio has a beta of 1 o t is currently worth $500,000 The index currently stands at 1000 What trade is necessary to provide insurance against the portfolio value falling below $450,000? Options, Futures, and other Derivatives, 5th edition 2002 by John C. Hull
Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull 13.11 Example 1 • Portfolio has a beta of 1.0 • It is currently worth $500,000 • The index currently stands at 1000 • What trade is necessary to provide insurance against the portfolio value falling below $450,000?
13.12 Example 2 Portfolio has a beta of 2.0 It is currently worth $500,000 and index stands at 1000 The risk-free rate is 12% per annum The dividend yield on both the portfolio and the index is 4% How many put option contracts should be purchased for portfolio insurance? Options, Futures, and other Derivatives, 5th edition 2002 by John C. Hull
Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull 13.12 Example 2 • Portfolio has a beta of 2.0 • It is currently worth $500,000 and index stands at 1000 • The risk-free rate is 12% per annum • The dividend yield on both the portfolio and the index is 4% • How many put option contracts should be purchased for portfolio insurance?
13.13 Calculating relation Between Index Level and portfolio value in 3 months If index rises to 1040, it provides a 40/1000 or 4 return in 3 months Total return(incl dividends)=5% Excess return over risk -free rate=2% Excess return for portfolio=4% Increase in portfolio value=4+3-1=6% Portfolio value=$530,000 Options, Futures, and other Derivatives, 5th edition 2002 by John C. Hull
Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull 13.13 • If index rises to 1040, it provides a 40/1000 or 4% return in 3 months • Total return (incl dividends)=5% • Excess return over risk-free rate=2% • Excess return for portfolio=4% • Increase in Portfolio Value=4+3-1=6% • Portfolio value=$530,000 Calculating Relation Between Index Level and Portfolio Value in 3 months