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A Manager of a Large Stock Portfolio Has Earned a Respectable

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Essay

A manager of a large stock portfolio has earned a respectable return by October, and would like to protect that return for the rest of the year using options. Describe the least risky way she could guarantee a certain portfolio return with trades in derivative securities.


Definitions:

Sensory Adaptation

The process by which sensory receptors become less sensitive to constant stimuli over time.

Sensation

The process by which our sensory receptors and nervous system receive and represent stimuli from our environment.

Perception

The process by which individuals organize and interpret their sensory impressions in order to give meaning to their environment.

Transduction

The process by which physical or chemical stimuli are converted into a signal that can be interpreted by the body or brain, like the conversion of light into visual information.

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