A Portfolio Manager in Charge of a Portfolio Worth $10

question 5

Multiple Choice

A portfolio manager in charge of a portfolio worth $10 million is concerned that the market 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 should the strike price of options on the index be the portfolio has a beta of 1?

• A) 425
• B) 450
• C) 475
• D) 500

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Definitions:

Pulse Volume

A measure of the blood flow in an extremity, often used to assess circulation and the health of the vascular system.

Strain Gauge

A device used to measure the amount of deformation or strain in an object when a force is applied.

Balance Beam

A gymnastics apparatus used especially by women gymnasts, consisting of a narrow beam on which athletes perform exercises requiring balance.

Spring Scale

A device used to measure weight or force by the elasticity of a spring.