A Portfolio Manager in Charge of a Portfolio Worth $10

question 3

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 0.5? Assume that the risk-free rate is 10% per annum and the dividend yield on both the portfolio and the index is 2% per annum.

• A) 400
• B) 410
• C) 420
• D) 430

---

Definitions:

Electromyography

A diagnostic procedure to assess the health of muscles and the nerve cells that control them (motor neurons) by measuring electrical activity.

Muscle Activity

The physical action or movement produced by the contraction of muscles.

Brain-Wave Activity

The patterns of electrical activity in the brain, measurable by EEG, associated with different states of consciousness.

Restless Legs Syndrome

A neurological disorder characterized by an uncontrollable urge to move the legs, usually due to uncomfortable sensations.