Answer Questions 1 Through 6 About Insuring a Portfolio Identical

question 52

Multiple Choice

Answer questions 1 through 6 about insuring a portfolio identical to the S&P 500 worth $12,500,000 with a three-month horizon. The risk-free rate is 7 percent. Three-month T-bills are available at a price of $98.64 per $100 face value. The S&P 500 is at 385. Puts with an exercise price of 390 are available at a price of 13. Calls with an exercise price of 390 are available at a price of 13.125. Round off your answers to the nearest integer.
-If the insured portfolio were dynamically hedged with stock index futures,how many futures would be used? The call delta is 0.52 and the continuous risk-free rate is 5.48 percent.Each futures has a multiplier of 250 and a price of 777.30.

• A)60
• B)64
• C)30
• D)32
• E)none of the above

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Definitions:

Remainderman

A remainderman is the person or entity entitled to receive the remainder of an estate after the termination of the life estate or other interest ends.

CPI-Measured Inflation Hedge

An investment or asset that is expected to increase in value at a rate that matches or exceeds the rate of inflation as measured by the Consumer Price Index (CPI), thus preserving purchasing power.

TIPS

Treasury Inflation-Protected Securities, a type of U.S. Treasury bond designed to help investors protect against inflation.

Fully-Funded Pension Funds

Pension plans that have sufficient assets to meet all the pension obligations to participants, both present and anticipated.