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 T-bills,how many T-bills would be used?
A)16,332
B)63,002
C)126,723
D)61,672
E)32,468

Question

Quizplus · Accepted Answer

To dynamically hedge the portfolio, you need to calculate the number of T-bills required to cover the portfolio's value. The T-bill price is $98.64, so the face value is $100. The number of T-bills needed is $12,500,000 / $98.64 = 126,723. However, since the risk-free rate is 7%, you need to adjust for the present value, resulting in approximately 63,002 T-bills.

Answer Questions 1 Through 6 About Insuring a Portfolio Identical