A portfolio manager in charge of a portfolio worth $10 million is concerned that stock prices might decline rapidly during the next six months and would like to use put 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 position is required if the portfolio has a beta of 1?
A) Short 200 contracts
B) Long 200 contracts
C) Short 100 contracts
D) Long 100 contracts

Question

Quizplus · Accepted Answer

The number of contracts required is 10,000,000/(500×100)=200.A long put position is required because the contracts must provide a positive payoff when the market declines.

A Portfolio Manager in Charge of a Portfolio Worth $10