The portfolio insurance approach works by using an offsetting portfolio of:

A) call options
B) put options
C) bought futures
D) bought warrants

Question

The portfolio insurance approach works by using an offsetting portfolio of:

A) call options
B) put options
C) bought futures
D) bought warrants

Quizplus · Accepted Answer

The concept of portfolio insurance allows an investor to set a floor on the value of a portfolio.This allows the portfolio value to increase,but ensures that the portfolio value does not fall below the pre-set floor value.Essentially the underlying portfolio is hedged against a fall in value below the floor by setting up an offsetting portfolio of put options.To hedge a broad market-oriented portfolio,the option used is generally a put option on a stock index (or an index option).

The Portfolio Insurance Approach Works by Using an Offsetting Portfolio