The derivative based strategy known as portfolio insurance involves
A) The sale of a put option on the underlying security position.
B) The purchase of a put on the underlying security position.
C) The sale of a call on the underlying security position.
D) The purchase of a call on the underlying security position.
E) Choices c and d.

Question

Quizplus · Accepted Answer

Portfolio insurance involves purchasing a put option on the underlying security position to protect against downside risk. This allows for the possibility of gains in the underlying asset while limiting potential losses. Selling a put option would increase risk exposure, and selling a call option would limit potential gains. Buying a call option would not provide protection against downside risk.

The Derivative Based Strategy Known as Portfolio Insurance Involves