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C O ezto.mheducation.com/hm.tpx ps Managed bookmarks l] Favorites Office Depot ? Corporate Esseedials M. Fedex Busress Cards ?? Las rship Imagine you are a provider of portfolio insurance. You minimum return of 0%. The equity portfolio has a standard devia on dividends are reinvestedi. are establishing a four-year program. The portfolio you manage is currently worth $150 million, and you promise to provide a of 25% per year, and T-bills pay 7 5% per year. Assume for smpicity that the portfolio pays no dvid ends (or that al a-1. What percentage of the portfolio should be placed in bills? (Input the value as a positive value. Round your answer to 2 decimal places) Portfolio in bills a-2. What percentage of the portfolio should be placed in equity? (Input the value as a positive value. Round your answer to 2 decimal places) Portfolio in equity b-1. Calculate the put delta and the amount held n bills the stock potol fals by 3% on the f st dayof trading bel ve the hedge is n place, I put the not round intermediate calculations. Round your answers to 2 decimal places) h e in poi tee alue ? Put deltla Amount held in bils miltion b-2. What action should the manager take? (Enter your answer in millions rounded to 2 decimal places The manager must (Click to select) milion of (Click to select and use the proceeds to (Click to select) (Click to select)

Solution

a-1) Current Value of Portfolio S0 $150.00 Million Floor promised to clients, 0% return X $150.00 Million Volatility ?^2 = .25^2 0.0625 Risk-free rate = r 0.07 T = Horizon of program 4 years d1 = (ln(S/K)+(r + ?2/2)^t)/ ? ?t d1 = (ln(150/150)+(.075 + .0625/2)x4)/ .25 ?4 0.85 Normal Distribution N( d1) using NormDIST 0.802337457 put delta is: N(d1) – 1 -19.77% Portfolio in bills             19.77% a-2) Portfolio in equity = 1 - 19.77% 80.23% b-1 Current Value of Portfolio S0 = $150M x 97% $145.50 Floor promised to clients, 0% return X $150.00 Volatility ?^2 = .25^2 0.0625 Risk-free rate = r 0.07 T = Horizon of program 4 d1 = (ln(S/K)+(r + ?2/2)^t)/ ? ?t d1 = (ln(145/150)+(.075 + .0625/2)x4)/ .25 ?4 0.789081585 Normal Distribution N( d1) using NormDIST 0.784967838 put delta is: N(d1) – 1 -21.50% Portfolio in bills             21.50% Amount held in bills = $145.50 x 21.50% $31.29 Millions b-2 The manager must sell $1.64 million of equity and use the proceeds to buy bills . Total value of Portfolio $150.00 Million Less: Equity Investment = $150 x 80.23% -$120.35 Million Less: T-bill investment = -$31.29 Million Sell the equity and use the proceeds to buy bills. -$1.64 Million