Suppose that you are managing a $5 million stock portfolio
Subject: Business    / Finance   
Question

    Suppose that you are managing a $5 million stock portfolio with a beta value of 1.5 but are concerned about the value in 2 months when your performance report is due to customers. You are now trying to hedge by using the S&P 500 index option. The option has a money multiplier of $100. Currently, the index stands at 1500 but could go down to 1200. The index dividend yield is 6% a year, and the risk-free rate is 0.8% a year. If your target protection level of the portfolio is $4.5


million, explain your risk management strategy with respect to the option’s strike price and why your strategy will work. Hint: Use the standard Capital Asset Pricing Model (CAPM) in your answer