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Question 1: An insurance company is managing a stock portfolio in which the current value happens...

Question 1: An insurance company is managing a stock portfolio in which the current value happens to be $20 million. The risk profile of the portfolio gives it a beta of 1.25. If a closely matched index has a value of 1,200, explain how a put option on that particular index with an exercise price of 1,100 can in theory provide protection and hence portfolio insurance.

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Expert Solution

If a Portfolio Insurance Insurance creates the cushion to soften the blow of a major drop in the portfolio, same can be achieved by exercising a put option of the same security. Understand the key factors of the problem and rest is just connecting the dots.

ekkarill92 answered 1 year ago
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