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1. Define and evaluate a portfolio insurance strategy for a stock portfolio currently worth $10 million.
Assume that an S&P 500 Put option is available with an exercise price of 250, expiring in 180 days, and priced at $10.
Also assume that the stock portfolio is perfectly positively correlated with the S&P 500 index and the current spot S&P 500 index is at 250.
- Evaluate the portfolio insurance strategy at possible spot index values at expiration of 230, 240, 250, 260, and 270.
- Show how the Put inspired strategy could be replicated with a fiduciary Call.
Assume that an S&P 500 Call is available with an exercise price of 300 and expiration at the end of 180 days, and that the risk-free rate is 6% per year.
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