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Suppose you are managing a stock portfolio that is currently valued at $2,000,000. You expect the stock market will be bullish in the next 3 months. But you are also aware of a small chance of market crash and you want to insure that your portfolio value will be at least $1,700,000 in 3 months even in a market crash. In other words, you don’t want to suffer more than 15% loss in the next 3 months. Assume your stock portfolio has a beta of 1.4, the current S&P 500 level is 2,000 and the risk-free rate is 3% per annum.
How would you hedge against your portfolio value dropping below $1.7M in 3 months? Be specific with your strategy. If you are using options, specify what the underlying asset is, the strike price, time to expiration. whether it’s a call or a put and how many units to buy or short.
(Please show all work)
Comment on the practical reality, and the academic truth that the “cost driver(s)” for this facility are, as stated, include not only the number of guests in attendance at the facility on any given day, but also the nationalities and consequent food ..
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