Project #121406 - Business Case Analysis

How does portfolio insurance work? If implemented by trading in stocks and government securities, how would LOR adjust its clients' portfolio as the S&P rises? Falls?

a. Suppose that the S&P suddenly dropped 25% before LOR could adjust its portfolio. Using the stylized example given in Figure A-1, how would the value of the desired put change? How would the value of the replicating portfolio change? What does this imply? How could LOR have set up its portfolio so as to manage this jump risk?


b. Suppose that buying and selling the S&P bundle cost firms 80 basis points per trade. When would the transaction costs of portfolio insurance be the greatest? What does this imply?

Subject Business
Due By (Pacific Time) 04/14/2016 05:00 am
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