Problem
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.
1) Evaluate the portfolio insurance strategy at possible spot index values at expiration of 230, 240, 250, 260, and 270.
2) 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.