Rock Solid has a stock portfolio worth $250 million, which tracks closely with the S&P 500. The

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Question:

Rock Solid has a stock portfolio worth $250 million, which tracks closely with the S&P 500. The portfolio manager fears that a decline is coming and want to completely hedge the value of the portfolio against any downside risk. With index options, the contract has a multiplier that determines the overall price. Usually the multiplier is 100.

1) If the S&P is currently at 2,500 and a strike price of 2,400 corresponds to a premium of $400/contract, how the hedging with options is accomplished?

2) What happens if after one year, the S&P 500 is at 2,300?