Question

You wish to insure a portfolio for 1 year. Suppose that S = $100, σ = 30%, r = 8%, and δ = 0. You are considering two strategies. The simple insurance strategy entails buying one put option with a 1-year maturity at a strike price that is 95% of the stock price. The rolling insurance strategy entails buying one 1-month put option each month, with the strike in each case being 95% of the then-current stock price.
a. What is the cost of the simple insurance strategy?
b. What is the cost of the rolling insurance strategy?
c. Intuitively, what accounts for the cost difference?


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  • CreatedAugust 12, 2015
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