The major objective of any portfolio insurance strategy is to limit the downside risk of a risky
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Question:
The major objective of any portfolio insurance strategy is to limit the downside risk of a risky asset (or a portfolio of risky assets), while simultaneously maintaining most of the upside return potential. Evaluate three portfolio insurance techniques of your choice.
Consider a portfolio that is Delta neutral, with a Gamma of - 2,500 and a Vega of - 4,000. The following traded options are available:
| Delta | Gamma | Vega |
Option 1 | 0.3 | 0.25 | 1 |
Option 2 | 0.25 | 0.4 | 0.6 |
Calculate and explain what positions need to be taken to make the portfolio both Gamma and Vega neutral, as well as Delta neutral.
Related Book For
Principles of Managerial Finance
ISBN: 978-0134476315
15th edition
Authors: Chad J. Zutter, Scott B. Smart
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