The fund manager holds 1000 shares in XYZ Plc and wants to ensure the portfolio

Question

A fund manager wants to protect the value of his portfolio and has particular concerns regarding one of his holdings, XYZ Plc.

The fund manager holds 1000 shares in XYZ Plc and wants to ensure the portfolio value is maintained until after the fund revaluation, which takes place in June.

Assuming today is the 1st November, explain which of the options from the table below is most suitable, giving an appropriate explanation and calculate the premium payable.

Answer 1

Since the portfolio manager is concerned with specific security, he should purchase puts on that position. Holding 1000 shares would require 10 puts (100 shares per) with expiry in July so as to protect his position past the date of revaluation. The strike price should be at or near the current market price. I am not given the table to select from so I can only comment that the premium would be the combination of any intrinsic value and the time value until expiration.