Investments, tenth edition

  Portfolio Insurance 

 In Chapter 20, we showed that protective put strate-

gies offer a sort of insurance policy on an asset. The 

protective put has proven to be extremely popular with 

investors. Even if the asset price falls, the put conveys 

the right to sell the asset for the exercise price, which 

is a way to lock in a minimum portfolio value. With an 

at-the-money put ( X   5   S  

0

 ), the maximum loss that can be realized is the cost of the put. 

The asset can be sold for  X,  which equals its original value, so even if the asset price 

falls, the investor’s net loss over the period is just the cost of the put. If the asset value 

increases, however, upside potential is unlimited.  Figure 21.10  graphs the profit or loss 

on a protective put position as a function of the change in the value of the underlying 

asset,  P.    

 What is the elasticity of a put option currently 

selling for $4 with exercise price $120 and hedge 

ratio  2 .4 if the stock price is currently $122? 

 CONCEPT CHECK