H2 Portfolio Insurance

A portfolio manager insures a share holding with puts. The puts expire early, mid or late.

Objective

Insure the holding against a fall through three periods. Assessed on profit and loss.

What it shows

• Portfolio insurance: a put as a floor under a holding.
• The cost of the floor against the cost of a fall.
• Expiry: a longer put costs more and covers more of the session.

Watch out for

• Buying the early put and meeting the fall after it has expired.
• Buying puts on a different number of shares than the holding.
• Paying for protection in a session where the share does not fall.

Who takes part

• Portfolio manager — every student. Holds 10,000 SHARE and trades P45E, P45M and P45L, puts at 45 that expire early, mid and late.

Class size

Ten to forty students in one role. The puts are priced by the class.