Questions: 1. A portfolio is currently worth $10 million and has a beta of 1.0. An index is currently standing at 800. Explain how a put option on the index with a strike of 700 can be used to provide portfolio insurance.
2. Calculate the value of a three-month at-the-money European call option on a stock index when the index is at 250, the risk-free interest rate is 10% per annum, the volatility of the index is 18% per annum, and the dividend yield on the index is 3% per annum.