P. F. Chang holds a well-diversified portfolio of high-quality, large-cap stocks. The current value of Chang’s portfolio is $735,000, but he is concerned that the market is heading for a big fall (perhaps as much as 20%) over the next 3 to 6 months. He doesn’t want to sell all his stocks because he feels they all have good long-term potential and should perform nicely once stock prices have bottomed out. As a result, he’s thinking about using index options to hedge his portfolio. Assume that the S&P 500 currently stands at 1,470 and among the many put options available on this index are two that have caught his eye: (1) a 6-month put with a strike price of 1,450 that’s trading at $26, and (2) a 6-month put with a strike price of 1,390 that’s quoted at $4.50. a. How many S&P 500 puts would Chang have to buy to protect his $735,000 stock portfolio? How much would it cost him to buy the necessary number of 1,450 puts? How much would it cost to buy the 1,390 puts?

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