portfolio insurance

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The use of a financial futures and options market to protect the value of a portfolio of investments. For example, a fund manager may expect the general level of prices to fall on the stock exchange. The manager could protect the portfolio by selling the appropriate number of index futures, which could then be bought back at a profit if the market falls. Alternately, the manager could establish the value of the portfolio at current prices by buying put options, which would provide the opportunity to benefit if there was a rise in the general level of prices.

Subjects: Financial Institutions and Services.

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