A major requirement in running a contingent immunization portfolio policy is monitoring the relationship between the current market value of the portfolio and the required value of the floor portfolio. In this regard, assume a $300 million portfolio with a horizon of five years. The available market rate at the initiation of the portfolio is 14 percent, but the client is willing to accept 12 percent as a floor rate to allow you to use active management strategies. The current market values and current market rates at the end of Years 1, 2, and 3 are as follows:
End of Year
a. What is the required ending-wealth value for this portfolio?
b. What is the value of the required floor portfolio at the end of Years 1, 2, and 3? c. Compute the safety margin or deficiency at the end of Years 1, 2, and 3.