LONDON (Reuters) – Fund managers who bought derivatives to protect their portfolios before the stock market’s recent downturn could have made a quick 10-fold return but most have held onto the insurance ahead of what is expected to be a turbulent summer.<\/p>\n
The FTSE 100 index has tumbled more than 7 percent over the past three weeks on concerns over inflation and the direction of interest rates, worries that economic growth may fade and concerns about red-hot commodity prices.<\/p>\n
However, in the weeks leading up to the downturn some fund managers bought put options — which offer the owner the right to sell an asset at a pre-determined price — to give their portfolios some protection against a stock market fall.<\/p>\n
Since the market downturn the price of puts has rocketed and those managers have profited as a result.<\/p>\n
For example, a FTSE 100 index put option with a strike price of 5,925 expiring in June 2006 was worth 73 pounds on May 10 when the FTSE 100 index closed at 6,083.4.<\/p>\n
By May 22, when the FTSE closed at 5,532.7, the price of the same put had soared to 779 pounds.<\/p>\n