Portfolio Insurance .

• Portfolio Insurance

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Exotic option - Examples

1 *Constant proportion portfolio insurance


Algorithmic trading - History

1 At about the same time Constant proportion portfolio insurance|

portfolio insurance was designed to create a synthetic put option on a

stock portfolio by dynamically trading stock index futures according

to a computer model based on the Black–Scholes option pricing model.


Structured products - Origin

1 * Constant Proportion Portfolio Insurance (CPPI)


Black Monday (1987) - Causes

1 Common strategies implemented by program trading involve an attempt to engage in arbitrage and portfolio

insurance strategies.


Black Monday (1987) - Causes

1 It made it hard – the portfolio insurance people were also trying to

sell their stock at the same time.


Credit derivatives - Types

1 * Synthetic constant proportion portfolio insurance (Synthetic

CPPI)


Robert D. Arnott - Bibliography

1 89.Portfolio Insurance: Trade-offs and Choices with R.G. Clarke, Financial

Analysts Journal, November/December 1987.


Robert D. Arnott - Bibliography

1 117.Portfolio Insurance's Future Rides on Futures with R.

Boling,'Feature',Pensions and Investment Age, September 1, 1986.


Constant proportion portfolio insurance

1 'Constant proportion portfolio insurance (CPPI)' is a trading strategy which allows an investor to maintain an exposure to the upside potential

of a risky asset while



1 Constant proportion portfolio insurance (CPPI) was first studied by

Perold (1986) for fixed income instruments and by Black and Jones (1987), Black and Rouhani (1989),

and Black and Perold for equity instruments.



1 In order to guarantee the capital invested, the seller of portfolio

insurance maintains a position in a Treasury bonds or liquid monetary

instruments, together with a leveraged position in a risky asset,

usually a market index.


Rebalancing investments - Rebalancing to control risk

1 The goal of rebalancing is to move the current asset allocation back in line to the

originally planned asset allocation (i.e., their preferred level of risk exposure). This rebalancing strategy is specifically known as a Constant-Mix Strategy and is one of

the four main dynamic strategies for asset allocation. The other three strategies are 1) Buy-and-Hold, 2) Constant-Proportion and 3) Option-Based Portfolio Insurance.


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Portfolio Insurance .

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