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Stop-loss strategies and derivatives portfolios

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  • Patrick L. Leoni

Abstract

We carry out a Monte-Carlo simulation of the long-term behaviour of a standard derivatives portfolio to analyse the performance of stop-loss strategies in terms of loss reductions. We observe that the more correlated the underlyings, the earlier the stop-loss activation for every acceptable level of losses. Switching from 0-correlation across underlyings to a very mild form of correlation significantly decreases the expected time of activation, and it significantly increases the probability of activating the stop-loss. Adding more correlation does not significantly change those features. We introduce the notion of laissez-faire strategies, and we show that those strategies always lead to lower average losses than stop-losses.

Suggested Citation

  • Patrick L. Leoni, 2008. "Stop-loss strategies and derivatives portfolios," International Journal of Business Forecasting and Marketing Intelligence, Inderscience Enterprises Ltd, vol. 1(1), pages 82-93.
    • Handle: RePEc:ids:ijbfmi:v:1:y:2008:i:1:p:82-93
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