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Risk minimisation using options and risky assets

Author

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  • Mohd Azdi Maasar

    (Universiti Teknologi MARA Malaysia)

  • Diana Roman

    (Brunel University London)

  • Paresh Date

    (Brunel University London)

Abstract

We consider mean-risk portfolio optimisation models, with risk measured by symmetric measures (variance) as well as downside or tail measures (lower partial moments, conditional value at risk). A framework for including index options in the universe of assets, in addition to stocks, is provided. The exercise of index options is settled in cash, making this implementable with a variety of strike prices and maturities. We use a dataset with stocks from FTSE 100 and index options on FTSE100. Numerical results show that, for low risk-low return and to medium risk-medium return portfolios, the addition of an index put further reduces the risk to a considerable extent, particularly in the case of mean-CVaR efficient portfolios, where the left tail of the portfolio return distribution is dramatically improved. For high risk-high return portfolios, the inclusion of an index call improves the right tail of the return distribution, creating thus the opportunity for considerably higher returns.

Suggested Citation

  • Mohd Azdi Maasar & Diana Roman & Paresh Date, 2022. "Risk minimisation using options and risky assets," Operational Research, Springer, vol. 22(1), pages 485-506, March.
  • Handle: RePEc:spr:operea:v:22:y:2022:i:1:d:10.1007_s12351-020-00559-5
    DOI: 10.1007/s12351-020-00559-5
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    References listed on IDEAS

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