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Options on constant proportion portfolio insurance with guaranteed minimum equity exposure

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  • Luca Di Persio
  • Immacolata Oliva
  • Kai Wallbaum

Abstract

In the present paper we study a new exotic option offering participation in a dynamic asset allocation strategy, which is an extension of the well‐known Constant Proportion Portfolio Insurance (CPPI) strategy. Our novel approach consists in assuming that the percentage of wealth invested in stocks cannot go under a fixed level, called guaranteed minimum equity exposure (GMEE). In particular, our proposal ensures to overcome the so‐called cash‐in risk, typically related to a standard CPPI technique, simultaneously guaranteeing the equity market participation. We look deeper into the valuation of call and put options linked to this new CPPI‐GMEE strategy. A particular attention is devoted to the analysis of key parameters' value as to gain a better understanding of the sensitivities of the option prices, when changing, for example, the embedded guarantee level. To show the effectiveness of our proposal we provide a detailed computational analysis within the Heston‐Vasicek framework, numerically comparing the evaluation of the price of European plain vanilla options when the underlying is either a purely risky asset, a standard CPPI portfolio and a CPPI with GMEE.

Suggested Citation

  • Luca Di Persio & Immacolata Oliva & Kai Wallbaum, 2021. "Options on constant proportion portfolio insurance with guaranteed minimum equity exposure," Applied Stochastic Models in Business and Industry, John Wiley & Sons, vol. 37(1), pages 98-112, January.
    • Handle: RePEc:wly:apsmbi:v:37:y:2021:i:1:p:98-112
    DOI: 10.1002/asmb.2547
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    References listed on IDEAS

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    1. Cesari, Riccardo & Cremonini, David, 2003. "Benchmarking, portfolio insurance and technical analysis: a Monte Carlo comparison of dynamic strategies of asset allocation," Journal of Economic Dynamics and Control, Elsevier, vol. 27(6), pages 987-1011, April.
    2. S. Albeverio & V. Steblovskaya & K. Wallbaum, 2013. "Investment instruments with volatility target mechanism," Quantitative Finance, Taylor & Francis Journals, vol. 13(10), pages 1519-1528, October.
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