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Options on CPPI with guaranteed minimum equity exposure

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  • L. Di Persio
  • I. Oliva. K. Wallbaum

Abstract

In the present paper we provide a two-step principal protection strategy obtained by combining a modification of the Constant Proportion Portfolio Insurance (CPPI) algorithm and a classical Option Based Portfolio Insurance (OBPI) mechanism. Such a novel approach consists in assuming that the percentage of wealth invested in stocks cannot go under a fixed level, called guaranteed minimum equity exposure, and using such an adjusted CPPI portfolio as the underlying of an option. The first stage ensures to overcome the so called cash-in risk, typically related to a standard CPPI technique, while the second one guarantees the equity market participation. 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 guaranteed minimum equity exposure.

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  • L. Di Persio & I. Oliva. K. Wallbaum, 2019. "Options on CPPI with guaranteed minimum equity exposure," Papers 1902.06505, arXiv.org.
    • Handle: RePEc:arx:papers:1902.06505
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    References listed on IDEAS

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