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arXiv · 1902.06505

Options on CPPI with guaranteed minimum equity exposure

L. Di Persio·I. Oliva. K. Wallbaum
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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. 2019-02-18. Options on CPPI with guaranteed minimum equity exposure. https://arxiv.org/abs/1902.06505

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