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 theHeston-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.
Options on constant proportion portfolio insurance with guaranteed minimum equity exposure / Di Persio, Luca; Oliva, Immacolata; Wallbaum, Kai. - In: APPLIED STOCHASTIC MODELS IN BUSINESS AND INDUSTRY. - ISSN 1526-4025. - (2020), pp. 1-15. [10.1002/asmb.2547]
Options on constant proportion portfolio insurance with guaranteed minimum equity exposure
Immacolata Oliva
;
2020
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 theHeston-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.File | Dimensione | Formato | |
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