Options on constant proportion portfolio insurance with guaranteed minimum equity exposure

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.