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Option Based Portfolio Insurance Revisited

Published online by Cambridge University Press:  10 May 2011

R. Bouchaib
R. Bouchaib
Affiliation:
ING Group, Corporate Insurance Risk Management, Amstelveenseweg 500, 1081 KL Amsterdam, The Netherlands. P.O. Box 810, 1000 AV Amsterdam., Email: [email protected]
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Abstract

In recent years, Constant Proportion Portfolio Insurance (CPPI) has been the most widely recognised form of portfolio insurance among market practitioners, despite a lack of theoretical framework to support it. This paper presents a revised formulation of Option Based Portfolio Insurance (OBPI) and shows, through a case study, how it can be used as a structured product and applied in practice as a dynamic investment strategy for insurance and pensions funds such as with-profits funds. CPPI and the Revised Option Based Portfolio Insurance (ROBPI) technique adopted in this paper are similar in the sense that they rely on dynamic allocation between risky and risk-free assets to provide downside protection. Comparison between the two methods shows that ROPBI is more efficient and forward looking, giving more information about downside risk and producing less volatile asset allocation, which reduces transaction costs and any market impact.

Keywords

Option Based Portfolio InsuranceConstant Proportion Portfolio InsuranceOption replicating portfolioStructured productsCall optionCall-spread optionDynamic Asset AllocationWith-profits fundsRisky-asset
Type
Papers
Information
Annals of Actuarial Science , Volume 2 , Issue 2 , September 2007 , pp. 195 - 215
Copyright
Copyright © Institute and Faculty of Actuaries 2007

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