Investments in money and capital markets involve different loss potentials that market participants should be able to manage. Below follows an overview and comparison of selected strategies to manage these risks. Portfolio insurance (PI) strategies were developed in the 1980s. They are used to hedge portfolios or individual investments against price losses. The volume of assets hedged with these strategies is significant. Different forms of individual strategies have developed over the years. Risk quantification and Value at Risk (VAR) strategies emerged around the same time. Risks of individual investments or portfolios were measured and different strategies were developed to take them into account in Value at Risk optimised portfolios (VaRoP). VaRoP is a strategy that calculates an optimal portfolio taking into account a given or permissible maximum VAR.
Both strategies are intended to protect portfolios from losses in value. Their similarities and differences as well as their successes are presented and summarised in this paper. Their applicability in practice is also examined.
Contents
Introduction
Portfolio Insurance
Stop-loss strategy
Synthetic put strategy
Constant-Proportion-Portfolio-Insurance
VAR and VaRoP
Comparison
Stop Loss and VAR / VaRoP
CPPI and VAR / VaRoP
Summary and outlook
Appendix: Assumptions and discussion
Discussion of assumptions
Bibliography
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