Many investors have been disappointed with the practical results of portfolio insurance programs, which attempt to achieve optionlike results through dynamic hedging. This article takes the simplest form of dynamic hedging, constant proportion portfolio insurance CPPI, as a model for developing a more optimal approach. The author uses Monte Carlo simulation to model the multiperiod median growth in discretionary wealth. In addition, he constructs leverage policies that mitigate the practical drawbacks to dynamic hedging. The article also shows that selfimposed ex ante borrowing constraints not the ex post constraint imposed by a margin call can, under certain conditions, improve the performance of dynamic hedging with respect to median terminal wealth.
The Journal of Risk Finance – Emerald Publishing
Published: Mar 1, 2001
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