Portfolio insurance, Alternative method for guaranteeing capitalDynamic allocation using a dynamic rebalancing between a Risky and a Riskless Asset depending on the Underlying (U/L) performance If the U/L does not perform, the CPPI decreases its exposure.The main risk of CPPI to the CPPI Manager (Hedger) is the Gap RiskGap risk is the risk of a serious downfall of the underlying beyond the limit allowed to provide the capital back at maturity A few parameters :The Bond Floor : calculated at inception, its the Zero Coupon level corresponding to the maturity of the CPPIMultiplier : It calculates the exposure. Multiplier = (1 / Gap Size)Example : If Gap risk = 20%, Multiplier = 5Portfolio value : Sum of the risky and riskless assetThreshold : Limits inside which, the CPPI Manager assesses that there is no need to re-balance. More commonly used for CPPIs on illiquid products (Funds, Credit Derivatives structures) since its all linked on liquidity of the U/LA few terms : Cushion or Health = Portfolio Value Bond FloorThe only subjective data for a CPPI Manager are :Gap Size & Fees. Management Fees acts like a dividend, they reduce the strategy price
Last edited by greghm
on February 6th, 2007, 11:00 pm, edited 1 time in total.