CPPI and Volatility

mapleleafs · January 17th, 2007, 7:27 am

How does CPPI benefit from an increase in implied volatility (index)? I thought CPPI performs poorly when the vol is high.

himalayan · January 17th, 2007, 9:17 am

If the vol of the underlying index is high then there is is a higher probability that the reference curve/bond floor will be hit. So in other words if the vol is high then there is a greater chance that the payoff from the cppi will only be 100. Unless I am missing something?

Sonyah · January 17th, 2007, 10:05 am

That's right - if the underlying is very volatile then you will be frequently switching between your risky and risk-free assets, causing the total value of the CPPI portfolio to reduce and leaving you increasingly more invested in the risk-free asset.The best thing for CPPI is a steadily rising market, with low volatility so you end up being completely invested in the risky underlying.

mapleleafs · January 18th, 2007, 6:21 am

so CPPI doesn't benefit from rising volatilitythis question is bad