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Numerical Methods and Optimization in Finance by Enrico Schumann, Dietmar Maringer, Manfred Gilli

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Chapter Nine

Financial Simulation at Work

Some Case Studies

Publisher Summary

Constant proportion portfolio insurance (CPPI) is a dynamic asset allocation strategy that aims at providing a guaranteed minimum level of wealth G at maturity T while allowing some participation in market profits. In its simplest incarnation, products with a guaranteed payback can be considered as a portfolio. The conceptual beauty of this strategy is hampered by real-life limitations. The risky assets are often hedge funds or other investment funds that are only traded at low intervals or might be sensitive to large volumes. The former can lead to gap risk: if the price drops substantially between adjustments, the floor constraint can be violated and the shortfalls ...

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