Title: Stop-loss strategies and derivatives portfolios

Authors: Patrick L. Leoni

Addresses: University of Southern Denmark, Department of Business and Economics, Campusvej 55, DK-5230 Odense M, Denmark

Abstract: We carry out a Monte-Carlo simulation of the long-term behaviour of a standard derivatives portfolio to analyse the performance of stop-loss strategies in terms of loss reductions. We observe that the more correlated the underlyings, the earlier the stop-loss activation for every acceptable level of losses. Switching from 0-correlation across underlyings to a very mild form of correlation significantly decreases the expected time of activation, and it significantly increases the probability of activating the stop-loss. Adding more correlation does not significantly change those features. We introduce the notion of laissez-faire strategies, and we show that those strategies always lead to lower average losses than stop-losses.

Keywords: derivatives; stop-loss strategies; Monte-Carlo simulation; loss reduction; laissez-faire.

DOI: 10.1504/IJBFMI.2008.020816

International Journal of Business Forecasting and Marketing Intelligence, 2008 Vol.1 No.1, pp.82 - 93

Available online: 17 Oct 2008 *

Full-text access for editors Access for subscribers Purchase this article Comment on this article