Authors: Chia Chun Lo; Konstantinos Skindilias
Addresses: Department of Finance, University of Macau, Macau, China ' London Metropolitan Business School, London Metropolitan University, London, UK
Abstract: We propose a generalised constant proportion portfolio insurance (CPPI) strategy for a commodity futures fund, which promises at least a partial principal guarantee at the end of the investment horizon. We present the generalised rebalancing rules to allocate capital between a risk-free asset and a futures margin account. Our formula guarantees that the fund satisfies both the margin requirement and the maximum exposure to the risky asset permitted by the CPPI at any time during the investment horizon. We find that although investment in futures is risky because of the use of significant leverage, generally, the proposed futures-based CPPI strategy performs better than the traditional CPPI-spot strategies. The satisfactory results in this paper will not only draw attention from academia but also from commodity trading advisors fund managers.
Keywords: portfolio insurance strategy; constant proportion portfolio insurance; CPPI; commodity futures; stochastic convenient yield modelling; rebalancing rules; capital allocation; risk-free assets; futures margin accounts.
International Journal of Financial Engineering and Risk Management, 2013 Vol.1 No.1, pp.55 - 72
Received: 02 Nov 2012
Accepted: 09 Jan 2013
Published online: 04 May 2013 *