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  • Difficulties With Protective Puts: PGP17 Portf Manag Tools (Nov 19)

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    Kumar Prashant
    28 vizualizări7 pagini
    This document discusses various portfolio management tools, including protective puts and portfolio insurance strategies. It begins by noting some difficulties with using protective puts directly, such as a lack of traded puts for certain assets. It then introduces the Black-Scholes option pricing formula, which can be used to construct a hedging portfolio that replicates the payoff of a protective put. The document provides an example of how to implement a protective put strategy for a stock when no traded put is available, by investing in a combination of the stock and risk-free assets according to the Black-Scholes formula. Finally, it discusses evaluating portfolio performance using risk-adjusted return measures and considering the appropriate measure based on the investment assumptions.

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    This document discusses various portfolio management tools, including protective puts and portfolio insurance strategies. It begins by noting some difficulties with using protective puts directly, such as a lack of traded puts for certain assets. It then introduces the Black-Scholes option pricing formula, which can be used to construct a hedging portfolio that replicates the payoff of a protective put. The document provides an example of how to implement a protective put strategy for a stock when no traded put is available, by investing in a combination of the stock and risk-free assets according to the Black-Scholes formula. Finally, it discusses evaluating portfolio performance using risk-adjusted return measures and considering the appropriate measure based on the investment assumptions.

    Drepturi de autor:

    © All Rights Reserved
    Descărcați ca PDF, TXT sau citiți online pe Scribd
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    28 vizualizări7 pagini

    Difficulties With Protective Puts: PGP17 Portf Manag Tools (Nov 19)

    Încărcat de

    Kumar Prashant
    This document discusses various portfolio management tools, including protective puts and portfolio insurance strategies. It begins by noting some difficulties with using protective puts directly, such as a lack of traded puts for certain assets. It then introduces the Black-Scholes option pricing formula, which can be used to construct a hedging portfolio that replicates the payoff of a protective put. The document provides an example of how to implement a protective put strategy for a stock when no traded put is available, by investing in a combination of the stock and risk-free assets according to the Black-Scholes formula. Finally, it discusses evaluating portfolio performance using risk-adjusted return measures and considering the appropriate measure based on the investment assumptions.

    Drepturi de autor:

    © All Rights Reserved
    Descărcați ca PDF, TXT sau citiți online pe Scribd
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    din 7

    11/21/2014

    IAPM
    PGP17
    Portf Manag Tools(Nov19)

    DifficultieswithProtectivePuts
    Notradedputsontheshareswewishtoinsure
    Portf insuranceonamorecomplicatedbasketofassets
    Putsareavailable,butnotwiththerequired

    strike/expiry

    11/21/2014

    EnterBlackScholes formula
    Black
    BlackScholes
    Scholes formulabesidesprovidingaformulafor

    thepriceofanoption,alsotellsushowthatoptioncan
    bereplicatedusingstocksandbonds.
    Wewillusethispartoftheformulatoconstructa
    portfolioinsurancestrategy

    BlackScholes Putoptionpremiums
    The price of a put (with strike K) in the BlackBlack

    Scholes model is given by

    P = [PV (K ) N (d2)] [S0 N (d1)],


    where d1 and d2 are

    11/21/2014

    ThusbuyingaPutisequivalentto

    investingPV(K)xN(d2)inariskfreeasset
    plus
    investingS0 N(d1) inthestock.
    BSformulagivesthecompletereplicationportfoliofor

    theoption

    Useofthisinmanagingaportfolio
    Ifyouwanttobuyaspecificportfolioofassetsandand

    aninsurancepolicyguaranteeingthatyourtotal
    investmentwillnotbeworthlessthanK,youcan
    achievethisbyinvestingacertainproportioninthe
    portfolioandtheremaininginriskfreeassets.

    11/21/2014

    Supposeyoudecidetoinvest$1000inNFYstock

    (currentlysellingatRs.56)andinprotectiveputsof
    thestockwithanexercisepriceofRs.50,foraoneyear
    period.
    The stock pays no dividends; you are hoping for a large capital

    gain at the end of the year, but you want to guard against
    NFY
    NFYss prices declining

    SupposethatthereisnotradedputonNFY,howdo

    youimplementatradingstrategythatwillbeapprox
    equivalenttotheprotectiveput?
    7

    PRNG PseudoRandomNumber
    Generators
    WhatgoesbehindRAND()PRNG
    P d
    d
    b
    Pseudo-random
    numbers
    Whatistheseedofarandomnumber?
    Considerthis:Midsquaremethod(oneoftheearliestPRNG)

    Xo=0.9876
    9753537
    Xo^2=0.97535376
    X1= 0.5353
    X1^2=0.28654609
    X2=0.6546

    X0istheseedofthisRandomnumbergenerator.
    8

    11/21/2014

    PortfolioPerformanceEvaluation(Nov20)

    AdjustingReturnsforRisk
    Thesimplestandmost

    popularwaytoadjust
    returnsforriskisto
    comparetheportfolios
    returnwiththereturns
    onacomparison
    universe(groupoffunds
    orportfolioswithsimilar
    riskcharacteristics)

    10

    11/21/2014

    IsQbetterthanP?
    Should I transfer some of my funds from P to Q?
    11

    WhichMeasureisAppropriate?
    Itdependsoninvestmentassumptions
    p
    p
    1) Iftheportfoliorepresentstheentireriskyinvestment,then
    usetheSharpemeasure.
    2)Iftheportfolioisoneofmanycombinedintoalarger
    investmentfund,usetheJensenortheTreynor measure.
    TheTreynor measureisappealingbecauseitweighsexcess
    returnsagainstsystematicrisk.
    i
    i i k

    12

    11/21/2014

    FurtherReading
    ReadCh.18,pages644647foranicehistorical
    ReadCh.18,pages644 647foranicehistorical

    perspectiveofPortfolioInsurance
    InvestmentsandRiskManagement:
    Aaron Brown: Building the wings on your way down

    ImplicationsofMultifactormodelstopractice
    Cochrane: Portfolio advice for multifactor world
    (http://info.freeman.tulane.edu/breese714/Investments%20Spr
    ing%202006/Readings/cochrane2.pdf)

    13

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