Synthetic puts and portfolio insurance strategies
1984; Euromoney Institutional Investor; Volume: 10; Issue: 3 Linguagem: Inglês
10.3905/jpm.1984.408960
ISSN2168-8656
AutoresJ. Clay Singleton, Robin Grieves,
Tópico(s)Leadership, Behavior, and Decision-Making Studies
ResumoP 63 5 ortfolio insurance with synthetic puts has relater section considers the slightly more complicated cently become a popular product with several major analysis when multiple events or time periods are E i3 security firms. Although they promise that these possible. Y strategies provide risk insurance for a very small premium, this promise calls for careful analysis. In this paper, we discuss the mechanics, costs, and benefits of hedging with synthetic puts. Our anaIysis relies only on the absence of sure arbitrage profits in stocks and bonds. Our major conclusion is that these strategies clearly succeed at reducing risk, but that they do so only at a fair price. Portfolio managers would naturally like to insure their portfolios against significant declines while preserving upward movements. In theory, they could achieve this by buying a protective put on each stock in their portfolio. The trouble with this ap,proach is that listed puts are not available for all securities. More important, the risk of a portfolio of stocks ist less than the sum of the individual risks, which means that it would be unnecessarily expensive to buy puts on each stock. What managers really need are puts on entire portfolios, not portfolios of puts, but the uniqueness of managed portfolios makes the listing of such puts impractical. Although several firms will tziilor portfolio puts for a fee, their strategies are neither esoteric nor necessarily cost effective. Therefore, to consider the full costs as well as i
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