Risk minimisation using options and risky assets

Mohd Azdi Maasar (), Diana Roman () and Paresh Date ()
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Mohd Azdi Maasar: Universiti Teknologi MARA Malaysia
Diana Roman: Brunel University London
Paresh Date: Brunel University London

Operational Research, 2022, vol. 22, issue 1, No 17, 485-506

Abstract: Abstract We consider mean-risk portfolio optimisation models, with risk measured by symmetric measures (variance) as well as downside or tail measures (lower partial moments, conditional value at risk). A framework for including index options in the universe of assets, in addition to stocks, is provided. The exercise of index options is settled in cash, making this implementable with a variety of strike prices and maturities. We use a dataset with stocks from FTSE 100 and index options on FTSE100. Numerical results show that, for low risk-low return and to medium risk-medium return portfolios, the addition of an index put further reduces the risk to a considerable extent, particularly in the case of mean-CVaR efficient portfolios, where the left tail of the portfolio return distribution is dramatically improved. For high risk-high return portfolios, the inclusion of an index call improves the right tail of the return distribution, creating thus the opportunity for considerably higher returns.

Date: 2022
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DOI: 10.1007/s12351-020-00559-5

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