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A scenario-based description of optimal American capital guaranteed strategies

Sami Attaoui and Vincent Lacoste
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Vincent Lacoste: Pôle Finance Responsable - Rouen Business School - Rouen Business School

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Abstract: The aim of the paper is to compare portfolio strategies with partial guarantee of the initial capital. We consider the option based and the constant proportion portfolio insurance strategies with both European and American features. We provide explicit formulae for all strategies and we recall the utility criteria for which each of them is optimal. Relying on historical and Monte Carlo simulations, we show that the behaviour of the strategies differs significantly in the case of a bear market. We further focus our attention on the liquidation values when market bounces back after a sharp drop, as it has been the case recently. The American CPPI strategy usually outperforms the American OBPI due to the Asian component of the former despite the lookback characteristic of the latter. To complete our analysis of the liquidation values, we exhibit the behaviour of the deltas of our strategies.

Date: 2013-06
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Published in Finance, 2013, Vol. 34 (n° 2), p. 65

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