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Theory of Performance Participation Strategies


  • Julia Kraus
  • Philippe Bertrand
  • Rudi Zagst


The purpose of this article is to introduce, analyze and compare two performance participation methods based on a portfolio consisting of two risky assets: Option-Based Performance Participation (OBPP) and Constant Proportion Performance Participation (CPPP). By generalizing the provided guarantee to a participation in the performance of a second risky underlying, the new strategies allow to cope with well-known problems associated with standard portfolio insurance methods, like e.g. the CPPI cash lock-in. This is especially an issue in times of market crisis. However, the minimum guaranteed portfolio value at the end of the investment horizon is not deterministic anymore, but subject to systematic risk instead. With respect to the comparison of the two strategies, various criteria are applied such as comparison of terminal payoffs and payoff distributions. General analytical expressions for all moments of both performance participation strategies as well as standard OBPI and CPPI are derived. Furthermore, dynamic hedging properties are examined, in particular classical delta hedging.

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  • Julia Kraus & Philippe Bertrand & Rudi Zagst, 2013. "Theory of Performance Participation Strategies," Papers 1302.5339,
  • Handle: RePEc:arx:papers:1302.5339

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    References listed on IDEAS

    1. Philippe Bertrand & Jean-Luc Prigent, 2005. "Portfolio Insurance Strategies: OBPI versus CPPI," Post-Print hal-01833077, HAL.
    2. Margrabe, William, 1978. "The Value of an Option to Exchange One Asset for Another," Journal of Finance, American Finance Association, vol. 33(1), pages 177-186, March.
    3. Snorre Lindset, 2004. "Relative Guarantees," The Geneva Papers on Risk and Insurance Theory, Springer;International Association for the Study of Insurance Economics (The Geneva Association), vol. 29(2), pages 187-209, December.
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    Cited by:

    1. Bahaji, Hamza, 2014. "Equity portfolio insurance against a benchmark: Setting, replication and optimality," Economic Modelling, Elsevier, vol. 40(C), pages 382-391.

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