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Option-Based performance participation

Author

Listed:
  • Rudi Zagst
  • Julia Kraus
  • Philippe Bertrand

    () (CERGAM - Centre d'Études et de Recherche en Gestion d'Aix-Marseille - AMU - Aix Marseille Université - UTLN - Université de Toulon, AMU IAE - Institut d'Administration des Entreprises (IAE) - Aix-en-Provence - AMU - Aix Marseille Université)

Abstract

The purpose of this article is to introduce and analyze the option-based performance participation (OBPP) as performance participation method based on a portfolio consisting of two risky assets. By generalizing the provided guarantee to a participation in the performance of a second risky underlying, this new kind of strategies allows to cope with well-known problems associated with standard portfolio insurance methods, especially in times of low or even negative interest rates. However, the minimum guaranteed portfolio value at the end of the investment horizon is not deterministic anymore, but subject to systematic risk instead. Hence, we compare the newly introduced OBPP with the option-based portfolio insurance (OBPI) in various dimensions such as terminal payoffs, mean-variance efficiency and stochastic dominance. To do this, general analytical expressions for all moments of the payoff distributions of the two strategies are derived. Furthermore, we show how an OBBP can be designed so that it stochastically dominates a given OBPI (with a given probability) while retaining the potential for a participation in rising markets via a so-called reserve asset. Numerical case studies show how the proposed concept can be easily implemented for practical applications.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Rudi Zagst & Julia Kraus & Philippe Bertrand, 2019. "Option-Based performance participation," Post-Print hal-02142054, HAL.
    • Handle: RePEc:hal:journl:hal-02142054
    DOI: 10.1016/j.jbankfin.2019.05.009
    Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-02142054
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