Based On The Option Portfolio Insurance Theory And Empirical Research

With the development of financial market in China, a series of Principal-Protected Funds were launched to meet the customers'needs. Portfolio insurance strategy is the core investment strategy to Principal-Protected Funds. Also, to Pension Funds and Mutual Funds with low risk preference, portfolio insurance is an applicable investment approach.This paper introduced the basic concept of portfolio insurance and analyzed the theories of Option-Based Portfolio Insurance (OBPI), Constant Proportion Portfolio Insurance (CPPI) and Time Invariant Portfolio Insurance (TIPP). The focus in this paper was on the key influencing factors to the performance of OBPI with synthetic put, including risk-free rate, strike price, adjustment frequency etc., and the comparison of performance among OBPI, CPPI and TIPP. The closing index of Shanghai Stock Exchange Composite Index between Jan. 1st, 2002 and Dec. 31st, 2006 was used for empirical study.The results indicated: The bigger the value of risk-free rate, the better the result of OBPI;The performance of OBPI would be better when exercising lower strike price in an upside market or exercising higher strike price in a downside market; Trading cost is not the key influencing factor to the outcome of portfolio insurance, actually, the performance is path-dependent; Under the same condition of insurance period, adjustment frequency and floor, in terms of growing competence, OBPI is superior to CPPI, and CPPI is superior to TIPI; In terms of hedging competence, TIPI is superior to CPPI, and CPPI is superior to OBPI.The key finding in this paper was all the 3 approaches (OBPI, CPPI and TIPP) have their own advantageous and disadvantageous. In practice, to decide an applicable approach, investor needs to balance the investment objectives and the forecast of market trend. There hardly has one-for-all approach in such complex financial market.