The Research Of The Pricing Of CPPI

Constant proportion portfolio insurance strategy is a dynamic process to adjusted the ratio of risk-freeasset and risk asset by set by the requirements for return on assets, the risk level of affordability and thevalue of the CPPIs. This strategy is frequently used in the securities investment decisions, the guidingideology is: When the stock market rise, the value of the portfolio rise, too. Thus, the risk-bearing capacityincreases, and the proportion invested in stocks will increase. Conversely, when stock prices fell, the netvalue of the portfolio fell as well, thus the risk bearing capacity decreases, and the proportion invested instocks of course will reduce.The CPPIs in China is divided into two parts: the bond assets and equity assets. In the dynamic time,the ratio of stock assets and bond assets will be dynamically adjusted by a certain percentage. The key ofadjustment is the multiplier M. When the stock fell, the greater the M is, the faster the portfolio value willfall to the insurance limit. In order to preserve the implementation, more times of implement dynamicadjustment are needed. In the ideal conditions that the price of risky asset changes continually and thebalance of risk-free assets and risky assets can be kept, the minimum income of the portfolio insurance isequal to the insurance limit settled. But under the rapidly changing financial environment, it’s nearlyimpossible to reach the two conditions, so the risk of portfolio fall down below the insurance limit is exist.In order to reduce that risk, a put option is introduced to hedge the risk assets, a new option pricingmethod based on the Markov process is proposed in this paper. Use an option pricing method based on theMarkov process by the feature of the put option in the constant proportion portfolio insurance, and made acompare with Monte Carlo pricing method, arrived the conclusion that the Markov method can reach theresult more accurately and more quickly, and have advantage in the convergence of the price, gamma, vegaand so on。The introduction of this article described the background, purpose, research framework and innovation,the second part summarized the relevant literature in the past, the third section described the relevantconcepts involved in this paper: such as a constant proportion portfolio insurance, Markov processes andGreeks, the fourth section analyzed the pricing method of CPPIs based on Markov process, the fifth sectiondiscusses the numerical characteristics of the pricing method based on Markov, the sixth section reveals the convergence results based on the Markov process, and made a compare with Monte Carlo pricing method,the last part is Conclusions and Prospects.