A type of capital protection product that has no cap placed on its performance, while typically offering synthetic participation in the performance of a fund/ a portfolio. Portfolio insurance (PI) is deployed as a strategy to hedge (protect, insure) an equities portfolio (generally a portfolio of risky assets) against the market risk by taking an opposite position (short position) in certain equity index derivatives (e.g., index futures).
Portfolio insurance is constructed by embedding capital guarantee (capital protection) derivative securities in a dynamic trading strategy in order to enhance the performance of a certain underlying assets. Such a portfolio insurance takes many forms, mainly including constant proportion portfolio insurance (CPPI) and option-based portfolio insurance (OBPI). Both types focus on a certain combination of risk-free assets and risky assets.
After construction, the portfolio is rebalanced and the level of risk taken will depend on the difference between the current value of the portfolio and the insurance amount- i.e., the amount needed to cover all its future obligations.
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