Portfolio insurance through derivatives: main concept and its limitations
Portfolio insurance through derivatives: main concept and its limitations

Summary/Abstract: Option markets play a dominant role for institutional investors, but are gaining on importance for wealthy private clients as well. Options are used to improve portfolio performance and there are numerous strategies that can be implemented in asset allocation by using options. Portfolio insurance strategies are an important element of portfolio management. The aim of this paper is first to present the basic concept of portfolio insurance and its main strategies. Secondly, the findings and empirical studies on various strategies comparisons are described. Currently, the two most popular strategies using portfolio insurance are synthetic protective put approach by Rubinstein Leland (1981) and constant portfolio insurance by Black and Jones (1987), and Black and Perold (1992). Therefore these two concepts have been analysed more profoundly in this paper. Finally, the critical look is taken on Crash 1987 and various experts’ views on the connection of this event with the portfolio insurance. The power of financial markets is incredible. Besides fundamental factors and market trends, the power of individuals and institutions that possess the aboveaverage knowledge and reputation is the most significant generator of the financial market evolution.

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