Portfolio insurance is an important part of the process of dynamic asset allocation. The terms floor and upside capture are important with regard to portfolio insurance. The floor is the minimum payoff level of portfolio insurance.
The portfolio insurances provide the investors with a certain percentage of the basic price of the portfolios. The payments are normally made on the payoff dates.
Process of Portfolio Insurance
The portfolio insurances are primarily accrued in order to assure the capital that has been put in by the investors. The option writer or seller has to purchase a zero coupon bond in order to make sure that the capital is insured.
Constant Proportion Portfolio Insurance
Constant proportion portfolio insurance acts like a capital guarantee derivative security. This insurance provides the underlying investments with the scope to perform better. The constant proportion portfolio insurance is separate from the bond plus calls in terms of returns.
However, the bond plus calls investment guarantees only the initial cushion, which consists of the remaining profits from the investments made. The constant proportion portfolio insurance provides the investors with purchasing power through multipliers. The constant proportion portfolio insurance has been derived from the interest rates.
There are certain terms that are important with regard to constant proportion portfolio insurance like the following:
The bond floor is primarily the lowest level that a certain portfolio is expected to fall to. The constant proportion portfolio insurance also operates by some rules that are called its trading rules.enient for the payer to plan the payments.
Last Updated on : 8th July 2013