Risk minimisation using options and risky assets

• Published in: Operational Research
• Main Author: Maasar M.A.; Roman D.; Date P.
• Format: Article
• Language: English
• Published: Springer Science and Business Media Deutschland GmbH 2022
• Online Access: https://www.scopus.com/inward/record.uri?eid=2-s2.0-85083795494&doi=10.1007%2fs12351-020-00559-5&partnerID=40&md5=24b14e0fedab4dc0b8004977a38326da

We consider mean-risk portfolio optimisation models, with risk measured by symmetric measures (variance) as well as downside or tail measures (lower partial moments, conditional value at risk). A framework for including index options in the universe of assets, in addition to stocks, is provided. The exercise of index options is settled in cash, making this implementable with a variety of strike prices and maturities. We use a dataset with stocks from FTSE 100 and index options on FTSE100. Numerical results show that, for low risk-low return and to medium risk-medium return portfolios, the addition of an index put further reduces the risk to a considerable extent, particularly in the case of mean-CVaR efficient portfolios, where the left tail of the portfolio return distribution is dramatically improved. For high risk-high return portfolios, the inclusion of an index call improves the right tail of the return distribution, creating thus the opportunity for considerably higher returns. © 2020, The Author(s).