Daugaard, D, Capital protection stratgies for investors, Journal of Applied Finance and Investment, 1, (2) pp. 51-55. ISSN 1326-9852 (1996) [Refereed Article]
Capital protection strategies are a classic case of putting theory into practice. They are a product of applying option pricing theory to the very practical activity of investing. Option pricing theory itself is a relatively new field. Developments and refinements of capital protection strategies have, therefore, been a recent phenomenon.
A capital protection strategy is the Australian equivalent to the investment strategy known as portfolio insurance in the United Sates. The objective of a capital protection strategy is ro achieve a high return when financial markets perform well, and to avoid a negative return when financial markets perform poorly. The strategy, therefore, has an asymmetric pay-off similar to that of a call option. Figure 1 contains the payoff for a capital protection strategy and the pay-off for a passive investment strategy - one which maintains a constant holding of investment assets.
The horizontal axis shows the return achieved by a particular set of assets. The vertical axis shows the return achieved on each of the two strategies. The passive investment strategy achieves the same as the assets - it is a forty-five degree line. In contrast, the capital protection strategy is immune from a negative return, but achieves a high proportion of the positive returns experienced by the assets.
Illustrating the objectives of a capital protection strategy is straightforward. However, designing a strategy to achieve those objectives is challenging.
This article explores the capital protection strategies used by investors. It outlines the strengths and weaknesses of each strategy. It also discusses the practical problems of implementation and the techniques to overcome these problems.
|Item Type:||Refereed Article|
|Keywords:||capital protection, investment strategy, derivatives|
|Research Division:||Commerce, Management, Tourism and Services|
|Research Group:||Banking, finance and investment|
|Objective Division:||Commercial Services and Tourism|
|Objective Group:||Financial services|
|Objective Field:||Finance services|
|UTAS Author:||Daugaard, D (Associate Professor Dan Daugaard)|
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