Title: Long term portfolio protection
Authors: Robert Navratil - Charles University, Faculty of Mathematics and Physics (Czech Republic) [presenting]
Jan Vecer - Charles University, MFF (Czech Republic)
Abstract: The purpose is to discuss novel approaches how to protect potential portfolio losses on long term horizons in the scale of several decades, which is a typical investment horizon of pension fund investments. The prices of existing financial products, such as put or call options, are increasing as a function of maturity, and their prices quickly take a significant percentage of the underlying assets. In this respect, such financial products become prohibitively expensive on horizons longer than a couple of years at most. In addition, these contracts tend to insure only static rather than actively traded portfolios which are more appropriate for pension funds. Thus it is desirable to have a protection of actively traded portfolio, where the client is free to move her wealth within different asset classes, while the portfolio value is protected against any trading losses. This is a generalization of a previously studied contract known as a passport option, but in our setup, the price of this contract is small enough to be attractive on 20-30 year investment horizons and thus the respective hedging strategy can be potentially embedded in pension fund products.