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DOI: 10.4230/OASIcs.SCOR.2016.9

Portfolio Optimisation Using Risky Assets with Options as Derivative Insurance

Authors: Mohd A. Maasar, Diana Roman, and Paresh Date

Published in: OASIcs, Volume 50, 5th Student Conference on Operational Research (SCOR 2016)

Abstract

We introduce options on FTSE100 index in portfolio optimisation with shares in which conditional value at risk (CVaR) is minimised. The option considered here is the one that follows FTSE100 Index Option standards. Price of options are calculated under the risk neutral valuation. The efficient portfolio composed under this addition of options shows that put option will be selected as part of the investment for every level of targeted returns. Main finding shows that the use of options does indeed decrease downside risk, and leads to better in-sample portfolio performance. Out-of-sample and back-testing also shows better performance of CVaR efficient portfolios in which index options are included. All models are coded using AMPL and the results are analysed using Microsoft Excel. Data used in this study are obtained from Datastream. We conclude that adding a put index option in addition to stocks, in order to actively create a portfolio, can substantially reduce the risk at a relatively low cost. Further research work will consider the case when short positions are considered, including writing call options.

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Mohd A. Maasar, Diana Roman, and Paresh Date. Portfolio Optimisation Using Risky Assets with Options as Derivative Insurance. In 5th Student Conference on Operational Research (SCOR 2016). Open Access Series in Informatics (OASIcs), Volume 50, pp. 9:1-9:17, Schloss Dagstuhl – Leibniz-Zentrum für Informatik (2016)

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@InProceedings{maasar_et_al:OASIcs.SCOR.2016.9,
  author =	{Maasar, Mohd A. and Roman, Diana and Date, Paresh},
  title =	{{Portfolio Optimisation Using Risky Assets with Options as Derivative Insurance}},
  booktitle =	{5th Student Conference on Operational Research (SCOR 2016)},
  pages =	{9:1--9:17},
  series =	{Open Access Series in Informatics (OASIcs)},
  ISBN =	{978-3-95977-004-0},
  ISSN =	{2190-6807},
  year =	{2016},
  volume =	{50},
  editor =	{Hardy, Bradley and Qazi, Abroon and Ravizza, Stefan},
  publisher =	{Schloss Dagstuhl -- Leibniz-Zentrum f{\"u}r Informatik},
  address =	{Dagstuhl, Germany},
  URL =		{https://drops.dagstuhl.de/entities/document/10.4230/OASIcs.SCOR.2016.9},
  URN =		{urn:nbn:de:0030-drops-65216},
  doi =		{10.4230/OASIcs.SCOR.2016.9},
  annote =	{Keywords: Portfolio optimisation, portfolio insurance, option pricing, mean-CVaR}
}

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Portfolio Optimisation Using Risky Assets with Options as Derivative Insurance

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