Conic CPPIs

Constant Proportion Portfolio Insurance (CPPI) is a structured product created on the basis of a trading strategy. The idea of the strategy is to have an exposure to the upside potential of a risky asset while providing a capital guarantee against downside risk with the additional feature that in case the product has since initiation performed well more risk is taken while if the product has suffered mark-to-market losses, the risk is reduced. In a standard CPPI contract, a fraction of the initial capital is guaranteed at maturity. This payment is assured by investing part of the fund in a riskless manner. The other part of the fund's value is invested in a risky asset to offer the upside potential. We refer to the floor as the discounted guaranteed amount at maturity. The percentage allocated to the risky asset is typically defined as a constant multiplier of the fund value above the floor. The remaining part of the fund is invested in riskless manner. In this paper we combine conic trading in the above described CPPIs. Conic trading strategies explore particular sophisticated trading strategies founded by the conic finance theory i.e. they are valued using non-linear conditional expectations with respect to non-additive probabilities. The main idea of this paper is that the multiplier is taken now to be state dependent. In case the algorithm sees value in the underlying asset the multiplier is increases, whereas if the assets is situated in a state with low value or opportunities, the multiplier is reduced. In addition, the direction of the trade, i.e. going long or short the underlying asset, is also decided on the basis of the policy function derived by employing the conic finance algorithm. Since, non-additive probabilities attain conservatism by exaggerating upwards tail loss events and exaggerating downwards tail gain events, the new Conic CPPI strategies can be seen on one hand to be more conservative and on the other hand better in exploiting trading opportunities.