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Principles of Financial Engineering, 2nd Edition by Salih N. Neftci

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CHAPTER 20

Principal Protection Techniques

1. Introduction

Investment products, where the principal is protected, have always been popular in financial markets. However, until recently the so-called guaranteed products sector has relied mainly on static principal protection which consists of a static portfolio of a default-free bond plus a basket of options. The advances in financial engineering techniques recently changed this. As structurers understood dynamic replication better, they realized that dynamic replication could synthetically create options on risks where no traded options exist. This led to the creation of dynamic rebalancing techniques, the best known being the constant proportion portfolio adjustment (CPPI). With the development ...

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