Analysis of Hedging Portfolios in Turbulent Markets
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Two different strategies, one dynamic and one static, were investigated on portfolios consisting of one long index and one long European put (at-the-money or 10% out-of-the-money). Three indices were considered: The MSCI World Index, the S&P 500 and the FTSE All-Share Index. The strategies were evaluated based on both performance and risk, and we found that close follow-up of the portfolios in general lead to reduction of the risks, but that it demanded a high level of liquidity and supervision. The investigation also indicated that at-the-money options are less risky than 10% out-of-the money options, and that the portfolio risk decreased the broader index used in the portfolio.