Analysis of Hedging Portfolios in Turbulent Markets

Abstract

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.