# Options on CPPI with guaranteed minimum equity exposure

## TL;DR

This paper introduces a novel two-step protection strategy combining a modified CPPI algorithm with an OBPI mechanism, ensuring minimum equity exposure and overcoming cash-in risk, validated through detailed numerical analysis.

## Contribution

It proposes a new approach integrating guaranteed minimum equity exposure into CPPI and OBPI, enhancing portfolio protection and market participation.

## Key findings

- The new method effectively prevents cash-in risk.
- Numerical results show improved option pricing accuracy.
- The approach maintains guaranteed equity participation.

## Abstract

In the present paper we provide a two-step principal protection strategy obtained by combining a modification of the Constant Proportion Portfolio Insurance (CPPI) algorithm and a classical Option Based Portfolio Insurance (OBPI) mechanism. Such a novel approach consists in assuming that the percentage of wealth invested in stocks cannot go under a fixed level, called guaranteed minimum equity exposure, and using such an adjusted CPPI portfolio as the underlying of an option. The first stage ensures to overcome the so called cash-in risk, typically related to a standard CPPI technique, while the second one guarantees the equity market participation. To show the effectiveness of our proposal we provide a detailed computational analysis within the Heston-Vasicek framework, numerically comparing the evaluation of the price of European plain vanilla options when the underlying is either a purely risky asset, a standard CPPI portfolio and a CPPI with guaranteed minimum equity exposure.