Financial Risk Management

Caselet
Portfolio Growth and Risk Management: Using Index Options and Index Futures

Article Details

Pub. Date	: Mar, 2023
Product Name	: The IUP Journal of Financial Risk Management
Product Type	: Article
Product Code	: IJFRM040323
Author Name	: Dharmendra Makwani and Santosh Viswanathan
Availability	: YES
Subject/Domain	: Finance Management
Download Format	: PDF Format
No. of Pages	: 4

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Introduction

Traditional portfolio management methods would bundle the investors into three to four categories and prescribe portfolios which are debt-heavy for conservative investors and equity-inclined for aggressive ones. The expected returns of the portfolio would be in proportion to the percentage of equity in the portfolio. We all know that there are phases of the market where the market falls by 40% and also rises by 50 to 60%. Maintaining portfolio value during the drawdown phase is very important, and if the value of the portfolio is maintained during the drawdown phase, the only way the portfolio will go up is when the uptrend starts. The objective of this paper is to protect the portfolio using futures and options during the period when the markets are down and get superior returns if the portfolio is rebalanced or exited in a downfall.

Scenarios Considered

We have taken three scenarios/cases to evaluate the growth of the portfolio and risk management under various circumstances:

Akash is an investor and has a portfolio of stocks worth 1 cr. He wants to grow the portfolio at a rate equivalent to the growth of a market index like the Nifty, but at the same time wants to protect the portfolio from huge drawdowns on account of volatility in the stock markets. His time horizon is five years.
Prashant is an investor and has cash of 1 cr. He is looking at avenues for investing the capital. His objective is to protect the capital and, at the same time, have a higher return than the market. He does not have much time and does not want to monitor his portfolio and transactions on a daily or weekly basis. His time horizon is ten years.
Varun is an investor and has cash of 1 cr. He is looking to start a restaurant business, and he expects a capital of 60 lakh for the same. At the same time, he wants his capital to grow and provide him with higher returns than the market. He does not want to see his portfolio in red beyond 10%. He has a time horizon of five years