Cppi with Cushion Insurance

Portfolio insurance allows investors to recover, at maturity, a given percentage of their initial invsetment. This limits downside risk in falling markets and allows some participation in rising markets. One of the standard portfolio insurance methods is the Constant Proportion Portfolio Insurance (CPPI). When comparing this method to the second well-known standard method, the OBPI, one of the worst scenario for CPPI is a falling market with a final growth before maturity. To limit such problem, we extend this method by providing an additional insurance on the cushion: whenever the portfolio value reaches a given floor, the investor receives a given amount. We determine and analyze the cost of this new guarantee and the performance of portfolios based on such strategy