Optimized Indexing combined with Risk Overlay : Analysis and Empirical Test of Margrabe's Exchange Option

The first part of this thesis aims to analyse the weaknesses of capitalization-based indexing methods and compares different weighting strategies, which are dedicated to alleviate the conspicuous flaws. At the present day, these alternative portfolio construction schemes are popularly labelled as “Smart Beta Indexing”, which is a term largely used by marketing units in order to spur sales volumes. Nonetheless, severe stock market corrections led to the insight that irrespective of which indexing weighting scheme is used, serious drawdown risk remains, since a long-only Beta 1 positioning is still continuing to exist.Based on this finding, it is shown that optimized indexing combined with a dynamic and effective Beta- and risk management tool, can deliver superior long-term results for investors on a risk-adjusted basis. The core content of this thesis focuses on the implementation of a dynamic replication of the Margrabe's exchange option, which is used as a part of the Best-of-Assets strategy. By means of empirical computations, comprehensive stress tests and risk perspective analyses, ultimately the detailed performance results of this portfolio insurance strategy are shown