At its core, portfolio and risk management is about gathering and processing market-related data in order to make effective investment decisions. To this end, risk and return statistics are estimated from relevant financial data and used as inputs within the investment process. It is this...

Near-the-money options experience a rapid decline in time value over the weeks leading up to the expiry date. A possible strategy to alleviate the impact of the time decay effect is to unwind the hedge prior to expiry. However, appreciable time value is present for a reason: it is an indication...

One of the most important aspects in portfolio management is having an accurate understanding of the future possible returns of the underlying assets. Unfortunately, estimating such return distributions is anything but trivial. In this research, we consider the information embedded in the...

This report attempts to answer the question: What underlying portfolio should one use to hedge an active fund? We introduce a framework which allows us to conduct analysis on simulated realistic active portfolios in order to build intuition as to how hedge mismatch error affects the level of...

In previous Peregrine Securities work, it was shown that currency hedge selection can be approached in an optimization framework and that the particular choice of hedge is strongly dependent on the correlation between the exchange rate and the foreign asset. Unfortunately, correlations between...

It's often said that diversification is the only ‘free lunch' available to investors; meaning that a properly diversified portfolio reduces total risk without necessarily sacrificing expected return. However, achieving true diversification is easier said than done, especially when we don't...

We focus on the issue of currency management in the context of offshore investing with an emphasis on the selection of an appropriate currency hedge. It is shown that when seeking to minimize the risk associated with the Rand value of a foreign asset, the optimal currency hedge is strongly...

In this report we study South African implied volatility from three different perspectives. Firstly, we conduct an analysis of the historical Top40 Index implied volatility surface dynamics. In particular, we consider the regime-dependence of atm volatility and skew levels and how this...

We address a very topical – and to some extent, intractable – question: When should I hedge? By analysing South African historical market returns, we show that only a handful of extreme returns – which are well characterised by two simple quantitative indicators – can have a significant...

Equity derivatives offer fund managers a great deal of flexibility in managing the risk of a portfolio and shaping the overall future return distribution. It can, however, be difficult for fund managers to decide on an appropriate protection strategy, both in terms of the proportion of equity to...