Pricing of guarantees for principal-protected funds under the constant proportion portfolio insurance strategy

This paper investigates the pricing of guarantees for principal-protected funds and derives a pricing model under the constant proportion portfolio insurance (CPPI) investment strategy. Due to the limited risk hedging financial instruments in China, the CPPI investment strategy has been adopted by all existing principal-protected mutual funds. Numerical illustrations are carried out based on Chinese equity market data and different parameter profiles of the CPPI. Our pricing model is then employed to assess the fairness of the guarantee fees charged to current principal-protected funds. Our research indicates that some funds are charged higher premiums than what our model predicts.