Using Derivatives and Structured Products to Enhance Investment Performance in a Low-yielding Environment

Maria Gjelsvik Berg & Pål-Andreas Iversen

Student thesis: Master thesis

Abstract

This paper provides an investigation of retail investors’ possibility to enhance their investment performance in a low-yielding environment by using derivatives. The current low-yielding financial market makes safe investments in traditional vehicles, such as money market funds and safe bonds, close to zero- or even negative-yielding. Some retail investors are therefore in need of alternative investment vehicles that can enhance their performance. By conducting Monte Carlo simulations and difference in mean testing, we test for enhancement in performance for investors using option strategies, relative to investors investing in the S&P 500 index. This paper contributes to previous papers by emphasizing the downside risk and asymmetry in return distributions to a larger extent. We find several option strategies to outperform the benchmark, implying that performance enhancement is achievable by trading derivatives. The result is however strongly dependent on the investors’ ability to choose the right option strategy, both in terms of correctly anticipated market movements and the net premium received or paid to enter the strategy.

EducationsMSc in Finance and Investments, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2017
Number of pages126
SupervisorsSøren Plesner