The CPPI (Constant Proportion Portfolio Insurance) method is intended to control risk and protect capital, and is based on three principles:
- Daily valuation of risk budget available;
- Daily portfolio rebalancing;
- Adoption of stop-loss rule.
Products based on CPPI are the following:
DAC, or Dynamic Allocation Certificate, is a financial instrument which combines capital protection, dynamic asset allocation and securitization of the investment strategy in the legal form of the certificate.
DAC has the following characteristics:
- Early redemption conditions. If on the fifth business day prior to the end of the year for which early redemption is provided (e.g. year 3), the benchmark index is higher than a given percentage of the capital invested (e.g. 130%), the DAC is understood to have expired and is redeemed, hence investors will receive the settlement amount early.
- Consolidation. In making provision for the possibility of early redemption (in year 3), the investor can consolidate the results obtained without having to wait for the maturity date and without the risk of additional bearish cycles.
- Secondary market. Mediobanca undertakes to buy back the certificate; nonetheless, there could be a liquidity risk.
- Financial risk. DAC is a protected capital investment instrument: the investor knows the maximum loss (as percentage of the capital invested, e.g. 10%) that could be incurred.
DAB, or Dynamic Allocation Bond, is a dynamic investment bond indexed to the performance of a diversified basket of mutual investment funds managed by specialist asset management companies. DAB combines guaranteed repayment of capital at expiry plus a possible minimum return (typical of a bond) with the advantages of a dynamic management model; it also guarantees the possibility of obtaining the same performances as a derivative product by eliminating the cost of volatility; it allows the investor to participate in a 100% increase in the performance of the benchmark index. The percentages of the share, bond and cash components of the basket are subject to non-discretional reallocation processed determined by the CPPI methodology and dependent on stock market performance.
DAB and Dac Indexes
|Name||ISIN||Date||Index||Index Components (%)|
|Risky||Low risk||Free risk|
|ABAXBANK GEMS DYN.07-17||IT0004305550||19/12/2017 12:00:00||91.40||0.70%||-10.10%||109.55%|
|OLYMPIA STAR I 2008-2018||XS0346539504||19/12/2017 12:00:00||95.91||0.00%||0.00%||100.15%|