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What is constant proportion portfolio insurance (CPPI)?

Constant Proportion Portfolio Insurance (CPPI) allows an investor to maintain exposure to the upside potential of a risky asset while providing a capital guarantee against downside risk. The outcome of the CPPI strategy is somewhat similar to that of buying a call option, but does not use option contracts.

How does portfolio insurance work?

In order to guarantee the capital invested, the seller of portfolio insurance maintains a position in a treasury bonds or liquid monetary instruments, together with a leveraged position in an "active asset", which constitutes the performance engine.

How do CPPI portfolios work?

CPPI portfolios move more portfolio value to the risky asset as the distance between the portfolio value and the floor increases. As the total value of the portfolio decreases, less of the portfolio is allocated to the risky asset. Leverage may be employed by the investor depending on the multiplier value and the total portfolio value.

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Risk warning: Digital asset trading is an emerging industry with bright prospects, but it also comes with huge risks as it is a new market. The risk is especially high in leveraged trading since leverage magnifies profits and amplifies risks at the same time. Please make sure you have a thorough understanding of the industry, the leveraged trading models, and the rules of trading before opening a position. Additionally, we strongly recommend that you identify your risk tolerance and only accept the risks you are willing to take. All trading involves risks, so you must be cautious when entering the market.

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