Investment Strategies of Constructing FTSE 100 Index
Funds with Exchange-Traded Derivative Instruments

Abstract

The author designed and analyzed investment strategies of constructing the FTSE-100 index funds with derivative instruments (futures and options respectively) as the return enhancement techniques. The portfolios of stock index derivatives combined with Treasury bills holdings, amounting to the respective derivative contracts’ underlying value, showed remarkable ability to limit the market downside risk. Excess returns, which could be achieved by derivative funds above the stock index performance, were found. The author distinguished factors contributing to the observed outperformance. The results of the research are very encouraging and strongly advocate for the use of futures and options as investment vehicles instead of constructing index tracking portfolios with stocks.

TOPICS: Options, futures and forward contracts, VAR and use of alternative risk measures of trading risk