|  JAN 1992

Using Futures And Options to Reshape Portfolio Risk by Jean-Olivier Fraisse, C.F.A.

Using Futures And Options to Reshape Portfolio Risk by Jean-Olivier Fraisse, C.F.A. Portfolio management at its simplest is finding the highest possible return while limiting the risk involved. Because economic conditions constantly change, keeping to this goal requires moving assets in and out of the portfolio — a time consuming and (worse) costly procedure. The goal can be reached without the tedious reshuffling, this writer says, if stock index futures and options are used. Fraisse uses Standard & Poor's 500 index futures contracts as a tool with which to quickly increase a portfolio's exposure to market fluctuations if a money manager is bullish or decrease a portfolio's risk if a money manager is bearish. Simply, portfolio management consists of seeking out the highest possible return while simultaneously limiting investment risk. Changing economic conditions require periodic asset reshuffling, which is costly and time consuming. Futures and options offer a faster, cheaper and more effective way to redeploy assets or modify a portfolio risk profile. Since a portfolio beta measures its systematic or market risk, to adjust portfolio risk, the portfolio's beta must be modified by introducing new assets or altering the weights of existing assets. If a portfolio manager is bullish on stocks, he or she can quickly increase the portfolio's stock exposure by purchasing stock index futures contracts such as the Standard & Poor's 500. If a portfolio manager is bearish, he or she can reduce the stock exposure by selling short stock index futures. USING STOCK INDEX FUTURES An S&P 500 futures contract is an agreement between seller and buyer to deliver and take delivery of, respectively, a portfolio of stocks represented by the S&P 500 stock price index at a specified future date. The delivery is a cash settlement of the difference between the original transaction price and the final price of the index when the contract is terminated. In practice, however, cash settlements occur in daily increments because futures positions are ""marked to market"" until the contract is terminated as the contract trading price changes.

by Jean-Olivier Fraisse, C.F.A.