Constant proportion portfolio insurance

An investment in which the principal is notionally guaranteed by the use of a trading strategy in which allocations to a risky exposure and a low-risk (cash) position are adjusted periodically. This technique is often used to create principal-protected notes based on equity and hedge fund investments. Adjustments to the allocations are carried out based on the market value of the risky exposure and the cost of buying a zero-coupon risk-free bond which can be used to repay the principal of the security at maturity. The cost of the zero-coupon bond is referred to as the bond floor, and the size of the investment is not permitted to fall below this level. The reserve or cushion is the difference between the initial investment amount plus or minus any trading gains or losses. The size of the risky exposure is a multiple of the reserve. Related dynamic allocation techniques include dynamic proportion portfolio insurance (DPPI).

See also credit CPPI.