CPPI transactions

The following Banking & Finance practice note provides comprehensive and up to date legal information covering:

  • CPPI transactions
  • What is a CPPI transaction?
  • A step by step guide to a CPPI transaction
  • What is 'rebalancing'?
  • Static transactions
  • Managed transactions
  • What is 'gap risk'?
  • What is a 'cash out' event?
  • Advantages of a CPPI transaction
  • How is a CPPI transaction documented?
  • More...

CPPI transactions

What is a CPPI transaction?

'CPPI' stands for constant proportion portfolio insurance, and refers to a form of investment strategy. 'Constant proportion' refers to the maximum leverage exposure which remains the same during the course of the transaction. 'Portfolio insurance' is a generic term for an investment strategy that allows an investor to benefit from some capital protection while also retaining exposure to higher returns from riskier assets through leveraged exposure to an underlying portfolio.

It is a funded derivative product, meaning that an up-front amount or ‘premium’ must be paid by the protection buyer to the protection seller, who will assume the risk of the underlying portfolio. For more information on funded derivatives, see Practice Note: What are credit derivatives?

The key reason a party may be keen to invest in a CPPI transaction is that the investor will benefit from an element of principal protection but also from a more aggressive trading strategy being used to generate unlimited returns. For example, in a CDO, an investor is limited to returns based on the agreed interest rate. In contrast, a buyer of a hedge fund benefits from uncapped returns but its principal is at risk. A CPPI transaction combines the advantages of both types of product, meaning that an investor benefits from a protected principal amount as well as the potential for an investment return

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