Evaluating An Investment Fund with Downside Risk Protection: A Case Study

In this paper, we report a case study on evaluating an investment fund with downside risk protection by which investors can gain higher returns from investing on a mutual fund and protect themselves from losing their principle investment. Such downside risk protection is preferred in many cases, e.g. in managing government pension, trust funds, and donation funds of academic institutions. Supposedly one such organization, ABC Ltd, plans to invest its excess funds to maximize capital gains and yet requires assurance of the principal invested capital (even in bearish market conditions) after a 5-year period. ABC is interested in investing in CP Notes marketed by XYZ as it may meet ABC’s investment objective. We develop a simulation model to evaluate the appropriate charge for such an option to protect any downside risks