My question is about option based portfolio insurance in practice.
Some insurance companies offer products where there is a mutual fund (equity and bonds) and a guarantee attached. This guarantee is usually given by some investment bank.
The bank can either apply a CPPI model or it can apply option based insurance meaning that it acts as if it had sold a put option on the mutual fund. Talking about the option case: what do banks in practice do?
Is it usual to
- hedge the risk by selling futures?
- swap the risk somehow?
- apply strict risk limits for the mutual fund?
- demand a certain strategy for the fund?
- anything else?
What is the best practice for options based portfolio insurance?
EDIT: To be more precise about the product: in Austria we have a pensions system financed by the state (by contributions by the labor force). As this will probably not suffice for the future the population is motivated to invest in retirement pension insurance contracts.
These insurance contracts are mainly saving contracts where monthly payments are invested in a mutual fund that holds 30% stocks and 70% bonds. Additional to this there are premiums by the state. Furthermore these insurance contracts need to have guarantees attached such that you get at least all your money invested back after a minimum time of say 10 years.
I assume that this system is applied in other countries as well. So this question is rather general.
final edit: there are insurance companies who sell these products in retail. Then there is the guarantee that can be implemented by an investment bank as option based portfolio insurance. I hope the term "insurance" is clear wherever it appears in my question.