Derivatives: Turning risks into opportunities

By Alberto Cuccu | 14 November 2017

Derivatives are financial instruments that are often considered complex and much specialised.

Derivatives enable full or partial protection against downside losses by creating short position that can cover unpredictable events.

While investing in derivatives can be used for hedging, using them to invest in underweighted segments can also provide additional dimensions in a portfolio. By using derivatives, a traditional investment portfolio can be further diversified.

Risk-parity investing is another of the many methods that allow portfolios to increase diversification by using leverage via derivatives. Risk-parity investing aims to allocate assets to a more diversified portfolio with a higher risk-reward trade-off than a traditional investment portfolio. This can be achieved by introducing leverage to increase return expectations on low risk segments while derivatives are used to generate additional exposure in a cost-efficient way.

Another way of managing a derivatives investment portfolio is by rebalancing it against a model portfolio. Rebalancing is a powerful tool to keep the leverage level under control and to maintain the portfolio strategy.

Because of these multiple uses, derivatives in private wealth portfolios may seem like a frightening prospect.

In the white paper authored by Objectway and Saxo Bank, you’ll discover how Objectway’s eXimius supports the creation and valuation of derivative positions for multiple investment purposes, as well as helping to manage derivatives and MiFID II compliance about depreciation reporting.