1. © 2005 MIT Sloan School of Management
October 19, 2016
Trading Strategy for
SIFI Insurance
A presentation by:
George Ma
Partha Sarathi Sharma
Viki Qi
Xuyang Lin
Ziang Fang

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Overview
• Problem Statement
• Solution Approach
• Incorporating for Inflation
• Test Results
• Improvements

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Investment requirements

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Key considerations

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Passive Strategy

6. Passive Strategy
© 2005 MIT Sloan School of Management

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Risk Hedging strategy

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Determining Sigma
To get the optimal weight between the asset classes, we solve
the optimization problem. The constrained functions are as
follows:

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Determining Sigma
σBM = 0.1%, actively managed portfolio in 5 year horizon

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Determining Sigma
σBM = 0.05%, 0.1% and 0.2%, actively managed portfolio in 5
year horizon

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Determining Sigma
Regulators Inputs
1.The capital (CSIFI) SIFI can deploy to cover
losses
2.The confidence that they require SIFI to
work with (rreg)
Factors SIFI controls
1.The promised rate of return (rp)
2.The portfolio size (PF)
(rp – rreg) * PF C≤ SIFI

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Determining Sigma

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Determining Sigma

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Determining Sigma

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Inflation

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Testing

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Data

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Simplifying Assumptions

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Results
Passive Strategy (moderate)

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Results
σBM = 0.05%

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Results
σBM = 0.1%

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Results
σBM = 0.2%

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Further Improvement

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Thank You