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Mr. Madoff's Amazing Returns: An Analysis of the Split-Strike Conversion Strategy

30 Pages Posted: 1 Apr 2009 Last revised: 23 May 2011

Carole Bernard

Grenoble Ecole de Management

Phelim P. Boyle

Wilfrid Laurier University - School of Business & Economics; University of Waterloo

Date Written: May 14, 2009

Abstract

It is now known that the very impressive investment returns generated by Bernie Madoff were based on a sophisticated Ponzi scheme. Madoff claimed to use a split-strike conversion strategy. This strategy consists of a long equity position plus a long put and a short call. In this paper we examine Madoff's returns and compare his investment performance with what could have been obtained using the split-strike conversion strategy based on the historical data. We also analyze the split-strike strategy in general and derive expressions for the expected return, standard deviation, Sharpe ratio and correlation with the market of this strategy. We find that the Madoff's returns lie well outside their theoretical bounds and should have raised suspicions about Madoff's performance.

Keywords: Madoff, split-strike conversion strategy, performance measurement

Suggested Citation

Bernard, Carole and Boyle, Phelim P., Mr. Madoff's Amazing Returns: An Analysis of the Split-Strike Conversion Strategy (May 14, 2009). Journal of Derivatives, Vol. 17, No. 1, 2009. Available at SSRN: https://ssrn.com/abstract=1371320 or http://dx.doi.org/10.2139/ssrn.1371320

Carole Bernard

Grenoble Ecole de Management ( email )

12, rue Pierre Sémard
Grenoble Cedex, 38003
France

Phelim P. Boyle (Contact Author)

Wilfrid Laurier University - School of Business & Economics ( email )

Waterloo, Ontario N2L 3C5
Canada
519 884 1970 (Phone)
519 888 1015 (Fax)

University of Waterloo

Waterloo, Ontario N2L 3G1
Canada

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