Riskless Trading: Passport Options, Fund Managers and the Prudent Investor Rule

Company and Securities Law Journal, Vol. 18, May 2000

Posted: 30 Apr 2001

See all articles by Paul Ali

Paul Ali

University of Melbourne - Law School

Abstract

The "passport" or "perfect trader" option is a new derivative instrument which enables investment managers and other fiduciaries to renounce the losses that might be incurred on investment portfolios. This article provides an overview of the different types of passport options (barrier, chooser, double stake, magic potion, reset, smooth trader and switch passport options), and considers the use of such options by fiduciaries in the terms of the "prudent investor rule".

Under Australian law, investment managers and other fiduciaries entrusted with the investment of assets on behalf of others, are subject to an overarching duty to act prudently when investing those assets. Passport options can make the management of investment portfolios less risky by shielding fiduciaries from trading losses. Nonetheless, a fiduciary considering the use of such options must assess their suitability (including the premium being charged) in terms of the risk profile and return objectives of the trust fund.

Note: This is a description of the article and not the actual abstract.

Keywords: Passport Options, Investment Managers, Prudent Investor Rule

JEL Classification: G11, K22

Suggested Citation

Ali, Paul, Riskless Trading: Passport Options, Fund Managers and the Prudent Investor Rule. Company and Securities Law Journal, Vol. 18, May 2000. Available at SSRN: https://ssrn.com/abstract=267323

Paul Ali (Contact Author)

University of Melbourne - Law School ( email )

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