Riskless Trading: Passport Options, Fund Managers and the Prudent Investor Rule
Company and Securities Law Journal, Vol. 18, May 2000
Posted: 30 Apr 2001
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: Suggested Citation