NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Understanding Derivatives
A client with a diversified equity portfolio worth Rs 50 lakh and a beta of 1.2 wants to fully hedge against market falls using Nifty futures. The Nifty futures price is 25,000 and the lot size is 25. Approximately how many contracts should be sold?
The beta-adjusted exposure is Rs 60 lakh, and each Nifty contract is worth Rs 6.25 lakh, so about 9.6 or roughly 10 contracts should be sold. Ignoring beta would give 8 contracts and under-hedge the portfolio.
- A6
- B8Correct
- C10
- D12
Explanation
Contract value = 25,000 x 25 = Rs 6,25,000. Hedge value needed = beta x portfolio = 1.2 x 50,00,000 = Rs 60,00,000. Contracts = 60,00,000 / 6,25,000 = 9.6, about 10. Checking: 10 contracts cover Rs 62.5 lakh, close to 60 lakh. Using beta 1 gives 8 contracts, which understates the hedge.
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