CFA Level I · CFA Level I Exam · Derivative Benefits, Risks, and Issuer and Investor Uses
A fund manager expects to receive a large cash inflow in one month and wants to gain exposure to the equity market now to avoid missing a possible rally. Which action is the manager most likely to take?
The manager would most likely buy equity index futures now and close them when the cash arrives and the shares are purchased. This gives immediate market exposure with minimal cash, so a rally before the inflow is not missed.
- ASell equity index futures now
- BBuy equity index futures now and close them when the cash arrives and shares are boughtCorrect
- CBuy equity index put options now
Explanation
Buying index futures creates synthetic long exposure immediately with little cash outlay, and the position is unwound as the physical shares are purchased. Selling futures or buying puts would reduce or hedge exposure, not create it.
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