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CFA Level I · CFA Level I Exam · Derivative Benefits, Risks, and Issuer and Investor Uses

A pension fund expects to receive a large cash contribution in three months and wants to gain exposure to the equity market now, without waiting for the cash. Which derivative position is the most appropriate?

Long equity index futures are most appropriate. They give the fund immediate exposure to the equity market using only margin, so it can remain invested until the cash contribution arrives and then buy securities and close the futures. Short futures would do the opposite and reduce exposure.

  1. ALong equity index futuresCorrect
  2. BShort equity index futures
  3. CLong put options on the index sold at a deep discount

Explanation

Long index futures give immediate equity market exposure with only margin required, and the fund can later buy the securities and close the futures. Short futures would reduce exposure. The third option is not a way to gain upside exposure.

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