NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Derivatives
A PMS client holds a portfolio of Indian large-cap stocks worth Rs 50 lakh with a beta of 1.0 relative to Nifty 50. The portfolio manager wants to hedge fully against a market fall using Nifty futures with a contract value of Rs 10 lakh each. Which action is appropriate?
The manager should sell 5 Nifty futures contracts. A long equity portfolio is hedged by taking a short futures position, and the number of contracts equals portfolio value times beta divided by contract value, which is Rs 50 lakh divided by Rs 10 lakh, giving 5.
- ASell 5 Nifty futures contractsCorrect
- BBuy 5 Nifty futures contracts
- CSell 50 Nifty futures contracts
- DBuy 50 Nifty futures contracts
Explanation
To hedge a long portfolio, short futures are sold. Number of contracts = (Portfolio value x beta) / contract value = 50 lakh x 1.0 / 10 lakh = 5. Buying futures would increase, not reduce, market exposure.
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