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NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Derivatives

A PMS client holds a portfolio of shares worth Rs 50,00,000 with a beta of 1.0 relative to the Nifty 50. The portfolio manager wants to fully hedge against a market fall using Nifty futures. Which position is appropriate?

Sell Nifty futures of notional value about Rs 50,00,000. A long portfolio loses when the market falls, so short index futures offset it. With beta 1.0, hedge notional equals portfolio value times beta, which is Rs 50,00,000.

  1. ABuy Nifty futures of notional value about Rs 50,00,000
  2. BSell Nifty futures of notional value about Rs 50,00,000Correct
  3. CBuy Nifty put options sold to the client
  4. DSell Nifty futures of notional value about Rs 25,00,000

Explanation

To hedge a long equity portfolio against a fall, the manager sells index futures. With beta 1.0, the notional value of futures sold should be about equal to the portfolio value, i.e. Rs 50,00,000 (beta x portfolio value). Buying futures would add to market exposure, and Rs 25,00,000 would hedge only half.

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