NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Derivatives
A PMS client holds shares worth Rs 1 crore and sells Nifty futures to hedge, but the portfolio has a beta of 1.2 against the Nifty. The Nifty then falls 5% and the shares fall exactly as per their beta. The futures position hedged Rs 1 crore notional. Ignoring costs, what is the approximate net loss?
The net loss is about Rs 1 lakh. The portfolio loses 6 percent, or Rs 6 lakh, given beta of 1.2 and a 5 percent market fall, while the Rs 1 crore short futures gain Rs 5 lakh, leaving the under-hedged shortfall of Rs 1 lakh.
- ARs 6 lakh
- BRs 5 lakh
- CRs 1 lakhCorrect
- DNil
Explanation
The portfolio falls 1.2 x 5% = 6%, a loss of Rs 6 lakh. The short futures of Rs 1 crore gain 5%, i.e. Rs 5 lakh. Net loss = 6 - 5 = Rs 1 lakh, because the hedge was under-sized for the beta. Rs 6 lakh ignores the futures gain.
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