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

A PMS investor holds a portfolio of shares worth Rs 50 lakh with a beta of 1.0 relative to the Nifty. The portfolio manager sells Nifty futures worth Rs 25 lakh to hedge. Assuming the futures move exactly with the Nifty, what is the approximate effect if the Nifty falls 10%?

The net loss is Rs 2.5 lakh. The Rs 50 lakh portfolio loses Rs 5 lakh when the Nifty falls 10%, while the short futures position of Rs 25 lakh gains Rs 2.5 lakh, so the hedge offsets only half of the loss.

  1. APortfolio loses Rs 5 lakh and futures gain Rs 2.5 lakh, net loss of Rs 2.5 lakhCorrect
  2. BPortfolio loses Rs 5 lakh and futures lose Rs 2.5 lakh, net loss of Rs 7.5 lakh
  3. CPortfolio loses Rs 2.5 lakh and futures gain Rs 5 lakh, net gain of Rs 2.5 lakh
  4. DPortfolio loses Rs 5 lakh and futures gain Rs 5 lakh, net loss of nil

Explanation

Portfolio loss = 10% of 50 lakh = Rs 5 lakh. Short futures of Rs 25 lakh gain 10% = Rs 2.5 lakh. Net loss = 5 - 2.5 = Rs 2.5 lakh. The fully hedged option wrongly assumes the futures cover Rs 50 lakh.

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