Skip to content

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

A PMS manager holds a diversified equity portfolio and expects the market to fall in the short term, but does not want to sell the holdings. Which derivative position would typically be used to hedge?

Selling index futures is the typical hedge. If the market falls, the short futures position gains, offsetting losses on the held equity portfolio without selling the shares. The other choices either increase exposure to a falling market or profit only when the market rises.

  1. ABuy index futures
  2. BSell index futuresCorrect
  3. CSell a put option on the index
  4. DBuy a deep out-of-the-money call on the index

Explanation

Selling index futures generates gains if the index falls, offsetting losses on the equity portfolio. Buying futures or selling puts adds to market exposure and increases losses in a fall. A call purchase gains only on a rise.

Did you get it right without looking?

One question tells you little. A timed set on Derivatives shows your real accuracy, how long you take and where you lose marks.

Practise DerivativesFree diagnostic mock

More Derivatives questions