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

A PMS portfolio holds Rs 50 lakh of Nifty-linked stocks with a beta of 1.0 to the index. The manager sells Nifty futures worth Rs 50 lakh to hedge fully. If the Nifty falls 4% and the portfolio falls exactly 4%, ignoring costs, what is the approximate net result?

The net result is approximately zero. The portfolio loses Rs 2 lakh, which is 4% of Rs 50 lakh, while the short Nifty futures position of equal value gains Rs 2 lakh, so the hedge offsets the fall, ignoring costs and basis differences.

  1. ARs 0, as the Rs 2 lakh loss on stocks is offset by a Rs 2 lakh gain on futuresCorrect
  2. BA loss of Rs 4 lakh
  3. CA gain of Rs 2 lakh
  4. DA loss of Rs 2 lakh

Explanation

The stock loss is 4% of Rs 50 lakh = Rs 2 lakh. The short futures gain 4% of Rs 50 lakh = Rs 2 lakh. Net is zero. Rs 2 lakh loss alone would result only if unhedged.

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