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

A PMS portfolio holds shares worth ₹2 crore and the manager wants to hedge against a market fall using index futures. Which position would be appropriate for hedging?

The manager should sell index futures. If the market falls, the loss on the equity holdings is offset by the gain on the short futures position. Buying futures would add to market exposure rather than reduce it, so it is not a hedge.

  1. ABuy index futures
  2. BSell index futuresCorrect
  3. CBuy index call options and sell index put options only
  4. DHold no position because derivatives cannot be used for hedging

Explanation

A long equity portfolio loses value when the market falls. Selling index futures produces gains when the index falls, offsetting the portfolio loss. Buying futures would increase exposure to a fall. Derivatives are permitted for hedging under PMS rules.

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