NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Derivatives
A portfolio manager holds a diversified equity portfolio and fears a short-term market fall but does not want to sell the holdings. Which derivative action is most suited to hedging this exposure?
Selling index futures is the suitable hedge. If the market falls, the gain on the short futures position offsets losses in the equity portfolio, so the holdings need not be sold. Buying futures or selling puts would increase exposure to a decline.
- ABuy index futures
- BSell index futuresCorrect
- CSell index put options
- DBuy deep out-of-the-money index call options only
Explanation
Selling index futures creates a gain when the market falls, offsetting losses on the portfolio. Buying futures adds to market exposure. Selling puts adds downside risk. Buying calls does not protect against a fall.
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