NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Derivatives
A portfolio manager holds a diversified equity portfolio and wishes to protect it from a short-term market fall while retaining the upside. Which strategy fits best?
Buying index put options best protects a diversified equity portfolio against a short-term fall while keeping the upside. The put gains value if the market declines, and the maximum cost is the premium paid. Selling futures would remove the upside, and buying futures would increase exposure.
- ASelling index futures
- BBuying index put optionsCorrect
- CSelling index call options
- DBuying index futures
Explanation
Buying index puts pays off if the market falls, while the loss is limited to the premium and the portfolio still participates in gains. Selling futures locks in the level and removes upside. Selling calls gives only limited premium cushion, and buying futures adds to market risk.
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