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

A portfolio manager holds a diversified equity portfolio worth Rs 2 crore and wants to hedge against a short-term market fall without selling the shares. Which position in index derivatives is most appropriate?

Selling index futures is the appropriate hedge. If the market falls, the short futures position gains and offsets the loss in the equity portfolio, so the manager protects value without selling the shares. Buying futures or selling puts would increase downside exposure.

  1. ASell index futuresCorrect
  2. BBuy index futures
  3. CSell put options on the index
  4. DBuy shares on margin

Explanation

Selling index futures gains when the market falls, offsetting losses on the held portfolio. Buying index futures increases exposure, and selling puts also adds downside risk since the seller loses when the index falls. Buying on margin increases exposure too.

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