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

A portfolio manager holds a diversified portfolio of large-cap stocks worth Rs 5 crore and fears a short-term market fall, but does not want to sell the stocks. Which derivative action best reduces market risk temporarily?

Selling index futures is the appropriate hedge. If the market falls, the gain on the short futures position offsets the loss on the stock portfolio, so the manager can protect value temporarily without selling the underlying shares.

  1. ABuy index futures
  2. BSell index futuresCorrect
  3. CBuy deep out-of-the-money index call options only
  4. DSell index put options

Explanation

Selling index futures creates a gain if the market falls, offsetting losses on the stock portfolio. Buying index futures adds to market exposure. Selling put options adds downside risk and gives only limited premium income. Buying far OTM calls does not protect against a fall.

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