NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Derivatives
A portfolio manager holds equities worth Rs 10 crore with a beta of 1.2 relative to the Nifty. Nifty futures are at 20,000 with a lot size of 50 units (contract value Rs 10 lakh). To fully hedge market risk using futures, how many contracts should be sold?
The manager should sell 120 contracts. The beta-adjusted exposure is 1.2 times Rs 10 crore, which is Rs 12 crore, and dividing by the Rs 10 lakh contract value gives 120. Using 100 would ignore the portfolio's higher sensitivity to the market.
- A10
- B12
- C100
- D120Correct
Explanation
Number of contracts = (beta x portfolio value) / contract value = (1.2 x Rs 10 crore) / Rs 10 lakh = Rs 12 crore / Rs 10 lakh = 120. Ignoring beta gives 100. The options 10 and 12 come from a crore-to-lakh conversion slip.
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