NISM Certifications · NISM-Series-VIII: Equity Derivatives · Understanding Index
A stock in an index has a beta of 1.4 and an investor holds a portfolio worth Rs 14,00,000 consisting only of this stock. To fully hedge the portfolio using index futures with a Nifty value of 20,000 and lot size of 50, how many contracts should be sold (nearest whole number)?
Sell 2 contracts. Each Nifty contract is worth Rs 10,00,000, and the beta-adjusted exposure is 1.4 times Rs 14,00,000, which is Rs 19,60,000. Dividing gives 1.96 contracts, which rounds to 2 for the hedge.
- A1
- B2Correct
- C14
- D1.4
Explanation
Contract value = 20,000 x 50 = Rs 10,00,000. Contracts = beta x portfolio value / contract value = 1.4 x 14,00,000 / 10,00,000 = 1.96, which rounds to 2. Using 14 confuses the portfolio value with the number of lots, and 1 ignores beta's scaling to the nearest whole number.
Did you get it right without looking?
One question tells you little. A timed set on Understanding Index shows your real accuracy, how long you take and where you lose marks.
More Understanding Index questions
- The stock of a company in an index has a beta of 1.4 relative to the market. If the market index rises 5%, what is the expected change in th…
- An index has a base-date market capitalisation of Rs 5,00,000 crore, the index value being 1,000. Because of a new constituent addition, the…
- Which of the following is a reason that an index with fewer constituents, such as a sectoral index, is generally considered to carry higher …
- In a price-weighted index of three stocks priced at Rs 200, Rs 300 and Rs 700, the divisor is 3. If the Rs 700 stock rises by 10% and the ot…
- Which statement about beta of a stock relative to an index is correct?
- An index has a base value of 1000 and base market capitalisation of Rs 50,00,000 crore. If the current free-float market capitalisation is R…