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NISM Certifications · NISM-Series-VIII: Equity Derivatives · Strategies using Equity Futures and Equity Options

An investor holds a diversified equity portfolio and wants to protect it against a fall in the market for the next two months without selling any shares. Which of the following is the most suitable strategy using index derivatives?

Buying index put options is the suitable hedge, because the puts gain value when the market falls and offset portfolio losses, while the investor retains the upside after paying the premium. Selling puts or buying calls does not protect against a decline.

  1. ABuy index put optionsCorrect
  2. BSell index put options
  3. CBuy index call options
  4. DSell index futures and then buy them back immediately

Explanation

Buying index puts gains when the index falls, offsetting losses on the portfolio, while the investor keeps upside apart from the premium paid. Selling puts adds downside risk. Buying calls does not offset a fall in portfolio value.

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