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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 against a fall in market value over the next two months without giving up the benefit of any rise. Which position best serves this purpose?

Buying index put options is the best choice. The put pays off if the market falls, offsetting portfolio losses, while the maximum cost is the premium. The investor still benefits fully from any rise, which a short futures hedge would give up.

  1. ABuy index put optionsCorrect
  2. BSell index futures
  3. CSell index call options
  4. DBuy index futures

Explanation

A long put gains when the index falls and the loss is limited to the premium paid, while the portfolio keeps its upside. Selling futures hedges the fall but also removes the gains. Selling calls gives only limited premium protection, and buying futures adds to risk.

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