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

An investor holds a diversified portfolio of large-cap shares and expects the market to fall sharply over the next month, but does not wish to sell the shares. Which futures-based action best hedges the portfolio?

Selling Nifty futures is the best hedge, because a market fall produces gains on the short futures that offset the loss on the share portfolio. Buying futures would increase exposure to the fall, and a calendar spread does not protect against falling prices.

  1. ABuy Nifty futures
  2. BSell Nifty futuresCorrect
  3. CBuy Nifty put and sell Nifty call at the same strike, both far out of the money
  4. DSell Nifty futures of a far-month contract and buy the near-month contract in equal quantity

Explanation

Selling index futures creates gains if the index falls, offsetting losses on the portfolio. Buying futures would add to the loss, making it wrong. The calendar spread does not hedge directional risk and the strangle-like combination is not a standard hedge.

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