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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 fears a market fall over the next month, but does not want to sell the shares. Which position in index derivatives is most suitable for hedging?

Selling index futures is the suitable hedge. If the market falls, the loss on the share portfolio is offset by profit on the short futures position, so the investor protects value without selling the underlying shares.

  1. ABuy index futures
  2. BSell index futuresCorrect
  3. CSell index put options
  4. DBuy index call options and sell index put options

Explanation

A long equity portfolio loses when the market falls. Selling index futures produces gains when the index falls, offsetting the portfolio loss. Buying futures or selling puts would increase exposure to a fall rather than reduce it.

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