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NISM Certifications · NISM-Series-VIII: Equity Derivatives · Introduction to Forwards and Futures

An investor holds a portfolio and wants to protect it against a market fall in the short term without selling the shares. Which futures action suits this purpose?

The investor should sell index futures. If the market falls, the loss on the share portfolio is offset by the gain on the short futures position, so the portfolio is hedged without liquidating the holdings.

  1. ABuy index futures
  2. BSell index futuresCorrect
  3. CBuy stock futures of an unrelated company
  4. DDo nothing as futures cannot hedge

Explanation

Selling index futures creates gains when the market falls, offsetting losses in the portfolio. Buying futures would increase exposure to a fall rather than reduce it.

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