NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Derivatives
An investor holds a portfolio of large-cap shares worth Rs 50 lakh with a beta of 1.0 against the Nifty. To hedge fully against a market fall using Nifty futures, the investor should:
The investor should sell Nifty futures worth Rs 50 lakh. A short futures position offsets losses on the long share portfolio, and with a beta of 1.0 the hedge value equals the portfolio value, giving a full hedge against market declines.
- ABuy Nifty futures worth Rs 50 lakh
- BSell Nifty futures worth Rs 50 lakhCorrect
- CBuy Nifty put options and sell Nifty futures together
- DSell Nifty futures worth Rs 25 lakh
Explanation
To hedge a long portfolio, one takes an offsetting short position in index futures. With beta 1.0, the hedge value equals portfolio value times beta, i.e. Rs 50 lakh. Buying futures would increase exposure; Rs 25 lakh would be only a half hedge.
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