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

An investor holds a portfolio of Nifty-linked stocks and fears a short-term market fall but does not want to sell the shares. Which derivative position is the most direct hedge?

Selling Nifty futures is the most direct hedge for a long stock portfolio. If the market falls, the gain on the short futures offsets the loss on the shares, while buying futures or selling puts would increase the downside exposure.

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

Explanation

A long equity portfolio loses when the market falls. Selling index futures produces a gain when the index falls, offsetting the loss on the portfolio. Buying futures would add to the exposure, and selling puts also adds downside risk.

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