NISM Certifications · NISM-Series-VIII: Equity Derivatives · Basics of Derivatives
An investor holds a portfolio of shares worth Rs 50 lakh with a beta of 1.2 against the Nifty. To hedge fully using Nifty futures, the investor should do which of the following?
The investor should short Nifty futures worth Rs 60 lakh. The hedge size is portfolio value multiplied by beta, 50 lakh times 1.2, and a short position offsets losses on the long share portfolio if the market falls.
- AShort Nifty futures with a contract value of Rs 60 lakhCorrect
- BShort Nifty futures with a contract value of Rs 50 lakh
- CBuy Nifty futures with a contract value of Rs 60 lakh
- DShort Nifty futures with a contract value of Rs 41.67 lakh
Explanation
To hedge a long portfolio, short futures. The hedge value is portfolio value times beta = 50 lakh x 1.2 = Rs 60 lakh. Rs 50 lakh ignores beta. Rs 41.67 lakh comes from dividing by beta (50/1.2), the wrong operation. Buying futures would increase exposure rather than hedge.
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