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

An investor holds a portfolio of stocks that closely tracks the Nifty 50 and fears a short-term market fall without wanting to sell the shares. Which futures position hedges this risk?

The investor should sell Nifty futures. Since the portfolio loses value when the market falls, a short index futures position gains in a fall and offsets the loss, giving a hedge without selling the underlying shares.

  1. ABuy Nifty futures
  2. BSell Nifty futuresCorrect
  3. CBuy a Nifty futures and sell a stock future in the same month
  4. DHold no futures and wait for the expiry

Explanation

A long stock portfolio loses when the market falls. Selling index futures creates gains on the short futures when the index falls, offsetting the portfolio loss. Buying futures would increase the exposure to the same direction of risk.

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