NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Understanding Derivatives
An investor holds a portfolio worth Rs 50,00,000 with a beta of 1.2 against the Nifty. Nifty futures trade at 20,000 with a lot size of 50. To fully hedge the market risk of the portfolio, how many Nifty futures contracts should she sell, to the nearest whole number?
The hedge ratio is beta times portfolio value divided by futures contract value. With beta 1.2, portfolio Rs 50 lakh and contract value Rs 10 lakh, the investor should sell 6 Nifty futures contracts to neutralise market risk.
- A5
- B6Correct
- C4
- D3
Explanation
Contract value = 20,000 x 50 = Rs 10,00,000. Number of contracts = beta x portfolio value / contract value = 1.2 x 50,00,000 / 10,00,000 = 6. Ignoring beta gives 5, and the other options use wrong ratios.
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