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NISM Certifications · NISM-Series-VIII: Equity Derivatives · Sales Practices and Investors Protection Services

An investor who holds a diversified portfolio of shares worth Rs 20 lakh is advised to buy index put options as a protective measure. From a suitability standpoint, what is the main purpose of this advice?

The purpose is hedging: buying index puts protects the portfolio against a market fall, with the loss on the hedge limited to the premium paid. It does not assure profit, remove the premium cost, or give free extra upside exposure.

  1. ATo hedge against a fall in the portfolio value at a known premium costCorrect
  2. BTo earn assured profit irrespective of market direction
  3. CTo eliminate the premium cost altogether
  4. DTo increase the exposure to market rise without any cost

Explanation

A protective put limits downside risk of the holdings, with the maximum cost being the premium paid. It does not guarantee profit, it does involve premium cost, and it does not add free upside exposure.

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