NISM Certifications · NISM-Series-VIII: Equity Derivatives · Introduction to Forwards and Futures
An investor who owns a diversified equity portfolio expects a short-term market fall but does not want to sell the shares. Which futures position best hedges this risk?
The investor should sell index futures. If the market falls, the gain on the short futures position offsets the loss in the diversified portfolio, hedging market risk without selling the underlying shares.
- ABuy index futures
- BSell index futuresCorrect
- CBuy stock futures of one company only
- DTake no position and wait for expiry
Explanation
If the market falls, losses on the portfolio are offset by gains on a short index futures position. Buying futures would increase exposure to the fall. A single stock future would not match a diversified portfolio.
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