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NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Derivatives

In a standard exchange-traded equity futures contract, which party is exposed to a potentially unlimited loss if the underlying index rises sharply?

The seller of a futures contract faces potentially unlimited loss if the index rises sharply, because the short position loses as the price increases and a price rise has no upper limit. The buyer gains in that scenario, and a put buyer's loss is capped at the premium.

  1. AThe buyer of the futures contract
  2. BThe seller (short) of the futures contractCorrect
  3. CThe buyer of a put option
  4. DThe clearing corporation in all cases

Explanation

A short futures position loses when the underlying price rises, and there is no upper limit to how high the price can go. The long futures holder gains in that case. A put buyer's loss is limited to the premium, and the clearing corporation uses margins rather than taking directional risk.

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