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NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Understanding Derivatives

Meera, a 45-year-old client, holds a Rs 10,00,000 portfolio of large-cap shares that closely tracks the Nifty, with a portfolio beta of 1.0. Nifty is at 20,000. She wants to hedge fully for one month using Nifty futures with a lot size of 50. How many Nifty futures contracts should she sell, and what is the hedged notional per lot?

Meera should sell 1 lot. One Nifty lot is worth 20,000 x 50 = Rs 10,00,000, equal to her portfolio value, and with beta 1.0 the hedge ratio is one. Since she is long shares, she hedges by selling futures, not buying them.

  1. ASell 1 lot, since one lot of notional Rs 10,00,000 matches the portfolioCorrect
  2. BSell 10 lots, since the portfolio is Rs 10,00,000
  3. CBuy 1 lot, because a hedge needs a long futures position
  4. DSell 2 lots, to cover twice the beta

Explanation

Notional value per lot = 20,000 x 50 = Rs 10,00,000. Number of contracts = (portfolio value x beta) / lot notional = 10,00,000 x 1.0 / 10,00,000 = 1. A long portfolio is hedged by selling futures, so buying is wrong. Selling 10 lots confuses the rupee value with the number of contracts, and 2 lots over-hedges.

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