NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Understanding Derivatives
Ms. Iyer, a client, owns a diversified equity portfolio worth Rs 1,10,00,000 with a beta of 1.2 relative to Nifty. She wants to fully hedge market risk using Nifty futures. Nifty futures trade at 22,000 and the lot size is 50. Approximately how many futures contracts (lots) should she short?
She should short 12 lots. Each lot is worth Rs 11,00,000 (22,000 x 50), and the beta-adjusted exposure is 1.2 x Rs 1,10,00,000 = Rs 1,32,00,000, which divided by the lot value gives 12.
- A12Correct
- B10
- C11
- D14
Explanation
Contract value = 22,000 x 50 = Rs 11,00,000. Hedge lots = beta x portfolio value / contract value = 1.2 x 1,10,00,000 / 11,00,000 = 12. Ignoring beta gives 10. The other options come from incorrect rounding or inflating the ratio.
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