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

Ms. Meera Iyer holds a diversified portfolio of Nifty 50 stocks worth Rs 50 lakh with a beta of 1.0 against the Nifty. She fears a short-term fall in the market but does not want to sell her shares. Nifty futures trade at 25,000 with a lot size of 50 units. Which action would best hedge her exposure, and approximately how many lots are needed?

She should sell about 4 Nifty futures lots. One lot is worth Rs 12.5 lakh (25,000 x 50), so Rs 50 lakh at beta 1.0 needs 4 lots. Shorting futures offsets losses on her long stock portfolio if the market falls.

  1. ABuy about 4 lots of Nifty futures
  2. BSell about 4 lots of Nifty futuresCorrect
  3. CSell about 40 lots of Nifty futures
  4. DBuy about 40 lots of Nifty futures

Explanation

To hedge a long portfolio, she must short futures. Value of one lot = 25,000 x 50 = Rs 12,50,000. Lots = 50,00,000 / 12,50,000 = 4 with beta 1.0. Selling 40 lots would be a wrong contract-value computation, and buying adds to risk.

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