Series VIIIHardFutures Contracts

An investor holding a diversified equity portfolio fears a short-term market fall. The most direct way to hedge is to:

ABuy call options on each stock
BBuy index futures
CSell (short) index futurescheck_circle
DSell put options on the index

Correct answer

C. Sell (short) index futures

lightbulbDetailed Solution

To protect a long equity portfolio against a broad market decline, the investor sells (goes short) index futures. If the market falls, the loss on the portfolio is offset by the gain on the short futures position. Buying futures would add to the long exposure, not hedge it.

Reference: NISM Series VIII Equity Derivatives, Chapter 2.

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