You own a diversified investment portfolio and wish to hedge it against market declines. Which one of the following would be best suited as a cross-hedge for this purpose?
A)going long on Treasury bonds in the spot market
B)going long on DJIA futures
C)going short on S&P 500 index futures
D)going long on an index fund
E)going short on Eurodollar futures

Question

Quizplus · Accepted Answer

Going short on S&P 500 index futures can hedge against market declines as the value of the contract will increase as the index decreases, thus offsetting losses in the diversified portfolio. The other options may not necessarily provide effective cross-hedging for a diversified portfolio. Going long on Treasury bonds may provide some level of protection, but it is not necessarily a direct cross-hedge. Going long on DJIA futures or an index fund is essentially adding more exposure to equities and does not provide true hedging. Going short on Eurodollar futures would hedge against changes in interest rates, but it does not directly hedge against market declines.

You Own a Diversified Investment Portfolio and Wish to Hedge