You hold a portfolio of stocks and you are concerned about a decline in the market value of the portfolio.You might hedge with:

Question

Quizplus · Accepted Answer

A short position in stock index futures would provide a hedge against a decline in the market value of the portfolio. This is because as the market value of the portfolio decreases, the value of the stock index futures would increase, offsetting the loss in the portfolio. A long position in stock index futures, on the other hand, would only provide a hedge against an increase in the market value of the portfolio. Long positions in call options and short positions in put options would provide limited protection and may not be as effective as a short position in stock index futures.

You Hold a Portfolio of Stocks and You Are Concerned