If a portfolio manager believes stock prices will fall and knows that a block of funds will be received in the future,then he should
A) sell stock index futures short.
B) buy stock index futures long.
C) stay out of the futures market.
D) borrow and buy securities now.

Question

Quizplus · Accepted Answer

Selling stock index futures short will allow the portfolio manager to profit from a market downturn. By taking this position, the manager is essentially betting that the index will decrease in value, thereby offsetting potential losses in their stock holdings. This strategy is particularly effective if the manager expects to receive a block of funds in the future since it provides a hedge against market risk without requiring immediate capital outlay. Options B, C, and D are not necessarily appropriate in this scenario since they either involve buying futures (which would not be profitable in a falling market) or staying out of the market altogether (which does not provide any protection against potential losses).

If a Portfolio Manager Believes Stock Prices Will Fall and Knows