If an investor strongly believes that the stock market is going to have a sharp decline shortly,he or she could maximize profit by
A)short selling stock-index futures contracts.
B)hedging current short positions.
C)using stock-index futures to straddle the market.
D)buying stock-index futures contracts.

Question

Quizplus · Accepted Answer

Short selling stock-index futures contracts means selling contracts at the current price with the intention of buying them back at a lower price in the future. If the investor strongly believes that the stock market is going to have a sharp decline, they can profit from the decline by selling futures contracts now and buying them back later at a lower price. This allows them to maximize their profit potential. Hedging current short positions and using stock-index futures to straddle the market are more appropriate strategies for uncertain market conditions. Buying stock-index futures contracts would be an ineffective strategy if the investor believes the market will decline.

If an Investor Strongly Believes That the Stock Market Is