An entity that holds a well diversified portfolio of shares and wishes to use futures to protect its investments for possible downturns should enter into a sell position in a futures contract.

Question

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By entering into a sell position in a futures contract, the entity can benefit from a potential rise in the price of the futures contract while also having a hedge against any potential decrease in the value of its portfolio. By selling the futures contract, the entity essentially locks in a price at which it can sell its portfolio in the future, thus protecting against any potential losses.

An Entity That Holds a Well Diversified Portfolio of Shares