Managing Market Risk through Derivatives

Maxine is a portfolio manager at a wealth management firm. Her client, an affluent investor, is concerned about the potential adverse impacts of market volatility on their investment portfolio, which is predominantly in equities. In response, Maxine is considering three different strategies to manage market risk effectively.

The first strategy involves increasing the allocation to fixed income securities to offset potential equity loss. The second strategy considers diversifying into alternative assets, including commodities and private equity, to reduce overall portfolio correlation to public markets. The third strategy is to implement derivatives, specifically purchasing put options on the equity indices held in the portfolio, to provide downside protection.

Maxine aims to suggest the best strategy that effectively reduces the portfolio's exposure to market risk while providing adequate returns.