ABC Asset Management is managing a diversified portfolio that includes equities, fixed income, and alternative investments. The firm aims to optimize its risk-adjusted returns by actively managing its market risk exposure. One of their strategies involves using Value at Risk (VaR) models to estimate potential losses in various market scenarios. As part of their risk management framework, they are considering the introduction of derivatives to hedge against adverse market movements.
Given the current market landscape characterized by high volatility, the portfolio manager needs to decide which derivative strategy would best reduce market risk while ensuring that the overall investment strategy remains intact. Specifically, the manager considers three different approaches that could be implemented to manage this market risk. Which of the following derivative strategies would be the most effective in mitigating market risk in this context?