A portfolio manager is tasked with managing a diversified equity portfolio of $50 million. The manager is concerned about potential losses due to a market downturn and is considering using derivatives for risk management. The manager identifies the following options: Option A: Buy put options on the entire portfolio to protect against a downturn. Option B: Sell futures contracts on a market index that correlates closely with the equity portfolio. Option C: Purchase call options on a sector index expected to perform well during downturns. Given the goals of risk management and the need to hedge potential losses, which derivative strategy would be the most effective for this purpose?

Exam

CFA Level 3

Section

Difficulty

Portfolio Management and Wealth Planning

Effective Derivative Strategy for Portfolio Risk Management

Hard Risk Management Derivatives In Risk Management

A portfolio manager is tasked with managing a diversified equity portfolio of $50 million. The manager is concerned about potential losses due to a market downturn and is considering using derivatives for risk management. The manager identifies the following options:

Option A: Buy put options on the entire portfolio to protect against a downturn.
Option B: Sell futures contracts on a market index that correlates closely with the equity portfolio.
Option C: Purchase call options on a sector index expected to perform well during downturns.

Given the goals of risk management and the need to hedge potential losses, which derivative strategy would be the most effective for this purpose?

Buy put options on the entire portfolio to protect against a downturn.

Sell futures contracts on a market index that correlates closely with the equity portfolio.

Purchase call options on a sector index expected to perform well during downturns.

Hint

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