Definition
Portfolio Hedging with Futures
Portfolio hedging with futures means shorting index futures to protect an equity portfolio against a market fall.
Instead of selling individual stocks, an investor can short Nifty or Bank Nifty futures to offset the market risk of their portfolio. The number of contracts depends on the portfolio's value and its beta — a higher-beta portfolio needs more index futures to be fully hedged.
Indian investors and institutions use this to ride out uncertain periods, such as before elections or global shocks, without disturbing their long-term holdings or triggering capital gains tax on sales. The hedge offsets losses in a fall but also caps gains in a rally, so it is meant for temporary protection.
Related terms
- Index Futures vs Stock FuturesIndex futures track a basket like Nifty and settle in cash, while stock futures track a single company and settle physically.
- Hedge RatioThe hedge ratio is the proportion of a position that must be offset to neutralise risk, often equal to the option's delta.
- HedgingHedging is taking an offsetting position to protect a portfolio against adverse price moves, like insurance for your investments.
- BetaBeta measures how much a stock tends to move relative to the overall market.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.