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Question:
Roland Carlson owns a portfolio of large capitalization stocks. Carlson has a positive long-term outlook for the stock market, but would like to protect his portfolio from any sudden declines in the stock market, without selling his holdings. The most likely way for Carlson to achieve his objective of limiting the downside risk of his portfolio is to:
A
sell an S&P 500 futures contract.
explanation
Losses on Carlson's portfolio of large cap stocks can be offset by gains on a short position in a futures contract. (Gains on the portfolio would be offset by futures losses.) He could also buy put options on the S&P 500. A long position in an S&P 500 forward contract would not offer any downside protection.
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