Stock Market · Futures Trading

Hedging with futures

Hedging is using futures to reduce risk, not increase it. A properly hedged position limits downside, at the cost of limiting some upside too.

Portfolio hedging

You hold a ₹20 lakh equity portfolio (mostly Nifty 50 large-caps). You're worried about a 10% correction but don't want to sell your holdings.

Solution: Short Nifty futures equivalent to your portfolio value.

If Nifty falls 10%, your portfolio loses ~₹2 lakh. Your Nifty short gains ~₹2 lakh. Net: approximately hedged.

Calculating the hedge ratio

Lots to short = Portfolio value × Beta ÷ (Nifty value × Lot size)

If portfolio = ₹20L, Nifty = 22,000, lot size = 75:

₹20L ÷ (22,000 × 75) = ₹20L ÷ ₹16.5L = 1.21 lots → short 1 lot (round down).

> A beta of 1.2 means your portfolio moves 1.2× the Nifty. Adjust hedge ratio accordingly.

Cost of hedging

• Margin blocked for the short futures position
• If markets RISE, your hedge loses money (shorts lose when market rises), but your portfolio gains
• Basis decay works against long-term hedges

Hedging is not free insurance

Hedging reduces variance. Both downside AND upside. It's useful when you're certain a correction is near but uncertain about timing, or when you're temporarily risk-averse around specific events (election results, RBI policy, quarterly earnings).

1 monthtypical hedge duration for event-driven hedges

Betayour portfolio's sensitivity to market moves. Critical for accurate hedging

Takeaway. Hedge your equity portfolio by shorting Nifty futures in proportion to portfolio value × beta. It limits downside but also limits upside gains. Best used for specific risk events, not indefinitely.