Identifier: C5T6L3 · Revision: 2026-10-26 · Classification: domestic

Decision and objectives

The practical task is to select an equity hedge against both loss and cash constraints. Make the decision reproducible: name the exposure, time horizon, cash requirement and comparison baseline before selecting a product.

Objectives: Select an equity hedge against both loss and cash constraints; Compare a partial futures hedge with a protective put and asset reduction; Quantify basis, beta, premium and funding residuals.

Prerequisite: C5T6L2; completed Classes 1–4 and the Stock Market School foundation or Forex School foundation. Every example is hypothetical. Prices, dates, rates, fees, contract factors, policies and tax schedules are supplied teaching inputs, not current offers or legal parameters. No live account is needed.

Mechanics

A domestic equity hedge needs a market-risk objective, a position quantity and a funding plan. A beta hedge reduces estimated market sensitivity but leaves stock selection and basis risk. A protective put supplies a nonlinear expiry boundary on its specified reference, while a direct sale reduces exposure immediately once executed and settled. Options and futures only exist as implementable alternatives after actual series, access and depth checks.

This case uses hypothetical exact index tracking to isolate the decision; real portfolios rarely match perfectly. The option is European, cash settled and expires on the objective date. It does not transfer ownership or automatically sell the portfolio.

Price and return drivers

Futures candidate shorts = portfolio × (beta − target beta)/(future × multiplier). Protected expiry result combines portfolio value plus long put payoff less premium and costs. Expiry bounds do not guarantee a current exit price, and a profitable cash asset cannot pay a futures call until monetized or financed.

Worked case

Hypothetical equity portfolio TRY 1,000,000, beta 1, objective limit a20% index-down scenario loss to TRY 80,000 and require no more than TRY 100,000 starting hedge liquidity. Future10,000 points, multiplier TRY 10; target beta 0.5 needs five shorts. At expiry index 8,000, portfolio loss TRY 200,000, future gain5×10×2,000=TRY 100,000, net−TRY 103,000 after execution TRY 1,500 and funding TRY 1,500, so it misses the loss objective. Initial hypothetical margin TRY 75,000, execution TRY 1,500 paid at entry and funding TRY 1,500 reserved at entry leave only TRY 22,000 of the cash budget free. The reserved funding is unavailable for calls and is charged over the holding period. A20% index rise creates TRY 100,000 future debit; an additional margin shock TRY 15,000 means another TRY 115,000 need, exceeding that free cash by TRY 93,000 even while the shares gain.

Adverse case

Alternative: ten long puts, multiplier 10, strike 9,500, premium 200 points; premium TRY 20,000 and execution TRY 2,000, total TRY 22,000. At expiry index 8,000: asset TRY 800,000 plus put TRY 150,000 gives net package−TRY 72,000 relative to original portfolio and paid hedge cost; at 10,000 result−TRY 22,000; at 12,000 result+TRY 178,000. The matched expiry comparison fits the stated downside and leaves TRY 78,000 initial liquidity. Before expiry the put bid may differ because of time/volatility; a supplied bid 250 points would value puts TRY 25,000, but says nothing about an unavailable full-size execution. A cash alternative sells TRY 650,000 equity, retains TRY 350,000 and pays TRY 1,000 cost; a20% fall then loses TRY 71,000 including cost, meeting the stress limit while giving up much upside.

Practical use

Choose only after verifying the portfolio/index match, option exercise and cash settlement, live executable series, broker collateral and custody encumbrances. With real beta error a20% index loss can correspond to a larger portfolio loss, so restress the chosen put package using its actual reference. Include premium financing/opportunity cost, rebalancing, roll, conversion, custody and dated tax if applicable; those not supplied above are excluded rather than assumed universally zero.

Use permitted domestic access routes and the actual instrument documents. Verify intermediary authority, investor eligibility, order/redemption terms, settlement, custody and executable size before implementation. Reconcile spread and commissions, funding, collateral, custody, product expenses, conversion and exit charges; an amount already embedded in a fill or fund unit price is not deducted again. A published mark or product description does not promise an executable price or liquidity.

Tax is excluded unless a numerical schedule is expressly supplied as hypothetical. For actual rules record income year, residence and individual/corporate status, instrument and acquisition/contract dates, taxable event and rule effective date. The GIB investment-income guide, checked 2026-10-26, covers 2025 individual income; its 2026 publication date alone cannot settle a 2026 liability.

Decision boundaries

Under the fictional exact-match and cost assumptions, the put package meets both stated constraints and keeps the original upside exposure less premium. The partial futures candidate fails loss and funding limits. If a suitable put is unavailable, the funded asset-reduction baseline is defensible; do not invent option liquidity to force the desired strategy.

Practice and references

Exercise: hypothetical portfolio TRY 500,000, exact index match, put strikes provide a TRY 450,000 floor at expiry, premium/fees TRY 12,000. Solution: at asset expiry values TRY 350,000,500,000,600,000, combined net profits are−TRY 62,000,−TRY 12,000,+TRY 88,000. A cash-reduction route retaining TRY 200,000 equity loses TRY 40,000 in a20% fall before its own costs, but its upside differs.

Takeaway: Quantify basis, beta, premium and funding residuals with the cash dates, costs and remaining risks stated.

Product card: portfolio-decision-record. Formula: Hedge objective and funding comparison. Glossary: Hedge feasibility gate, Foregone upside. Next lesson: C5T6L4. Topic test.

Sources checked 2026-10-26:

Additional product cards: viop-index-future, protective-put.

Shared reference guide