An investment advisor client, Ms. Chen, owns a diversified portfolio of Canadian equities. She is concerned about a potential short-term market downturn but does not want to liquidate her holdings and incur capital gains taxes. She is considering using a derivative strategy to protect against a significant decline in her portfolio's value over the next quarter. Which of the following strategies is most suitable for her objective?

Question: An investment advisor client, Ms. Chen, owns a diversified portfolio of Canadian equities. She is concerned about a potential short-term market downturn but does not want to liquidate her holdings and incur capital gains taxes. She is considering using a derivative strategy to protect against a significant decline in her portfolio's value over the next quarter. Which of the following strategies is most suitable for her objective?

Answer options:

• Selling call options on her individual stock holdings. ✅ Buying put options on a broad-based Canadian equity index ETF (e.g., XIU).
• Entering into a forward contract to sell her entire portfolio at a predetermined price.
• Buying call options on individual stock holdings.

Correct answer: Buying put options on a broad-based Canadian equity index ETF (e.g., XIU).

Explanation: Buying put options on a broad-based index ETF provides portfolio-level protection against a market downturn, allowing Ms. Chen to retain her individual holdings. Selling call options limits upside and provides limited downside protection. A forward contract on an entire portfolio is impractical due to illiquidity and customization. Buying call options is a bullish strategy.