A Canadian pension fund manager is concerned about a potential downturn in the domestic equity market over the next six months. To mitigate this risk for their diversified equity portfolio, which derivative strategy would be most appropriate?

Question: A Canadian pension fund manager is concerned about a potential downturn in the domestic equity market over the next six months. To mitigate this risk for their diversified equity portfolio, which derivative strategy would be most appropriate?

Answer options: ✅ Selling Canadian equity index futures contracts.

• Buying call options on individual Canadian stocks.
• Selling interest rate futures contracts.
• Buying Canadian dollar currency futures contracts.

Correct answer: Selling Canadian equity index futures contracts.

Explanation: Selling Canadian equity index futures allows the pension fund to lock in a future selling price for their equity exposure. If the market falls, the profit from the futures contracts would offset some of the losses in the underlying equity portfolio, thereby hedging the market risk.