Scenario:

Assume you are a financial consultant and one of your client is holding an equity portfolio. The value of the portfolio is $1.5 million currently and investing equally in the following 15 largest stocks listed at ASX: CBA, CSL, BHP, WBC, NAB, WES, ANZ, FMG, WOW, MQG, TLS, RIO, TCL, GMG, and COL. Your client is worried about the market risk in the next 6 months and seeking advice from you. At the same time, your client is also interested in index derivatives and wants to explore the investment opportunity in this type of products.

Question

Index futures can be used to remove the market risk from an equity portfolio. Based on your clients situation, provide your advice and explain how to use index futures to change or remove the exposure to market risk. The questions you need to address in your discussion can but not limited to the following questions:

1. When you need to choose a futures contract, what underlying you need to use? What is the reasoning/consideration behind your choice?