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An investor can use futures contract to hedge the risk associated with the portfolio and stabilize the returns of the portfolio. As an example, we can consider the simple case of an investor who has $2 million invested in the equity markets. The investor is concerned that a decline in the equity markets can have an adverse impact on the value of the portfolio. Therefore a short position in the futures market can be taken in which the short position would gain value as the value of equities decline. Therefore, the downside in the equity position can be countered by the upside in the derivatives position...
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