Question

A mutual fund is engaged in the purchase of index futures, for purposes of minimizing its portfolio exposures. Which "use" most closely explains their actions? A) Risk management B) Speculation C) Reduced transaction costs D) Regulatory arbitrage

The answer is C) Reduced transaction costs but I don't understand why. I thought it would be A) Risk management

Answer 1

The question can be seen as having two answers, but the correct one would be one which is most appropriate,

Index futures are bought and sold for the purpose of buying and selling the underlying securities, in the S&P 500 Index, 500 largest companies prices are tracked.

If a mutual fund manager goes on to pick individual stocks, he would end up paying huge transaction costs in terms of brokerage and taxes but in trading a future index, a bunch of securities are tracked ,hence the transaction costs are reduced