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An investor wants to sell her diversified stock portfolio in December, but this would create a...

An investor wants to sell her diversified stock portfolio in December, but this would create a large taxable profit for her. She would like to be able to defer the taxes for one year. How can she accomplish this?

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Answer #1

To defer taxes as well as to protect her profits, the investor can try selling the appropriate number of Futures contracts on the Underlying Index which closely resembles her diversified portfolio.

The no. of contracts is given by

No of contracts to be sold = beta of her portfolio * Current value of her portfolio / size of one futures contract

The short position on the futures contract will protect the value of her portfolio and will keep it almost constant till another year.

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