PDF Nism 8 Equity Derivatives Last Day Revision Test 1 DD

NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
V.IMP LAST DAY REVISION EXAM 1
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EXAM 1
LAST DAY REVISION EXAM
Question 1 The total number of outstandi

outstanding
ng / unsettled contrac
contracts
ts in the market, at any point of time is
known as OPEN INTEREST- True or False ?
(a) TRUE
(b) FALSE
Question 2
The clearing corporation may utilize the client account margins deposited with it for
fulfilling the dues which a clearing member may owe to the clearing corporation for the
trades on the clearing members own account. State True or False ?
(a) TRUE
(b) FALSE
Correct Answer 1 TRUE
Answer
Explanation An open interest is the total number of contracts outstanding (yet to be settled) for an underlying
asset.
Correct Answer 2 FALSE
Answer
Explanation Clients money cannot be used by the Clearing or Trading member for his trades .

Question 3 A clearing member has deposited eligib

eligible
le liquid assets of Rs.75 lakhs. The exchange has
minimum liquid net worth requirement of Rs. 50 lakhs. The member has not entered into
any transactions so far. What is the margin available for trading. (in lakhs)
(a)
(b) 75
50
(c) 25
(d) 125
Question 4 Is it true that an effici

efficient
ent cash market is required for an effici
efficient
ent futures market ? Yes or No
?
(a) Yes
(b) No
Correct Answer 3 25
Answer Liquid Networth is defined as Liquid Assets minus Initial Margin.

Explanation In above case he has deposited Rs 75 lakhs as liquid assets. Rs 50 lakhs is the requirement, so the
balance Rs 25 lakhs
lakhs will be used
used as initial margin.
margin.
Correct Answer 4 Yes

Question 5 If the price of a future contract increases

increases,, the mark to market margin account of the holder
of the short position in that contract is credited for the gain. State whether True or False ?
(a) TRUE
(b) FALSE
Question 6 The absolute amount of minimum capit

capital
al adequacy require
requirement
ment for derivativ
derivativee brokers is
same as that for cash market - True or False ?
(a) TRUE
(b) FALSE
Answer In a short position, if the price increase their is a loss. So the mark to market margin will be
Explanation debited.
Answer The absolute amount of minimum capital adequacy requirement for derivative brokers/dealers has
Explanation to be much higher than for cash market. Further, if a broker/dealer is involved both in cash and
futures segments, or in several exchanges, the capital adequacy requirement should be satisfied for
each exchange/segment separately.

Question 7 Change in option premium for a unit change in ________ is known as Rho.
(a) markett volatility
marke
(b) Price of the underlying asset
(c) Risk free interest rate
(d) liquidity
Question 8 The ask price is the price at which___

(a) the cleaning corporation settles the transaction
(b) the trader is prepared to sell the share
(c) the trader is prepared to purchase the share
(d) the trader is prepared to either buy or sell the share
Correct Answer 7 Risk free interest rate
Answer
Explanation Rho is the change in option price given a one percentage point change in the risk-free interest rate.
Correct Answer 8 the trader is prepared to sell the share
Answer BID ASK price means Buyer and Seller price - eg Rs 100 - 101
Explanation So Ask price is the price at which the trader is prepared to sell the share.

Question 9 In India, futures and options on individual stocks are allowed on_______
on__________.
___.
(a) A few selected stocks only
(b) All stocks listed on any of the exchanges
(c) All stocks with stock price of more than Rs.100 or Rs 50 in A and B group resp.
(d) Only those stocks which are simultaneously listed on all the stock exchange in India
Question 10 Higher the price volatil

volatility,
ity, higher would be the initial margin require
requirement
ment - State True or
False ?
(a) TRUE
(b) FALSE
Correct Answer 9 A few selected stocks only
Answer Only those stocks are included to be traded in the derivatives segment which meet the SEBI /
Explanation Exchange criteria for derivatives trading ,
Answer If the price of a stock is very volatile, the risk of losses increases. So the Stock Exchanges collect
Explanation higher initial margins in such cases .

Question 11 In a derivativ
derivativee exchange, the net worth require
requirement
ment for a cleari
clearing
ng member is higher than
that of a non-clearing member.
(a) TRUE
(b) FALSE
Question 12 Money and securit

securities
ies deposited by clie
clients
nts with the trading members should be kept by them
in a separate clients account - True or False ?
(a) TRUE
(b) FALSE

Question 13 All active members of the Exchange are required to make initial contrib
contribution
ution towards Trade
Guarantee Fund of the Exchange - State True or False ?
(a) TRUE
(b) FALSE
Question 14 An increase in the interest rates will lead to _________.

(a) increase the premium on put options
(b) decrease the premium on put options
(c) No effect
effect on put options
(d) Expiration of the option automatically
Correct Answer 14 decrease the premium on put options
Answer High interest rates means high cost of capital and this will result in an increase in the value of a
Explanation call option and a decrease in the value of a put option.

Question 15 In a forward contra

contract,
ct, the party thats agrees to sell the underlying asset on a certain
specified date for a certain specified price is said to have assumed_______
assumed_______
(a) A long position

(b) a square off position
(c) a short position
(d) a trade off position
Question 16 Mr. Hitesh is a trading member. One of his clients has purchased 12 contracts of March
series index futures and another client as has sold 10 contracts of March series index futures.
The exposure of Mr. Hitesh as trading member is ________.
(a) grossed up at 22 contracts
(b) netted out at 2 contracts
(c) maximum of 10 and 12 which is 12 contracts

(d) The Exchange will decide to either gross up or net out the exposure depending upon his past
record
Correct Answer 15 a trade off position
Answer Trade off basically means- an exchange where you give up one thing in order to get something
Explanation else. In a forward contract for eg - the farmers sells his crop two months hence in exchange of
some amount of money.
Correct Answer 16 grossed up at 22 contracts
Answer The open position of all the clients of a trading member are grossed up to arrive at the total
Explanation exposure of the trading member .

Question 17 In case of Call options, if the market price is less than the exercis
exercisee (strike) price, the option
will __________.
(a) expire worthless

(b) seller of the option will exercise it
(c) will definitely get exercised
(d) none of the above
Question 18 Does the differe

difference
nce between exercis
exercisee price of the optio
optionn and spot price affects option
premium ? State Yes or No.
(a) Yes
(b) No
Correct Answer 17 expire worthless
Answer If market price is below strike price, the option expires worthless as the buyer will incur the
Explanation maximum loss of his premium paid and the seller will earn the premium received.
Answer The Option premium is a combination of intrinsic value and time value and other factors.
Explanation The Intrinsic value is difference between Spot and Exercise Price (Strike Price).
Exercise price remains constant whereas the Spot price fluctuates.
So the option premium will fluctuate as per the movement in Spot price.

Question 19 A high initial margin level improves solvency & financial capability of the clearing
corporation - True or False ?
(a) TRUE
(b) FALSE
Question 20 An America
American n put option gives the buyer the right but not the oblig
obligations
ations to sell to the writer
an underlying asset at a specified price on or before the expiry date - State whether True or
False ?
(a) TRUE
(b) FALSE
Answer Higher intial margin collection from trading members reduces the chances of their defaults thus
Explanation improving the solvency & financial capability of the clearing corporation.
Answer The owner of American option can exercise his right at any time on or before the expiry date/day
Explanation of the contract.
The owner of European option can exercise his right only on the expiry date/day of the contract.

Question 21 State True or False - A futures contract is usually referr

referred
ed to by its delivery month.
(a) TRUE
(b) FALSE
Question 22 Mr A sold a put option of strike Rs.400 on PQR stock for a premium of Rs.32. The lot size is
500. On the expiry day, PQR stock closed at Rs. 350. What is your net profit or loss?
(a) -25000 (Loss)
(b) -9000 (Loss)
(c) 9000 (Profit)
(d) 25000 (Profit)
Answer A key characteristic of a futures contract that designates when the contract expires and when the
Explanation underlying asset must be delivered. The exchange on the futures contract is traded will also
establish a delivery location and a date within the delivery month when the delivery can take
place.
Not all futures
futures contracts require
require physical delivery
delivery of a commodity,
commodity, and many
many are settled in cash.
Delivery Month is also referred to as "contract month."
Correct Answer 22 -9000 (Loss)
Answer Mr. A sold a PUT option, that means he has a bullish or neutral view on PQR stock.
Explanation However, PQR stock has fallen by Rs 50 ( 400 - 350 ).
Which means he has lost Rs 50.
Since he has sold a PUT, he will receive the premium which is Rs 32.
So his net loss will be Rs 50 (Loss) - Rs 32 (Premium Recd) = Rs 18
Total Loss = Rs 18 x 500 (lot size) = Rs. 9000

Question 23 In an Index Futures contract, the tick size is 0.2 of an index point & the index multiple is Rs
50, then a tick is valued at_______.
(a) Rs 50
(b) Rs 100
(c) Rs 10
(d) Rs 2.50
Question 24 The securit

securities
ies which are placed by cleari
clearing
ng members with the cleari
clearing
ng corporatio
corporationn as a part
of liquid assets are __________ .
(a) marked to market on a periodical basis
(b) is not marked to market as they are blue chip shares
(c) may or may not be marked to market depending on the decision of the Stock Exchange
(d) None of the above
Correct Answer 23 Rs 10
Answer Rs 50 X 0.2 = Rs 10.

Explanation Each tick movement will result in profit or loss of Rs 10 for the Index buyer or seller resp.
Correct Answer 24 marked to market on a periodical basis
Answer As per Prof. J. R. Verma Committee recommendations the securities placed with the Clearing
Explanation Corporation shall be marked to market on a periodical basis (weekly).

Question 25 Contract month means_____

(a) Month in which the transaction is done
(b) Month of expiry of the futures contract

(c) Month of beginning of the futures contract
Question 26 Initial margin is calculated based on ____

(a) Average price movement in the last 5 working days
(b) Value-At-Risk (VAR) based margining.
(c) fixed at 25% for most of the scrips and 35% for volatile scrips
(d) As per the The Black & Scholes Model
Correct Answer 25 Month of expiry of the futures contract
Answer Contract month is the maturity month of the contract.

Explanation For eg - A trader may buy an March month contract in January.
So March will be the contract month.
Correct Answer 26 Value-At-Risk (VAR) based margining.
Answer Initial margin requirements are based on 99% value at risk over a one day time horizon.
Explanation

Question 27 Daily Trading Price Limits defi

define
ne the maximum perce
percentage
ntage by which the price of a future
contract can rise above or fall below the previous days settlement price - State whether True
or False ?
(a) TRUE
(b) FALSE
Question 28 For portfo

portfolio
lio hedging by instit
institutions
utions and mutual funds, index based derivativ
derivatives
es are more
suitable and are much more cost effective than derivative based on individual stocks - State
True or False ?
(a) TRUE
(b) FALSE

Question 29 A Clearing Member is responsible to the exchange for his transactio

transactions
ns & also for the
position of his trading members under him - True or False ?
(a) FALSE
(b) TRUE
Question 30 A default by a member in the derivativ

derivatives
es segment will be not be treated as
as default in the cash
segments of that exchange - State True or False ?
(a) FALSE
(b) TRUE
Answer A default by a member in the derivatives segment will be treated as default in all segments of
Explanation that exchange and as default on all exchanges where he is a member.

Question 31 Does trading in deriv

derivatives
atives become expensive due to high margins ? State Yes or No.
(a) Yes
(b) No
Question 32 _______ ____ risk is the compone

___________ component
nt of price risk that is unique to partic
particular
ular events of the
company and/or industry and this risk could be reduced to a certain extent by diversifying
the portfolio.
(a) Unsystematic
Unsystem atic Risk
(b) Systematic Risk
Systematic R isk
(c) Arbitrage Risk
(d) Interest Rate Risk
Answer Cost components of futures transaction include margins, transaction costs (commissions), taxes
Explanation etc.
So higher the margins more expensive the trading.
Correct Answer 32 Unsystematic

Unsystematic Risk

Question 33 The Cleari

Clearing
ng of trades on a stock exchange can be done by_______
by_________.
__.
(a) by the trading members
members
(b) by the clearing

clearing members
members
(c) both by clearing
clearing members
members and trading members
members
Question 34 In an in the money PUT option____

(a) strike price would be lower than the market price
(b) exercise price would be equal to the market price
(c) strike price would be higher than the market price
(d) strike price would be zero
Correct Answer 33 by the clearing

clearing members
members
Correct Answer 34 strike price would be higher than the market price
Answer A put option is said to be In The Money when market price is lower than strike price.
Explanation

Question 35 Delta measures the expecte

expected
d change in the option premium for a unit change in _______
________.
_.
(a) Volatility of underlying asset
(b) treasury interest rates

(c) time to option expiry
(d) spot price of underlying asset
Question 36 In an out-of-t
out-of-the
he money put option ____
(a) Strike price would be higher than the market price
(b) Exercise price would be equal to the market
(c) Strike price would be lower than the market price
(d) strike price would be zero
Correct Answer 35 spot price of underlying asset
Answer Delta measures the sensitivity of the option value to a given small change in the price of the
Explanation underlying asset.
Correct Answer 36 Strike price would be lower than the market price
Answer A put option is said to be OTM when spot (market) price is higher than strike price.
Explanation A call option is said to be OTM, when spot (market) price is lower than strike price.

Question 37 Liquid assets criter

criterion
ion for professio
professional
nal cleari
clearing
ng members is differe
different
nt from that of the
trading cum clearing members - True or False ?
(a) TRUE
(b) FALSE
Question 38 A trader sold on ABC Stock Futures Contract at Rs.354 & the lot size is 900. What is your
profit or loss if you purchase the contract back at Rs.341 ?
(a) Rs 11700
(b) - Rs 11700 (Loss)
(c) Rs 8300
(d) - Rs 8300 (Loss)
Answer He sold at Rs 354 and bought back at Rs 341 which means he has made a profit.
Explanation Rs 354 - Rs 341 = Rs 13
Rs 13 X 900 (Lot size) = Rs 11700 Profit

Question 39 When would a trader make a profit on a short positio

position
n of September futures?
(a) when he buys a October future at a lower price
(b) when he sells another September future at a lower price

(c) he square of this short position by buying the September future at lower price
(d) when he sells October futures at a lower price.
Question 40 Which of the following is not an applicatio

applicationn of indices?
(a) index derivatives
(b) exchange traded funds
(c) private equity
equity funds
(d) Index funds
Correct Answer 39 he square of this short position by buying the September future at lower price
Answer Profit can be made in a short position when the price falls and the same is bought back.
Explanation For eg - You sold a stock at Rs 100 ie. created a short position. When price falls to say Rs 80 and
you buy it back, you make a profit of Rs 20.
In case of futures, you have to square up in the same expiry month.
Correct Answer 40 private equity

equity funds
Answer Private Equity Funds are not connected to any index nor are they listed on a stock exchange.
Explanation

Question 41 Options contrac

contractsts are not symmetric
symmetrical
al with respect to rights & obligat
obligations
ions of the parties
involved - State True or False ?
(a) TRUE
(b) FALSE
Question 42 Time value and intrinsic value of a call option are always either positive or zero- True or
False ?
(a) TRUE
(b) FALSE
Answer The buyer of an option has a right but not the obligation in the contract. Also his riskd are limited
Explanation to the extent of premium paid.
The writer/seller of an option is one who receives the option premium and is thereby obliged to
sell/buy the asset if the buyer of option exercises his right. His risks are unlimited.
Thus Option contracts are not symmetrical as the buyers and sellers have different obligations and
risk factors.
On the other hand obligations and returns in Futures are symmetrical for both buyer and sellers.
Answer Only in-the-money options have intrinsic value whereas at-the-money and out-of-the-money
Explanation options have zero intrinsic value. The intrinsic value of an option can never be negative.
Time value also can never be negative.

Question 43 The gain or loss is realized on daily basis due to mark to market mechanism in which of the
following contracts ?
(a) Forward Contracts

(b) Contracts in Swaps
(c) Future market contracts
(d) Equity Cash Market contracts
Question 44 Stock Brokers are allowed to fund margin require

requirement
ment of their clie
clients.
nts. They may not collect
such margins from their clients - State True or False ?
(a) TRUE
(b) FALSE
Correct Answer 43 Future market contracts
Answer As per Dr. L. C. Gupta Committee all clients should pay margins. Brokers should not fund
Explanation margins of clients.

Question 45 The main logic behind Position limits is to____________.
prevent the market being unduly influenced

prevent influenced by the activities
activities of an individual/group of
of investors
(a)
(b) preventt the market being unduly influenced
preven influenced by Central Govt
Govt policies
(c) give direction to the market to move up or down as determined by SEBI
(d) to encourage high networth investors to provide direction to the market
Question 46 The seller of the put option gains if price of underlyin

underlying
g asset_________
asset___________
__
(a) Decreases
(b) Increases
(c) Does not change
(d) Both 2 and 3
Correct Answer 45 preven

preventt the market being unduly
unduly influenced by the activities
activities of an individual/group of
of investors
Answer Position limits are the maximum exposure levels which the entire market can go up to and each
Explanation Clearing Member / Trading member or investor can go up to.
Thus no investor can take an extra ordinary large position and influence the direction of a scrip /
market.
Correct Answer 46 Both 2 and 3
Answer The seller of PUT option is either bearish or neutral. He gains the premium received if the
Explanation underlying increases or remains flat.

Question 47 A portfolio with 50 differe

different
nt stocks is twice as risky as another portfolio with 100 stocks in it
- State whether True or False ?
(a) TRUE
(b) FALSE
Question 48 Mr A buys a call option with lower strike price and sells another call option with higher
strike price both on the same underlying share and same expiration date, the strategy is
called______
(a) Bull Spread
(b) Bear Spread
(c) Butterfly Spread
(d) Calendar Spread
Answer Higher the number of stocks, better the diversification and lower the risks.
Explanation
Correct Answer 48 Bull Spread
Answer A bull call spread is constructed by buying a call option with a low strike price, and selling another
Explanation call option with a higher strike price.

Question 49 Futures trading is considered more risky than equity trading due to ________
_________.
_.
(a) high leverage
(b) High pressure
(c) high volatility
(d) high liquidity
Question 50 Institutio nal investors pay higher margins than the individ
Institutional individual
ual investors for derivativ
derivatives
es
trading - State True or False ?
(a) TRUE
(b) FALSE
Correct Answer 49 high leverage
Answer Traders can trade in derivat

derivatives
ives by paying a small margin
margin ( around 25 to 30% of the total contract
Explanation value), This leverage increases the risk as the trader can take up poistions beyond his capacity.

Question 51 The deriv

derivatives
atives segment of a Stock Exchange is under the same governi
governing
ng council as the cash
segment - State True or False ?
(a) TRUE
(b) FALSE
Question 52 You have bought a futures contract and the price drops, you will _________.
(a) Make a profit
(b) Make a loss
(c) given information is incomplete to arrive at a conclusion
Answer The derivatives exchange/segment has a separate governing council and no common members are
Explanation allowed between the Cash segment Governing Board and the Derivatives segment Governing
Council of the exchange.
Correct Answer 52 Make a loss

Question 53 Stock price is ____________.

(a) same as in the near month future contract
(b) same as exercise price of an option
(c) same as strike price of an option
(d) the price of the underlying in the spot market
Question 54 A naked call option means that the writer does not currently owns the underlying - State
True or False ?
(a) TRUE
(b) FALSE
Correct Answer 53 the price of the underlying in the spot market
Answer Stock price or Spot price means the current market price of that stock in the cash market.
Explanation
Answer An options strategy in which an investor writes (sells) call options on the open market without
Explanation owning the underlying security.
This strategy is sometimes referred to as an "uncovered call" or a "short call".

Question 55 Factor(s) influencing option pricing include which of the followin

following
g?
(a) time to expire
(b) volatility of the underlying shares
(c) dividend pay out
(d) all of the above
Question 56 When ordinary cash dividends are declared, put option values will decrease - State True or
False ?
(a) TRUE
(b) FALSE
Correct Answer 55 all of the above
Answer Cash dividends issued by stocks have big impact on their option prices. This is because the
Explanation underlying stock price is expected to drop by the dividend amount on the ex-dividend date.
Put options gets more expensive due to the fact that stock price always drop by the dividend
amount after ex-dividend date.
In case of call options, they can get discounted by as much as the dividend amount.

Question 57 A Writer of an option _________.

(a) has obligation in the contract
(b) receives the premium
(c) has choice in the contract
(d) Both 1 and 2
Question 58 The daily settlement prices of equity derivatives are decided by _________.
(a) Clearing Corporation
(b) SEBI
(c) Brokers Association
(d) RBI
Correct Answer 57 Both 1 and 2
Answer The writer of an option is one who receives the option premium and is thereby obliged to sell/buy
Explanation the asset if the buyer of option exercises his right.
Correct Answer 58 Clearing Corporation
Answer One of the responsibilities

responsibilit ies of the Clearing Corporation is to decide the Daily Settlement Prices.
Explanation

Question 59 The maximum

higher possible
depending on theloss for the option
underlying buyer is theThis
price movement. premium
is truepaid , but the
for which profits
type can be?
of options
(a) true for all types of options
(b) true for American options only
(c) true for European options only
(d) false for all types options
Question 60 If a Cleari
Clearing
ng members defaults, the margin paid on his own account only is allowed to be
used by the clearing corporation for realizing its dues from the member. The clients margin
remain unaffected - State True or False ?
(a) TRUE
(b) FALSE
Correct Answer 59 true for all types of options
Answer The difference between American and European options is relating to the time of exercising the
Explanation contract. Profit potential in both of them is same,
Answer In case of Clearing Member default, margins paid by the Clearing Member on his own account
Explanation alone would be used to settle his dues.

Question 61 A future contract is a very standardized contract that leaves very little (except the price)
open to negotiation - State True or False ?
(a) FALSE
(b) TRUE
Question 62 Shorter the time to maturity of the call option, higher will be the time value - State whether
True or False ?
(a) TRUE
(b) FALSE
Answer Terms of the future contracts are standardized wrt. quantity, time period etc. Only price is decided
Explanation by the demand
demand supply and other
other market situations.
situations.
A forward contract on the other hand is not standardized.
Answer Other things being equal, options tend to lose time value each day throughout their life. This is due
Explanation to the fact that the uncertainty element in the price decreases.
Thus shorter the time to maturity, lower will be the time value.

Question 63 Mr. Anand asks his broker to buy certa

certain
in number of contrac
contracts
ts at the market price, this
instruction is called____________
(a) arbitrage order

(b) limit order
(c) stop loss order
(d) market order
Question 64 A client registration form contains clients _____________

(a) investmentt objective
investmen objectivess
(b) background
(c) beneficial identity
identity
Correct Answer 63 market order

Question 65 Any person who wishes to open a Trading Account must be given the following documents
by his trading member –
(a) Complete version of all the laws of SEBI

(b) Risk disclosure document
(c) All the rules & regulations of the exchange
(d) SEBI guidelines on the subject
Question 66 The ASK price is always_________.

(a) greater than the bid price
(b) equal to bid price
(c) lower than the bid price
Correct Answer 65 Risk disclosure document
Answer Model Risk Disclosure Document is issued by the members of Exchanges and contains important
Explanation information on trading in Equities and F&O Segments of exchanges.
Correct Answer 66 greater than the bid price
Answer Bid and Ask price means the Buyer and Seller price.
Explanation For eg price of a stock as quoted on a stock market is Rs. 100 - 101.
So 100 is the Bid price and 101 is the Ask price.
The Ask will will always be higher tha Bid price.

Question 67 Mr. Mohan entere

entered
d into a contract with Mr. Soham to buy 500 bags of Cotton at a price of
Rs 800 per bag. Delivery of goods and payment of money will take place 4 months from now.
Both
WhatMr.
typeMohan and Mr.
of contract Soham have a right as well as an obligation under this contract.
is this?
(a) Options
(b) Forwards
(c) Futures
(d) Swaps
Question 68 The process by which a futures contrac

contractt is terminat
terminated
ed by a transact
transaction
ion that is equal and
opposite to the original transaction is called__________ .
(a) netting
(b) off setting

(c) hedgeing
(d) mark to market
Correct Answer 67 Forwards
Answer Forward contract is an agreement made directly between two parties to buy or sell an asset on a
Explanation specific date in the future, at the terms decided today. There is no Stock Exchange, Commodity
Exchange etc. involved.
Correct Answer 68 off setting
Answer
Explanation A closing purchase
offsetting transaction
orissale.
one that reduces or eliminates an existing position by an appropriate

Question 69 The Cleari

Clearing
ng members in deriva
derivatives
tives exchange are require
requiredd to make a minimum deposit of
Rs 20 lakhs with the exchange/clearing corporation in the form of liquid assets -State True
or False ?
(a) FALSE
(b) TRUE
Question 70 If you have a long or short position in a futures contrac

contract,
t, this can be closed by initiati
initiating
ng a
reverse trade - True or False ?
(a) TRUE
(b) FALSE
Answer Clearing Members have to maintain a Minimum Deposit in Liquid Assets of Rs 50 lakhs with the
Explanation exchange or it’s Clearing Corporation.
Corporation.

Question 71 The idea and economic rational of introducin

introducing
g forward contracts is to___
(a) help arbitrage
(b) help trading
(c) help hedgeing
(d) both 1 and 3
Question 72 As per Accounting Standards, the initial margin paid by an option seller is shown under
___________ in the
the balance sheet
(a) Bad Debts
(b) Fixed Assets
(c) Current Assets
(d) Current Liabilities
Correct Answer 71 help hedgeing
Answer The essential idea of entering into a forward is to fix the price and thereby avoid the price risk. By
Explanation entering into forwards, one is assured of the price at which one can buy/sell an underlying asset.
Thus Forward contracts are basically meant for hedgeing / managing the risks.
Correct Answer 72 Current Assets
Answer The seller/ writer of the option is required to pay initial margin for entering into the option contract
Explanation and its should be debited to an appropriate account, say, "Equity Index/ Stock Option Margin
Account".
In the balance sheet, such account should be shown separately under the head "Current Assets".

Question 73 A person who is bullis

bullish
h and a payer of premium is a _______
____________.
_____.
(a) buyer of call
call option
(b) seller of call option
(c) buyer of put option
(d) seller of put option
Question 74 Investor Mr. X wants to sell 11 contracts of Feb series at

at Rs.6300 & investor Mr. Y wants to
sell 13 contracts of March series at Rs.6450. Lot size is 50 for both these contracts. The initial
margin is fixed at 6%. How much initial margin is required to be collected from both these
investors(sum of initial margin of X and Y) by the broker?
(a) Rs 251550
(b) Rs 459450
(c) Rs 640000
(d) Rs 374900
Correct Answer 73 buyer of call

call option
Answer Margin from Mr. X

Explanation Rs 6300 X 11 contracts
contracts X 50 (lot size) X 6% = 207900
Margin from Mr. Y
Rs 6450 X 13 contracts X 50 (lot size) X 6% = 251550
Total Margin = 207900 + 251550 = 459450.

Question 75 A trader has taken a short position of one contract in Sept ABC futures (contrac
(contractt multiplier
50) at a price of Rs.1800. When he closed this position after a few days, he realized that he
has madethe
generate a profit a Rs.5000.
profit?( Whichbrokerage
Please ignore of the foll costs)
closing. actions would have enabled him to
(a) Buying 1 Sept ABC futures contract at 1900

(b) Buying 1 Sept ABC futures contract at 1700
(c) Selling 1 Sept ABC futures contract at 1900
(d) Selling 1 Sept ABC futures contract at 1700
Question 76 The option which gives the holder a right to buy the underlyi
underlying
ng asset on or before a
particular date for a certain price, is called as _________
(a) European
European put option
(b) American put option

(c) American call option
(d) European call option.
Correct Answer 75 Buying 1 Sept ABC futures contract at 1700
Answer To make a profit of Rs 5000, he has to earn Rs 100 per share ( 5000 / 50 (lot size) = 100 )
Explanation Since he has gone short, he will make a profit when the price falls and he buys at the reduced
price.
He has sold at Rs 1800, so when he buys back at Rs 1700 he make Rs 100 profit per share.
Rs 100 X 50 ( Lot size ) = Rs 5000 profit.
Correct Answer 76 American call option
Answer In case of American options, buyers can exercise their option any time before the maturity of
Explanation contract.
In case of European options, owner of such option can exercise his right only on the expiry
date/day of the contract.

Question 77 A call option gives the holder a right to buy how much of the underlying from the writer of
the option?
(a) The specified quantity or less than the specified quantity

(b) The specified quantity or more than the specified quantity
(c) Only the specified quantity
Question 78 Which of the following is closest to the forward price of a share if cash price is Rs 425,
forward contract maturity=12 months from date, market interest rate 12%
(a) 425
(b) 482
(c) 476
(d) 437
Correct Answer 77 Only the specified quantity
Answer Only the specified quantity as per the lot size of the option contract.
Explanation
Correct Answer 78 476
Answer 12 months maturity means full one year of interest cost.

Explanation So 12% of 425 = 425 x 12 / 100 = 51
425 + 51 = 476 is closest to the one year forward price

Question 79 A trader is very bearish on speci

specific
fic companies. However he is bullis
bullishh on the market as a
whole. Which of the following is the most appropriate strategy to take advantage from this
view?
(a) sell the shares of those specific companies and also sell index futures
(b) sell the shares of those specific companies and buy index futures
(c) buy the shares
shares of those specific
specific companies
companies and sell
sell index futures.
futures.
(d) do nothing
Question 80 The concept in which the derivat

derivative
ive trader gets a higher exposure for the small portion of
margin amount brought by him is called as ___________ .
(a) Arbitrage
(b) Leverage
(c) Delta Hedgeing
(d) Speculation
Correct Answer 79 sell the shares of those specific companies and buy index futures
Correct Answer 80 Leverage

Question 81 The networth criter

criterion
ion for Profess
Professional
ional cleari
clearing
ng Members is the same as that for Trading
cum clearing members - State whether True or False ?
(a) TRUE
(b) FALSE
Question 82 Which of the following problem(s) that exist in the forward contracts are solved by the Futures
contracts ?
(a) a central agency for monitoring

(b) settlement problems
(c) counter party risk
Answer The Professional clearing Member is required to bring in additional Interest free security deposit
Explanation of Rs. 2 Lakhs and Collateral security deposit of Rs. 8 Lakhs per trading member whose trades he
undertakes to clear and settle in the F&O segment.

Question 83 Loss incurred on derivativ

derivatives
es transact
transactions
ions can be carrie
carriedd forward for a period of 12
assessment years - State whether True or False ?
(a) TRUE
(b) FALSE
Question 84 A short positio

positionn in a CALL option can be closed out by taking a long position in a PUT
option with same exercise date and exercise price.
(a) TRUE
(b) FALSE
Answer Loss incurred on derivatives transactions which are carried out in a recognized stock exchange can
Explanation be carried forward for
for a period of 8 assessment
assessment years.
years.
Answer A short position in a CALL option can be closed out by taking a long position in a same CALL
Explanation option with same exercise date and exercise price.

Question 85 Which of the following complai

complaints
nts can be taken up by the exchange for redress
redressal
al ?
(a) Claims for notional loss, opportunity loss for the disputed period or trade
(b) Complaints pertaining to trades not executed on the Exchange by the complainant
(c) Claims of sub-broker/authorized persons for private commercial dealings with the trading member
(d) Excess Brokerage charged by Trading Member / Sub-broker
Question 86 Mr. Ravi purchases 10 call option on stock at Rs. 20 per call with strike price of Rs 350. If on
exercise date, stock price is Rs. 310, ignoring transaction cost, Mr. Ravi will
choose___________
(a) to exercise the option
(b) not to exercise the option
(c) may or may not exercise the option depending on whether he likes the company or not
(d) may or may not depending on whether he is in town or not
Correct Answer 85 Excess Brokerage charged by Trading Member / Sub-broker
Answer Exchanges provide assistance if the complaints fall within the purview of the Exchange and are
Explanation related to trades that are executed on the Exchange Platform. Excess Brokerage charged by
Trading Member / Sub-broker comes under this assistance.
Correct Answer 86 not to exercise the option
Answer Mr. Ravi has bought a Call Option assuming that the price will rise.
Explanation The price has fallen and he is in a loss. So he will not choose to exercise his option.
His loss is restricted to the premium he has paid.

Question 87 Trading members are required to possess a higher level of Capital Adequacy (as per balance
sheet) than clearing members- True or False ?
(a) TRUE
(b) FALSE
Question 88 A trader sold a call option on a share of strike price Rs. 200 and receiv
received
ed a premium of Rs.
12 from the option buyer. What can be his maximum loss on this position.
(a) Rs 200
(b) Rs 188
(c) Rs 12
(d) Unlimited
Answer Clearing Members are permitted to settle their own trades as well as the trades of the other non-
Explanation clearing members known as Trading Members who have agreed to settle the trades through them.
Thus the Capital Adequacy requirement is higher for Clearing Members.
Correct Answer 88 Unlimited
Answer
Explanation When
makes alosses
traderand
sells a Call option
theoretically he is
price canbearish
rise to/ any
neutral on -that
levels scrip.
so his But can
losses in case the price rises, he
be unlimited.

Question 89 Investor protection fund for the derivatives segment is ___________

(a) same as that of cash segment
(b) Independent of that of cash segment
(c) contributed by ministry of finance
(d) no investor protection fund is there for the derivative segment
Question 90 The contrac

contractt size in futures market is defined by _______
____________
_____
(a) The Stock Brokers
(b) The Stock Exchange
(c) The Parties to the contract
(d) SEBI
Correct Answer 89 Independent of that of cash segment
Correct Answer 90 The Stock Exchange
Answer The Contract size (Lot size) is specified by the exchange. (minimum value of Rs 2,00,000).
Explanation

Question 91 In Optio
Options
ns - the seller of an contrac
contractt pays an upfront premium at the time of enteri
entering
ng into
the contract - State whether True or False ?
(a) TRUE
(b) False as the premium is paid on maturity
(c) False as the premium is paid by the buyer and not the seller
Question 92 The mark-to-

mark-to-market
market margin debits for index options are made on_______
on________.
_.
(a) weekly basis
(b) daily basis
(c) fortnightly basis
(d) every friday
Correct Answer 91 False as the premium is paid by the buyer and not the seller
Correct Answer 92 daily basis
Answer All types of Mark to Market margin debits are made on daily basis.
Explanation

Question 93 A calendar spread in index futures is treated as ________

__________ in a far month contrac
contractt when the
near months contract is expired.
(a) long position
(b) hedged position
(c) naked position
(d) Short position
Question 94 The main objectiv

objectivee of derivative
derivativess is to enable market participa
participants
nts to ___
(a) Trade
(b) Manage the risks
(c) Speculate
(d) Arbitrage
Correct Answer 93 naked position
Correct Answer 94 Manage the risks

Question 95 Higher the interest rate, the higher the CALL option premiu
premiumm - State True or False ?
(a) TRUE
(b) FALSE
Question 96 A Buyer or holder of the option is the party to the contrac

contractt who has ________
__________.
__.
(a) the obligation but not the right
(b) the right but not the obligation
(c) the right and the obligation
Answer High interest rates will result in an increase in the value of a call option and a decrease in the value
Explanation of a put option.
Correct Answer 96 the right but not the obligation
Answer A Call option gives the buyer the right, but not the obligation to buy the underlying at the strike
Explanation price.
A put option gives the buyer of the option the right, but not the obligation, to sell the underlying at
the strike price.

Question 97 The Tradi

Trading
ng members on the exchanges derivat
derivatives
ives segment are not required to be
registered with SEBI.- State whether True or False ?
(a) FALSE
(b) TRUE
Question 98 A unique principl

principlee of futures trading makes trading possible for those who do not want to
make or take delivery of underlying assets. Which is that principle ?
(a) Traded on a recognised exchange
(b) Price uncertainty
(c) Standardisation
Standardisation of contracts
(d) Cash settlem
settlement
ent
Correct Answer 98 Cash settlem

settlement
ent

Question 99 On the National Stock Exchange, for its index futures, what would be the opening day of its
April series?
(a) Last Friday of March month
(b) Last Friday of April month
(c) Last Friday of January month
(d) Last Friday of February month
Question 100 Operational risks include losses due to______

(a) natural calamities
(b) computer system failure
(c) power failure
failure
Correct Answer 99 Last Friday of January month
Answer There are 3 series of index futures active all the time. A new series is introduced as the older series
Explanation expires.
Lets assume the Jan, Feb and March series are active currently.
On the last Thursday of Jan, the Jan series will expire.
So that next day ie. on the last Friday of Jan, the April series will be activated. This will be the
opening day for April series. Thus we will have three series active ie. Feb, March and April.
Correct Answer computer system failure

100
Answer Operational Risk include losses incurred from risks resulting from breakdowns in internal
Explanation procedures,
procedures, people and systems.
systems.

Practice Question Banks also available for :
NISM
NISM Series I: Currency Derivatives Certification Exam

NISM Series V A: Mutual Fund Distributors Certification Exam
NISM Series VI: NISM
NI SM Series VI - Depository Operations
Operations Certification Exam
NISM Series VII: Securities Operations and Risk Management
NISM Series VII: Equity Derivatives Certification Exam
NISM Series III A: Securities Intermediaries Compliance certification Exam
NISM Series X A : Investment Adviser (Level 1) Certification Exam
NISM Series X B: Investment Adviser (Level 2) Certification Exam
NCFM
NCFM Financial Markets: A Beginners Module

NCFM Capital Market (Dealers) Module
NCFM Derivative Market (Dealers) Module
BSE
Certificate on Security Market (BCSM)


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time duration is 2 hours.

Question 1 The total number of outstandi

Correct Answer 1 TRUE

Correct Answer 2 FALSE

Question 3 A clearing member has deposited eligib

Question 4 Is it true that an effici

Answer Liquid Networth is defined as Liquid Assets minus Initial Margin.

Correct Answer 4 Yes

Question 5 If the price of a future contract increases

Question 6 The absolute amount of minimum capit

Correct Answer 5 FALSE

Correct Answer 6 FALSE

Question 8 The ask price is the price at which___

Correct Answer 7 Risk free interest rate

Correct Answer 8 the trader is prepared to sell the share

Question 10 Higher the price volatil

Correct Answer 9 A few selected stocks only

Correct Answer 10 TRUE

Question 12 Money and securit

Correct Answer 11 TRUE

Correct Answer 12 TRUE

Question 14 An increase in the interest rates will lead to _________.

Correct Answer 13 TRUE

Correct Answer 14 decrease the premium on put options

Explanation call option and a decrease in the value of a put option.

Question 15 In a forward contra

(a) A long position

(c) maximum of 10 and 12 which is 12 contracts

Correct Answer 15 a trade off position

Correct Answer 16 grossed up at 22 contracts

(a) expire worthless

Question 18 Does the differe

Correct Answer 17 expire worthless

Correct Answer 18 Yes

Correct Answer 19 TRUE

Correct Answer 20 TRUE

Question 21 State True or False - A futures contract is usually referr

Correct Answer 21 TRUE

Correct Answer 22 -9000 (Loss)

Question 24 The securit

(d) None of the above

Answer Rs 50 X 0.2 = Rs 10.

Correct Answer 24 marked to market on a periodical basis

Question 25 Contract month means_____

(b) Month of expiry of the futures contract

Question 26 Initial margin is calculated based on ____

Correct Answer 25 Month of expiry of the futures contract

Answer Contract month is the maturity month of the contract.

Correct Answer 26 Value-At-Risk (VAR) based margining.

Question 27 Daily Trading Price Limits defi

Question 28 For portfo

Correct Answer 27 TRUE

Correct Answer 28 TRUE

Question 29 A Clearing Member is responsible to the exchange for his transactio

Question 30 A default by a member in the derivativ

Correct Answer 29 TRUE

Correct Answer 30 FALSE

Question 31 Does trading in deriv

Question 32 _______ ____ risk is the compone

Correct Answer 31 Yes

Correct Answer 32 Unsystematic

Question 33 The Cleari

Question 32 ___ risk is the compone