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NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 4
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PRACTICE TEST NO. 4
Question 1 ‘ICICI Bank stock call and put option’ belongs to which of the following categories ?
(a) Cash market product
(b) Derivative product
(c) Money market product
(d) Debt product
Correct Answer Derivative product
Answer Call and Put options on any stock are derivatives products.
Explanation
Question 2 Whom does the Clearing Member need to consult for setting limits on the trading members
clearing through him?
(a) Clearing Corporation
(b) SEBI
(c) The respective Stock Exchange
(d) No consultation is required with anyone as the Clearing Member can set the limits of his
trading members on his own
Correct Answer No consultation is required with anyone as the Clearing Member can set the limits of his
trading members on his own
Answer A trading terminal helps the Clearing Members to monitor the open positions of all the
Explanation Trading Members clearing and settling through him. A Clearing Member may set limits for
a Trading Member clearing and settling through him.
Clearing corporation assists the Clearing Member to monitor the intraday limits set up by
a Clearing Member and whenever a Trading Member exceed the limits, it stops
that particular Trading Member from further trading.
Question 3 If the price of far month futures is less than the price of near month futures, it is called as
_______ .
(a) Reverse Hedging
(b) Contango
(c) Basis
(d) Backwardation
Correct Answer Backwardation
Answer If futures price is lower than spot price of an asset or if the far month future prices are
Explanation lower than current month futures prices, it is called “Backwardation market”.
Question 4 What does a seller of Put Option expect?
(a) An increase in the price of the underlying
(b) No change in the price of the underlying
(c) A decrease in the price of the underlying
(d) Both 1 and 2
Correct Answer Both 1 and 2
Answer A seller of put option expects the price to rise.

Explanation
Even if the price remains stable, the seller earns the option premium.
(Note - Buyer of Put option is bearish and a seller of Put option is bullish / neutral)
Question 5 What does a beta of more than 1 mean ?
(a) It means that the expected percentage change in stock price will be twice the percentage
change in index
(b) It means that the expected percentage change in stock price will be less percentage change
in index
(c) It means that the expected percentage change in stock price will be more than the
percentage change in index
(d) It means that the expected percentage change in stock price equals the percentage change
in index
Correct Answer It means that the expected percentage change in stock price will be more than the
percentage change in index
Answer Beta measures the sensitivity of a stock / portfolio vis-a-vis index movement over a period
Explanation of time, on the basis of historical prices.
If Beta of a stock is 1, it means that a % change in the index will lead to equal % change in
the stock price.
Suppose a stock has a beta equal to 2. This means that historically a security has moved
20% when the index moved 10%.
Question 6 You sold a call option on a share. The strike price of the Call was Rs 250 and you received a
premium of Rs 16 from the option buyer. What can be the maximum loss on this position?
(a) Unlimited
(b) Zero
(c) Rs. 250
(d) Rs. 234
Correct Answer Unlimited
Answer When you sell a Call Option, you believe that the price will fall.
Explanation
If the price rises, you start making losses. Prices can rise theoretically to unlimited levels, so
the losses can be unlimited.
Question 7 Clearing Corporation of an Exchange guarantees performance of exchange traded contracts

- State whether True or False?
(a) TRUE
(b) FALSE
Correct Answer TRUE
Answer Clearing Corporation acts as a legal counterparty to all trades on this segment and also
Explanation guarantees their financial settlement.
Question 8 In the derivatives segment, who has to pay the margins as specified by the Clearing
Corporation?
(a) Clients
(b) Arbitrageurs
(c) Financial Institutions
(d) All of the above
Correct Answer All of the above
Answer All those who trade in the derivatives segment have to pay margins without exception.
Explanation
Question 9 When a dealer is doing trades in his own account and also doing trades for their clients then
these two trades have to be completely segregated - State True or False?
(a) TRUE
(b) FALSE
Correct Answer TRUE
Answer The trades done by the broker in his own account, by the dealer in his own account and the
Explanation trades of the clients have to be totally segregated.
Question 10 When a person enters into a forward contract, the loss that can occur on the position is
_____ .
(a) known
(b) Unknown
Correct Answer unknown
Answer When a person enters into a forward or a futures contract, his profits or losses are
Explanation uncertain as it depends on the movement of prices.
(Only in the case of buying an option, the losses are fixed ie. premium paid)
Question 11 As per the SEBI Act, the board members of Securities Exchange Board of India are appointed
by _____ .
(a) The Stock Exchanges
(b) The Central Government
(c) The High Court of Mumbai
(d) Securities Appellate Tribunal
Correct Answer The Central Government
Answer SEBI consists of a Board of Directors who are appointed by the Union Government of India.
Explanation
Question 12 Can a long position in a Put option can be closed out by taking a short position in a call
option with identical exercise date and exercise price ?
(a) Yes
(b) No
Correct Answer No
Answer A long position in a Put Option can be closed out (squared up) only by selling the same Put
Explanation Option.
Question 13 In the case of futures contract, the profits or losses are received / paid only on maturity -
State whether True or False?
(a) TRUE
(b) FALSE
Correct Answer FALSE
Answer In futures contract, the profits / losses are received / paid as and when the contract is
Explanation closed (squared up) by the trader or on maturity, which ever is earlier.
Question 14 Mr. Ashu has bought 100 shares of ABC at Rs 980 per share. He expects the price to up but
wants to protect himself if price falls. He does not want to lose more than Rs. 1000 on this
long position in ABC. What should Mr. Ashu do?
(a) Place a stop loss order for 100 shares of ABC at Rs 990 per share
(b) Place a stop loss order for 100 shares of ABC at Rs 970 per share
(c) Place a limit buy order for 100 shares of ABC at Rs 990 per share
(d) Place a limit sell order for 100 shares of ABC at Rs 970 per share
Correct Answer Place a stop loss order for 100 shares of ABC at Rs 970 per share
Answer Mr. Ashu will lose Rs 1000 if the ABC share will fall by Rs 10 as he has 100 shares and a 10
Explanation rupee fall will lead to Rs 1000 loss.
He has bought at Rs 980. So he will put the stop loss order at Rs 970 (980 - 10).
Question 15 Intrinsic value is always positive for in-the-money options and zero for out-of-the money
options - State True or False ?
(a) TRUE
(b) FALSE
Correct Answer TRUE
Answer In-the-money options have positive intrinsic value whereas at-the-money and out-of-the-
Explanation money options have zero intrinsic value. The intrinsic value of an option can never be
negative.
Question 16 The minimum Networth for clearing members of the derivatives clearing corporation/house
shall be _____ .
(a) Rs. 1 crore
(b) Rs 5 crore
(c) Rs 10 crore
(d) None of the above
Correct Answer None of the above
Answer The minimum Net-worth for clearing members of the derivatives clearing corporation
Explanation /house shall be Rs.300 Lakhs (Rs 3 cr).
Question 17 A long position in a call option can be closed out by taking a long position in a put option
with identical exercise date and exercise price - State True or False ?
(a) TRUE
(b) FALSE
Answer A long position in a CALL option can be closed out by taking a short position in the same
Explanation CALL option with same exercise date and exercise price.
Question 18 If futures price is higher than spot price of an underlying asset, this is known as _____ .
(a) Maximization
(b) Normalization
(c) Backwardation
(d) Contango
Correct Answer Contango
Answer If futures price is higher than spot price of an underlying asset, market participants may
Explanation expect the spot price to go up in near future. This expectedly rising market is called
“Contango market”.
Similarly, if futures price are lower than spot price of an asset, market participants may
expect the spot price to come down in future. This expectedly falling market is called
“Backwardation market”.
Question 19 On the derivatives exchange, a trading cum clearing member has a client who has
purchased and sold 600 and 350 contracts respectively in the August series of PQR futures
(contract multiplier 50). The trading cum clearing member has purchased and sold 300 and
850 contracts respectively on his own account in the same August series of PQR futures.
What is the outstanding liability (open position) of the member towards Clearing
corporation in the number of contacts ?
(a) 300
(b) 800
(c) 250
(d) 550
Correct Answer 800
Answer The open position of a client and the clearing member cannot be netted off.
Explanation
Open position of client is 600 - 350 = 250 purchase contracts

Open position of Clearing member is 300 - 850 = 550 sale contracts
Total outstanding position of the clearing member towards the Clearing Corporation is 250
+ 550 = 800 contracts
Question 20 Mr. Ashish is a portfolio manager and he is bullish on the market. What should be his
course of action ?
(a) He should sell index futures
(b) He should sell index call option
(c) He should buy index futures
(d) He should sell his complete portfolio
Correct Answer He should buy index futures
Answer Buying index futures such as Nifty futures will help him reap good profits if his view of
Explanation bullish markets prove correct.
Question 21 Can one sell assets in futures market even if he does not own any such assets ?
(a) Yes
(b) No
Correct Answer Yes
Answer One can sell futures / options etc. even if he does not own the underlying asset.
Explanation
Question 22 State True or False - The mark-to-market of index futures is daily valuation of open
positions as per the current market prices.
(a) TRUE
(b) FALSE
Correct Answer TRUE
Answer In futures market, while contracts have maturity of several months, profits and losses are
Explanation settled on day-to-day basis – called mark to market (MTM) settlement. The exchange
collects these margins (MTM margins) from the loss making participants and pays to the
gainers on day-to-day basis.
Question 23 If on the auction day, there are no sellers for a particular short delivery, what will the
Clearing Corporation do regarding the outstanding transaction ?
(a) The transaction is cancelled
(b) One more auction is held the next day
(c) The transaction is annulled
(d) The transaction is closed out
Correct Answer The transaction is closed out
Answer If no shares are received in an auction, the transaction is closed out at a particular price.
Explanation
The Close out will be at the highest price prevailing in the exchange from the day of trading
till the auction day or 20% above the official closing price on the auction day, whichever is
higher.
Question 24 In respect of Margin account - What will be done if the prices of future contract increases ?
(a) The margin account of the seller of futures will be debited for the notional loss
(b) The margin account of the buyer of futures will be credited for the notional gain
(c) Both 1 and 2
(d) Neither 1 nor 2
Answer The buyer of futures will have a notional gain and so his margin account will be credited by
Explanation the notional gain amount.
The seller of futures will have a notional loss if the price rises and his margin account will be
debited by the notional loss amount.
Question 25 When there is a ‘Closing buy transaction’, this will have the effect of partly or fully
offsetting ________ .
(a) A cross position
(b) A short position
(c) A high position
(d) A long position
Correct Answer A short position
Answer Creating a Short Position means selling the asset on an exchange with a view to buy it back
Explanation when the price falls.
So a Closing Buy transaction will be used to buy back / offset the short position created.
Question 26 An ideal index should contain ____ shares
(a) More than 50
(b) As many as possible
(c) As few as possible
(d) As per the objective of the index
Correct Answer As per the objective of the index
Answer Stocks in the index are chosen based on certain pre-determined qualitative and quantitative
Explanation parameters, laid down by the Index Construction Managers.
Question 27 Which of these CALL options are Out of The Money (OTM) ?
(a) The spot price is Rs 350 and strike price is Rs 330
(b) The spot price is Rs 350 and strike price is Rs 370
(c) The spot price is Rs 350 and strike price is Rs 350
(d) Depends on the Delta of the option
Correct Answer The spot price is Rs 350 and strike price is Rs 370
Answer A call option is out of the money when the strike price is higher than the spot/cash price of
Explanation the underlying.
Question 28 A farmer agrees to sell 100 tonnes of sugarcane to a factory after 2 month at a specific
price. What is this type of contract known as ?
(a) Swapation
(b) Future Contract
(c) Forward Contract
Correct Answer Forward Contract
Answer A contract which is between two or more persons as per their agreed terms and in which no
Explanation Stock Exchange or any other Exchange is involved is a Forward contract.
Question 29 Mr Rohit has bought 8 lots of contracts of June BSE Sensex futures and sold 6 lots of
contracts of July BSE sensex futures. What is his regular - non spread open position ?
(a) 14 lots
(b) 2 lots
(c) 8 lots
(d) 6 lots
Correct Answer 2 lots
Answer Mr Rohit has bought and sold the same underlying ie. BSE Sensex futures. So his risk is
Explanation limited to the net position which will be his open position.
Here he has bought 8 lots and sold 6 lots, so his open position is 2 lots.
Question 30 An European option can be exercised only on expiry date - State True or False ?
(a) TRUE
(b) FALSE
Correct Answer TRUE
Answer European Option is an an option that can only be exercised at the end of its life, at its
Explanation maturity / expiry and not before that.
An American option can be exercised any time.

Question 31 ________ are eligible to clear trades in Index Options.
(a) All trading members of a recognised stock exchange
(b) All trading members and their sub brokers
(c) Only members who are registered as clearing members with the derivative exchange
(d) All Public sector banks
Correct Answer Only members who are registered as clearing members with the derivative exchange
Question 32 Among the given options, which one can be the principal driver of the movement of stock
index ?
(a) Inflation
(b) Price movement in underlying shares
(c) Interest Rates
(d) Currency Rates
Correct Answer Price movement in underlying shares
Answer A stock index is made up of a basket of shares. For eg. Nifty is made up of 50 shares. So
Explanation price movements in these 50 shares will be the principal driver of the movement in Nifty
stock index.
Question 33 High level of initial margins deter brokers and clients from trading in the derivatives market
- State True or False ?
(a) TRUE
(b) FALSE
Correct Answer TRUE
Answer Risk involved in trading in derivatives are higher as compared to spot market due to bigger
Explanation trading lot sizes.
Margin levels in derivatives are kept at a higher level so that brokers and clients who do not
have adequate finances , do not trade in this market as they do not have the risk bearing
financial capacity.
Question 34 Investors who are called Bulls are those investors who believe the market or stock will fall -
State True or False ?
(a) TRUE
(b) FALSE
Answer Bulls believe that market / stock will rise.

Explanation
Bears believe that market / stock will fall.

Question 35 When a futures contract is entered, ________ .
(a) no margin is exchanged between the buyer and seller
(b) only the buyer pays the margin to the seller
(c) only the seller pays margin to buyer
(d) the buyer and seller pay margins to each other
Correct Answer no margin is exchanged between the buyer and seller
Answer In a futures contract, the margin is payable by both buyer and seller to the Clearing
Explanation Corporation and not to each other.
So among the four given options, option 1 is the most appropriate.
Question 36 It is recommended but not compulsory for the trading members to have dealers and sales
personal in the derivatives market who have passed a certification programme approved by
SEBI - State True or False ?
(a) TRUE
(b) FALSE
Answer It is mandatory that trading members are required to have qualified approved user and
Explanation sales person who have passed a certification programme approved by SEBI.
Each dealer should pass SEBI approved certification exams.

Question 37 Derivatives can have _________ as an underlying.
(a) a bond
(b) another derivative
(c) stock index
(d) All of the above
Correct Answer All of the above
Answer The most common underlying assets include stocks, indices, commodities, bonds, currencies
Explanation etc., but they can also be other derivatives, which adds another layer of complexity to
proper valuation.
Question 38 The liquid assets which are to be deposited by the clearing member can be in the form of
__________ .
(a) Only cash
(b) Only cash and approved securities
(c) Cash, Bank Guarantees, Equity Securities and other Cash Equivalents
Correct Answer Cash, Bank Guarantees, Equity Securities and other Cash Equivalents
Answer Liquid Assets can be in the form of Cash, Cash Equivalents (Government Securities, Fixed
Explanation Deposits, Treasury Bills, Bank Guarantees, and Investment Grade Debt Securities) and
Equity Securities.
Question 39 On exercise of the option, the seller/writer will pay the adverse difference, between the
final settlement price as on the exercise/ expiry date and the strike price. Such payment will
be recognised as a _________ .
(a) Profit
(b) Loss
(c) Debt
Correct Answer Loss
Answer Adverse difference means the transaction has resulted in a adverse way i.e. a Loss.
Explanation
On exercise of the option, the seller/writer will pay the adverse difference, between the
final settlement price as on the exercise/ expiry date and the strike price. Such payment will
be recognised as a LOSS.
Question 40 Mr. Deshmukh took a short position of one contract in May Nifty futures (Contract
multiplier 50) at a price of Rs. 5600. When he closed this position after a few days, he
realized that he has made a profit of Rs.5000. Which of the following closing actions would
have enabled him to generate this profit ?
(a) Selling 1 May Nifty futures contract at 5700
(b) Buying 1 May Nifty futures contract at 5700
(c) Buying 1 May Nifty futures contract at 5500
(d) Selling 1 May Nifty futures contract at 5500
Correct Answer Buying 1 May Nifty futures contract at 5500
Answer Mr Deshmukh is short ie. he has sold Nifty futures. He will make a profit when Nifty falls.
Explanation His profit is Rs 5000 and lot size is 50, so per share he has to get Rs 100 to make a profit of
Rs 5000 ( 50 x 100)
So when Nifty falls to 5500 and Mr Deshmukh buys it to square up his position, he will make
a profit of Rs 5000.
Question 41 You sold a Put option on a share. The strike price of the put was Rs.245 and you received a
premium of Rs.49 from the option buyer. Theoretically, what can be the maximum loss on
this position?
(a) 206
(b) 196
(c) 49
(d) NIL
Correct Answer 196
Answer When you sell a Put option you believe the share will go up. If the share goes down you will
Explanation make a loss.
Theoretically the share of 245 can fall to zero. So you can make a loss of 245.
You have received a premium of 49.
So the maximum loss can be 245 - 49 = 196
Question 42 A person has bought an option so cannot lose more than the option premium paid.
(a) False for all types of options
(b) True only for American options
(c) True only for European options
(d) True for all types of options
Correct Answer True for all types of options
Answer A buyer of an OPTION pays the premium and that is the maximum loss and its true for all
Explanation types of options.
(On the other hand a seller of an option receives the premium and thats his maximum
profit. The loss can be unlimited)
Question 43 Three Call series of same strike price of State Bank of India stock-June, July and August are
quoted. Which will have the lowest option premium ?
(a) Same premium for all
(b) June
(c) July
(d) August
Correct Answer June
Answer The series closest to current date will have the lowest premium due to low time value of
Explanation money ( so lower interest costs ).
Question 44 The Clearing Corporation can transfer a defaulting members client's position to
___________ .
(a) Liability a/c.
(b) Another solvent member
(c) Investor Protection Fund a/c.
(d) The Stock Exchange
Correct Answer Another solvent member
Answer As per SEBI rules, the Clearing Corporation can transfer client positions from one broker
Explanation member to another broker member in the event of a default by the first broker member.
Question 45 Mr. Nayar has purchased 8 contracts of March series and sold 6 contracts of April series of
the NSE Nifty futures. How many lots will get categorized as Regular (non-spread) open
positions?
(a) 14
(b) 8
(c) 2
(d) 6
Correct Answer 2
Answer Various future contract position in the same underlying ( even at various expiry dates ) are
Explanation netted off before arriving at open position. Here in this case its 8 - 6 = 2.
This is because a long and a short position in the same underlying will have no risk (if one
will make profit, the other will be in a simillar loss) and only the open position will have the
risks and margins will be collected from these open positions.
Question 46 _______ measures the sensitivity of the option value to a given small change in the price of
the underlying asset.
(a) Delta
(b) Theta
(c) Rho
(d) Vega
Correct Answer Delta
Answer The most important of the ‘Greeks’ is the option’s is “Delta”. This measures the sensitivity of the option value to
a given small change in the price of the underlying asset. It may also be seen as the speed with which an option
Explanation moves with respect to price of the underlying asset. Delta = Change in option premium/ Unit change in price of
the underlying asset. Delta for call option buyer is positive. This means that the value of the contract increases
as the share price rises. For example, with respect to call options, a delta of 0.6 means that for every Rs.1 the
underlying stock increases, the call option will increase by Rs 0.60
Put option deltas, on the other hand, will be negative, because as the underlying security increases, the value of
the option will decrease. So a put option with a delta of -0.6 will decrease by Rs.0.60 for every Rs 1 the
underlying increases in price.
The knowledge of delta is of vital importance for option traders because this parameter is heavily used in
margining and risk management strategies.
Question 47 Of the below mentioned options, which would attract margins ?
(a) Buyer of PUT Option
(b) Seller of CALL Option
(c) Seller of PUT Option
(d) Both 2 and 3
Answer Buyers of Options pay the premium and that is the maximum loss they can suffer - so they
Explanation need not pay any margin.
A seller of options receives the premium but he can suffer infinte losses - so margins are
collected both from sellers of Call and Put options.
Question 48 Mr. Singh purchases a call option on a stock at Rs. 10 per call with strike price of Rs. 140. If
on exercise date, stock price is Rs. 168 , ignoring transaction cost, Mr. Singh will choose
_______
(a) To exercise the option
(b) Not to exercise the option
(c) May or may not depending on the balance he has in his bank account
(d) May or may not depending on the recommendation of experts
Correct Answer To exercise the option
Answer Mr Singh has purchased a CALL and on the expiry day he is in a profitable postion as the
Explanation price of the stock has risen and the spot price is above the strike price. So he will exercise
his option.
Question 49 You have bought a CALL of ITC Ltd. of Strike price of Rs 200 of January. To close the position,
you will SELL a PUT of same strike price of January. True or False ?
(a) FALSE
(b) TRUE
Answer If you have bought a CALL option, then to close the position you will have to sell a CALL
Explanation option Rs 200 strike price.
Question 50 Mr Prashant has bought one lot of ABC futures for Rs 75 (lot size 2000) expecting that this
share will go up. But he also wants to protect himself against any loss of more than Rs 3000.
What should he do ?
(a) Put a stop loss sell order at Rs 74
(b) Put a stop loss sell order at Rs 73.5
(c) Place a buy order for 2000 shares of ABC at Rs.76.50 per
Correct Answer Put a stop loss sell order at Rs 73.5
Answer Mr. Prashant has bought one lot ie. 2000 shares and does not want to have a loss of more
Explanation than Rs 3000. So 3000 / 2000 = Rs 1.50. So per share he should not lose more than Rs 1.50.
His buying price is Rs 75. So 75 - 1.50 = 73.50 will be his stop loss price price.
When the share falls to Rs 73.50 , he will stand to lose Rs 3000.
*******************************
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NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION

EXAM – PRACTICE TEST NO. 4

PRACTICE TEST NO. 4

(a) Cash market product

(b) Derivative product

(c) Money market product

(d) Debt product

Correct Answer Derivative product

(a) Clearing Corporation

(c) The respective Stock Exchange

(a) Reverse Hedging

Correct Answer Backwardation

Question 4 What does a seller of Put Option expect?

(a) An increase in the price of the underlying

(b) No change in the price of the underlying

(c) A decrease in the price of the underlying

(d) Both 1 and 2

Correct Answer Both 1 and 2

Answer A seller of put option expects the price to rise.

Question 5 What does a beta of more than 1 mean ?

(c) Rs. 250

(d) Rs. 234

Correct Answer Unlimited

Question 7 Clearing Corporation of an Exchange guarantees performance of exchange traded contracts

Correct Answer TRUE

(c) Financial Institutions

(d) All of the above

Correct Answer All of the above

Correct Answer TRUE

Correct Answer unknown

(a) The Stock Exchanges

(b) The Central Government

(c) The High Court of Mumbai

(d) Securities Appellate Tribunal

Correct Answer The Central Government

Correct Answer FALSE

Correct Answer TRUE

(a) Rs. 1 crore

(d) None of the above

Correct Answer None of the above

Correct Answer FALSE

Correct Answer Contango

Correct Answer 800

Open position of client is 600 - 350 = 250 purchase contracts

(a) He should sell index futures

(b) He should sell index call option

(c) He should buy index futures

(d) He should sell his complete portfolio

Correct Answer He should buy index futures

Correct Answer Yes

Correct Answer TRUE

(a) The transaction is cancelled

(b) One more auction is held the next day

(c) The transaction is annulled

(d) The transaction is closed out

Correct Answer The transaction is closed out

(c) Both 1 and 2

(d) Neither 1 nor 2

Correct Answer Both 1 and 2

(a) A cross position

(b) A short position

(c) A high position

(d) A long position