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CONTENTS

Chapter No. Chapter Topic Weights % Page No.

Chapter 1 Basics of Derivatives 8% 2

Chapter 2 Understanding Index 2% 8

Chapter 3 Introduction to Forwards and Futures 25% 13

Chapter 4 Introduction to Options 25% 23

Chapter 5 Option Trading Strategies 3% 31

Chapter 6 Introduction to Trading Systems 4% 39

Chapter 7 Introduction to Clearing and Settlement System 13% 46

Chapter 8 Legal and Regulatory Environment 15% 55

Chapter 9 Accounting and Taxation 3% 62

Chapter 10 Sales Practices and Investors Protection Services 3% 66

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 CHAPTER: 1
Basics of Derivatives

Q 1: The first use of derivatives contract was _____________.

(a) To manage price uncertainty

(b) For speculation

(c) For arbitrage

(d) None of the above

Q 2: Derivative is a product whose value is derived from the value of one or more basic

variables, called bases such as__________________.

(a) Underlying asset

(b) Index

(c) Reference rate

(d) All of the above

Q 3: The underlying asset can be _________.

(a) Equity

(b) Forex

(c) Commodity or any other asset

(d) All of the above

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Q 4: The price of a derivative is driven by the _____.

(a) Future price of the underlying

(b) Past price of the underlying

(c) Spot price of the underlying

(d) None of the above

Q 5: Market Participants, who trade in the derivatives market, are _____.

(a) Hedgers

(b) Speculators

(c) Arbitrageurs

(d) All of the above

Q 6: Arbitrageurs are in business to take advantage of a _______.

(a) Similarity between prices in two different markets.

(b) Discrepancy between prices in two different markets

(c) Discrepancy between prices in two different securities

(d) Similarity between prices in two different securities

Q 7: Derivative products initially emerged as _________ against fluctuations in commodity

prices.

(a) Speculative devices

(b) Risky devices

(c) Hedging devices

(d) Volatile devices

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Q 8: The first stock index futures contract was traded at ____________.

(a) Kansas City Board of Trade

(b) Chicago Board of Trade

(c) Chicago Mercantile Exchange

(d) Chicago Board Options Exchange

Q 9: First exchange to start trading financial futures_______________.

(a) Kansas City Board of Trade

(b) Chicago Board of Trade

(c) Chicago Mercantile Exchange

(d) Chicago Board Options Exchange

Q 10: The derivatives trading on the exchange commenced with S&P CNX Nifty Index futures

on ___________.

(a) June 12,1999

(b) June 12, 2001

(c) June 12, 2000

(d) June 12,2002

Q 11: The trading in index options commenced in ___________.

(a) June 4, 2001

(b) June 4,2000

(c) June 4, 2002

(d) June 4, 2003

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Q 12: The trading in options on individual securities commenced in ________.

(a) July 2, 2001

(b) July 2, 2002

(c) July 2, 2003

(d) July 2, 2004

Q 13: Futures contracts on individual stocks were launched in _____________.

(a) November 9, 2004

(b) November 9, 2003

(c) November 9, 2002

(d) November 9, 2001

Q 14: Futures trading commenced first on_____________.

(a) Chicago Board of Trade

(b) Chicago Mercantile Exchange

(c) Chicago Board Options Exchange

(d) London International Financial Futures and Options Exchange

Q 15: The first exchange traded financial derivative in India commenced with the trading

of_________________.

(a) Index futures

(b) Index options

(c) Stock options

(d) Interest rate futures

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Q 16: Over-the-counter market is not a physical marketplace but a collection of broker-

dealers scattered across the country.

(a) True

(b) False

Q 17: Over-the-counter options are standardized products. True or False?

(a) True

(b) False

Q 18: OTC derivatives are considered risky because_______________.

(a) The management of counter-party (credit) risk is decentralized

(b) There are no formal rules or mechanisms for risk management.

(c) There are no formal centralized limits on individual position and margining.

(d) All of the above

Q 19: The derivatives market helps in improving price discovery based on actual valuations

and expectations

(a) True

(b) False

Q 20: Derivatives market helps in the transfer of various risks from a hedger to speculator.

(a) True

(b) False

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 CHAPTER 1 ANSWERS

1 (a) 2 (d) 3 (d) 4 (c) 5 (d)

6 (b) 7 (c) 8 (a) 9 (c) 10 (c)
11 (a) 12 (a) 13 (d) 14 (a) 15 (a)
16 (a) 17 (b) 18 (d) 19 (a) 20 (a)

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 CHAPTER: 2
Understanding Index

Q 1: A good stock market index captures the behavior of the _______.

(a) Individual script
(b) Specified scripts
(c) Overall equity market
(d) None of the above

Q 2: An index is a portfolio of securities that represent a particular market or a portion of a

market.
(a) True
(b) False

Q 3: An index can be used as a benchmark for portfolio performance.

(a) True
(b) False

Q 4: A good index is a trade-off between __________

(a) Diversification and liquidity
(b) Diversification and profitability
(c) Liquidity and profitability
(d) None of the above

Q 5: In a market capitalization-weighted index, each stock in the index affects the index
value in proportion to the _________ of all shares outstanding.
(a) Face value
(b) Par value
(c) Present value
(d) Market value

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Q 6: A market index can be used for which of following purpose_________.
(a) As a barometer for market behaviour & portfolio performance,
(b) As an underlying in derivative instruments like index futures,
(c) In passive fund management by index funds
(d) All of the above

Q 7: A good market index should have, which of the following attributes____________.

(a) It should capture the behavior of a large variety of different portfolios in the market.
(b) The stocks included in the index should be highly liquid.
(c) It should be professionally maintained.
(d) All of the above

Q 8: Which of following is true

(a) Impact cost is a Percentage degradation, which is experienced vis-à-vis the ideal price,
when shares are bought or sold.
(b) Impact cost is a Percentage upgradation, which is experienced vis-à-vis the ideal price,
when shares are bought or sold.

(c) Impact cost is a Percentage degradation effects the face value of a share.
(d) Impact cost is a most of time depend over it’s company management.

Q 9: Market impact cost is ________.

(a) Increasing the price of face value of the share.
(b) decreasing the price of face value of the share
(c) Percentage degradation of the ideal share price.
(d) Percentage up-gradation of the ideal share price..

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Q 10: Nifty index is managed by ________________
(a) National Stock Exchange Limited (NSEL),
(b) Security Exchange Board of India (SEBI)
(c) India Index Services & Products Limited (IISL)
(d) Ministry of Corporate Affairs

Q 11: Nifty is which type of index?

(a) Market capitalization weighted index
(b) Free-Float Market Capitalization Index
(c) Price-Weighted Index
(d) Equal Weighted Index

Q 12: The market impact cost on a trade of Rs.3 million of the full Nifty works out to be
about 0.5%. This means that if Nifty is at 2000, a buy order will go through at roughly
(a) 2010
(b) 2050
(c) 2500
(d) None of the above

Q 13: IISL is a joint venture of ________________

(a) Standard & Poor’s, National Stock Exchange and SEBI
(b) Standard & Poor’s, Reserve Bank of India (RBI) and SEBI
(c) National Stock Exchange, Bombay Stock Exchange and SEBI
(d) Standard & Poor’s, National Stock Exchange and CRISIL

Q 14: An index can be used for ________________

(a) To understand the overall market direction
(b) To create index fund
(c) To create exchange traded funds
(d) All of the above

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Q 15: An index generates the __________ return
(a) Similar or higher return
(b) Similar return
(c) Similar or lower return
(d) None of the above

Q 16: The first ETF in Indian Securities Market was

(a) Nifty BeES
(b) SPIcE
(c) CNX Midcap
(d) None of the above

Q 17: The first ETF in India, based on S&P CNX Nifty, was launched in _________.
(a) November 2001
(b) Novemver 2000
(c) December 2000
(d) December 2001

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 Why This Book

• This book is excellent medium to

complete the study in a short time.
• This book covers all the chapters of ‘NISM
Equity Derivative series IIIV’.
• The book contains all the questions that
can be asked in the examination of ‘NISM
Equity Derivative series IIIV’.
• This book is useful to all those candidates
who are going to appear for the
examination.
• Must read this book to ensure success in
the examination.

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