Test Paper - 4

Q1. How many shares should be ideally there in an index?

1. Depends on the objective of the index
2. Around 100 to comprehensively cover all sectors
3. Exactly 50
4. Below 50

Q2. Longer the time to maturity of the PUT option, higher will be the time value - State whether True or False?
1. True
2. False

Q3. The mark-to-market margin debits for stock futures are done on a daily basis but the mark-to-market margin credits
are done on a weekly basis - State whether True or False?
1. True
2. False

Q4. At price level of Rs. 6900, what will be the value of one lot of ABC futures contract (contract multiplier 50)?
1. Rs. 289000
2. Rs. 690000
3. Rs. 345000
4. Rs. 460000

Q5. Tick size is

1. Contract Lot size
2. Average of the high and low prices
3. The maximum permitted movement in the price of the contract
4. The minimum permitted movement in the price of the contract

Q6. A forward contract is

1. is a type of Option
2. is settled and cleared through a Clearing Corporation
3. a bilateral commitment of trade between two parties
4. is entered through an Exchange

Q7. The absolute amount of minimum capital adequacy requirement for derivative clearing member is higher than that of
spot market - State whether True or False?
1. True
2. False

Q8. Brokers and dealers of derivative exchanges have also to be registered with SEBI in addition to their registration with
stock exchange - State whether True or False?
1. True
2. False

Q9. Its the duty of the Clearing Corporation to continuously analyse and modify the initial margin requirements as the
stock markets tend to be very volatile - State whether True or False?
1. False
2. True

Q10. Counterparty risk can also be called as

1. Credit Risk
2. Default Risk
3. Both 1 and 2
4. Speculative Risk
Q11. As a Call option moves more Out-Of-The-Money, the absolute value of Delta will
1. Increase
2. Decrease
3. Not change
4. All of the above

Q12. Fixed deposits and Bank guarantees are NOT permitted to be offered by Clearing Members to the Clearing corp as
part of liquid assets - State whether True or False?
1. True
2. False

Q13. A penalty or suspension of registration of a stock broker from derivatives exchange/segment under SEBI (Stock
Broker and Sub-broker) Regulations, 1992 can take place if
1. The stock broker fails to resolve the complaints of the investors
2. The stock broker indulges in manipulating, or price rigging or cornering of the market
3. The stock broker does not follow the code of conduct
4. All of the above

Q14. At the time of final settlement, the seller / writer of the option will recognize the adverse difference he paid to the
buyer as _____ in his profit and loss account.
1. Expenses
2. Loss
3. Debt
4. Profit

Q15. The option premium is adjustable against the exercise price on settlement, if the option is exercised on maturity -
State True or False?
1. True
2. False

Q16. In the derivatives market, the mark to market margin is equal to the initial margin - State True or False?
1. True
2. False

Q17. Losses incurred on derivative transactions on a recognized stock exchange can be carried forward to any other non-
speculative business income of the ____ subsequent year.
1. 5
2. 8
3. 12
4. 15

Q18. A call option gives its holder the right to buy 'any quantity' of the underlying asset from the writer of the call option
at a pre-specified price - State True or False?
1. True
2. False

Q19. All types of investors should allot some portion of their portfolio to derivative products in order to increase the
portfolio returns irrespective of their risk tolerance levels - State True or False?
1. True
2. False

Q20.The price at which the underlying asset can be bought or sold on exercise of an option is called
1. Spot Price
2. Risk Premium
3. Strike Price
4. Option Premium
Q21. What will be the value of one lot of ABC futures contract if the price is Rs. 3200 and the contract size is 150?
1. Rs.240000
2. Rs.320000
3. Rs.540000
4. Rs. 480000

Q22. In general terms, if the number of participants in a market are more, the liquidity will be low - State True or False?
1. True
2. False

Q23. The initial margin in derivatives market depends on the volatility of the underlying market. Usually
1. Higher the volatility, Lower the initial margin
2. Higher the volatility, Higher the initial margin
3. Lower the volatility. Higher the initial margin
4. None of the above

Q24. In an 'Opening Buy Transaction' the effect will be that of creating or increasing
1. Arbitrage position
2. Cross position
3. Long position
4. Short position

Q25. A feature of a forward contract is

1. its traded one-to-one between counterparties
2. lt has good liquidity
3. It cannot be of a tenor of more than one year
4. It does not carry any credit risk

Q26. The Clearing Corporation gives exposure limits to Clearing Members based on the number of Trading Members
using the services of that Clearing Member - State
True or False?
1. True
2. False

Q27. State True or False - The mark-to-market of index futures is daily valuation of open positions as per the current
market prices.
1. True
2. False

Q28. The option premium is affected by the difference in the exercise price and the spot price - State True or False?
1. True
2. False

Q29. 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?
1. True
2. False

Q 30. What is the beta of a portfolio?

1. Its the value weighted average of the beta's of the constituent securities in that portfolio
2. Its the same as the beta of the stock with the highest market capitalization
3. Its the sum of the betas the constituent securities in that portfolio
4. Its the simple average of the beta's of the constituent securities in that portfolio

Q31.What is an Index Future?

1. its a synthetic option
2. Its a cash market product
3. lts a derivative product
4. Its an option
Q32. If the futures price is rising and open interest of the futures contract is also rising, then it signals a
1. Bullish trend
2. Bearish trend
3. No trend
4. Bearish trend in the short term only

Q33.What is the purpose of a 'Short Hedge' strategy?

1. To protect the investor against a decline in the market as a whole
2. To protect the investor's existing stock holding against an anticipated price fall
3. To protect against a price increase for a planned stock purchase in the future
4. To protect against both a stock price fall and stock price rise in the future

Q34. Cost of carry model states that

1. Price of Futures = Spot Price
2. Price of Futures = Cost of Carry
3. Price of Futures = Spot + Cost of Carry
4. Price of Futures = Spot - Cost of Carry

Q35. From the financial products mentioned below, which one is difficult to understand, when compared to the other
products?
1. Treasury bills/bonds
2. Index options on a broad equity index like Nifty
3. Index mutual funds replicating a broad equity index like Nifty
4. Index futures on a broad equity index like Nifty

Q36.Equity derivatives markets in India does not include

1. Individual stock options
2. Individual stock futures
3. Interest rate futures
4. Options on equity market indices

Q37. What will be the reaction to bid-ask spreads of derivatives contracts when there is high volatility?
1. Bid-Ask spreads tend to become zero
2. There is no change in the Bid-Ask spreads
3. Generally, the Bid-Ask spreads widen
4. Generally, the Bid-Ask spreads narrow down

Q38. How does the matching of bids and offers take place on the derivatives exchanges in India?
1. No matching takes place
2. The matching is done at the end of the day
3. The matching is done at the end of each hour
4. The matching is done online and immediately

Q39. The aim of function of the derivatives exchange is to maintain stability in the derivatives market.
1. Arbitration
2. Listing
3. Investor Grievance Handling
4. Risk Management

Q40. In a one-month CALL option on PQR stock with a strike price of Rs. 100 is Out-of-the money. Identify which of these
could be the spot price of PQR stock?
1. Rs. 100
2. Rs. 120
3. Rs. 80
4. Rs. 150
Q41.The can perform all the functions such as order and trade related activities, receiving reports for all branches of the
trading member firm/dealers of the firm and along with this he can also define exposure limits for the branches of the
firm
1. Chairman
2. Branch Manager
3. Corporate Manager
4. Dealer

Q42.One of the important duties of a trading member is to assess the financial soundness, genuineness and background
of a new client - True or False?
1. True
2. False

Q43. You sold one BI Ltd. futures contract at Rs.260 and the lot size is 1,000. What is your profit or loss, if you purchase
the contract back at Rs.251 ?
1. 9000
2. 9000
3. 7500
4. 7500

Q43. 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?
1. Selling 1 May Nifty futures contract at 5700
2. Buying 1 May Nifty futures contract at 5700
3. Buying 1 May Nifty futures contract at 5500
4. Selling 1 May Nifty futures contract at 5500

Q44. If you have sold a ITC Ltd. futures contract (contract multiplier 500) at 200 and bought it back at 228, what is your
gain/loss?
1. A gain of RS. 6,800
2. A loss of Rs. 6,800
3. A loss of Rs. 14,000
4. A gain of Rs. 14,000

Q45. In which option is the strike price better than the market price (i.e., price difference is advantageous to the option
holder) and therefore it is profitable to exercise the option?
1. At-the-money option
2. Out-of-the money option
3. In the money option
4. None of the above

Q 46. In which option is the strike price better than the market price (i.e., price difference is advantageous to the option
holder) and therefore it is profitable to exercise the option?
1. At-the-money option
2. Out-of-the money option
3. In the money option
4. None of the above

Q47.Under the Anti-Money Laundering (AML) and Combating of Financial Terrorism (CT) regulations, suspicious
transactions must be reported to
1. Financial Intelligence Unit - India
2. Securities and Exchange Board of India
3. Central Vigilance Commission
4. Reserve Bank of India

Q48. In an equity scheme, the Mutual Fund can hedge its equity exposure by selling index futures - True or False?
1. True
2. False
Q49.All the orders entered on the Trading System of a Derivative Exchange are at Prices exclusive of brokerage. True or
False ?
1. False
2. True

Q 50. A member has two clients Rohit and Mohit. Rohit has purchased 100 contracts and Mohit has sold 300 contracts in
March Tata Steel futures series. What is the net obligation of the member?
1. 100
2. 300
3. 400
4. 200
Answers

1. Depends on the objective of the index

Explanation:
Stocks in the index are chosen based on certain pre-determined qualitative and quantitative parameters,
laid down by the Index Construction Managers. Once a stock satisfies the eligibility criterion, it is entitled for
inclusion in the index. Generally, final decision of inclusion or removal of a security from the index is taken by a
specialized committee known as Index Committee.

2. True
Explanation:
Time value of the option depends upon how much time is remaining for the option to expire. Longer the time to
maturity, higher will be the time value. The effect of time to expiration on both call and put options is similar to
that of volatility on option premiums. Generally, longer the maturity of the option greater is the uncertainty and
hence the higher premiums. If all other factors affecting an option's price remain same, the time value portion of
an option's premium will decrease with the passage of time.

3. False
Explanation:
In the futures and options market, profits and losses (Debits and Credits) are settled on day-to-day basis - called
mark to market (MTM) settlement.

4. Rs. 345000
Explanation:
The value of the futures contract is the Price X Lot size = Rs 6900 X 50 = Rs. 345000

5. The minimum permitted movement in the price of the contract

Explanation:
Tick Size is minimum move allowed in the price quotations.
Exchanges decide the tick sizes on traded contracts as part of contract specification. For eg. - Tick size for Nifty
futures is 5 paisa.

6. A bilateral commitment of trade between two parties

Explanation:
Forward Contract - It is a contractual agreement between two parties to buy/sell an underlying asset at a certain
future date for a particular price that is pre-decided on the date of contract.

7. True
Explanation:
The absolute amount of minimum capital adequacy requirement for derivative brokers/dealers is much higher
than for cash market as the risk involved are higher. 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.

8. True
Explanation:
In addition to their registration as brokers of existing stock exchanges, Derivative brokers/dealers and clearing
members are required to seek registration from SEBI.

9. True.
Explanation:
As per Prof. J.R.Verma Committee recommendations - Initial Margin levels should be dynamic and recalculated
continuously based on volatility levels. The Clearing Corporation does this activity using modern mathematical
tools.

10. Both 1 and 2

Explanation:
 Counterparty risk is the risk of an economic loss from the failure of counterparty to fulfil its contractual obligation.
This risk is also called default risk or credit risk.

11. Decrease
Explanation:
A Call option moving more Out of the Money means the price of its underlying has fallen.
Delta for call option buyer is positive. This means that the value of the contract increases as the share price rises
and falls as the share price falls.

12. False
Explanation:
Clearing member is required to provide liquid assets which adequately cover various margins and liquid Net
worth requirements. He may deposit liquid assets in the form of cash, bank guarantees, fixed deposit receipts,
approved securities and any other form of collateral as may be prescribed from time to time.

13. All of the above

Explanation:
A penalty or suspension of registration of a stock - broker under the SEBI (Stock Broker)
Regulations, 1992 can be ordered if:
i. The stock broker violates the provisions of the Act
ii. The stock broker does not follow the code of conduct
iii. The stock broker fails to resolve the complaints of the investors
iv. The stock broker indulges in manipulating, or price rigging or cornering of themarket
v. The stock broker's financial position deteriorates substantially
vi. The stock broker fails to pay fees
vii. The stock broker violates the conditions of registration
viii. The stock broker is suspended by the stock exchange

14. 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

Explanation:
The premium paid is adjusted against the exercise price on settlement, if the option is exercised on maturity.

15. False
Explanation:
Mark to Market is a process by which margins are adjusted on the basis of daily price changes in the markets for
underlying assets. So this margin is as per the daily price movements. Initial margin is usually fixed depending on
the price volatility. Higher the volatility, higher the initial margin.

16. False
Explanation:
Mark to Market is a process by which margins are adjusted on the basis of daily price changes in the markets for
underlying assets. So this margin is as per the daily price movements. Initial margin is usually fixed depending on
the price volatility. Higher the volatility, higher the initial margin.

17. 8
Explanation:
Loss incurred on derivatives transactions which are carried out in a recognized stock exchange can be carried
forward for a period of 8 assessment years.

18. False
Explanation:
A call option gives its holder the right to buy ONLY THE SPECIFIED QUANTITY (lot size of the option contract) of
the underlying asset from the writer of the call option at a pre-specified price

19. False
 Explanation:
Derivatives are ideally used as a hedging product and not investment products. Also, as astand alone investment.
they can prove to be very risky. So investors who do not want to take risks. senior citizens etc. should not trade /
invest in derivative products

20. Strike Price

Explanation:
Strike price or Exercise price is the price per share for which the underlying security may be purchased or sold by
the option holder.

21. Rs.480000
Explanation:
Value of a futures contract is the price multiplied by the contract size. In the above question: 3200 * 150 =
Rs.480000

22. False
Explanation:
Liquidity in the context of stock market means a market where large orders are executed without moving the
prices. So, if there are more the participants, higher should be the liquidity.

23. Higher the volatility, Higher the initial margin

Explanation:
Higher the volatility, Higher the initial margin the stock is very volatile it could result in losses to the trader in a
short period of time. So to safe guard the trading member and the trader, higher initial margin are levied on
volatile stocks.

24. Long position

Explanation:
Opening a position means either buying or selling a contract, which increases client's open position (long or
short).

25. Its traded one-to-one between counterparties

Explanation:
Forward Contract - It is a contractual agreement between two parties to buy/sell an underlying asset at a certain
future date for a particular price that is pre-decided on the date of contract.

26. False
Explanation:
Clearing Corporation gives exposure limits to Clearing Members based on deposits and not the number of
members with that clearing member.

27. True
Explanation:
In futures market, while contracts have maturity of several months, profits and losses are 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.

28. True
Explanation:
The price difference between exercise price ( strike price ) and the spot price (market price) is always reflected in
the option premium pricing. Generally as the gap increases, the premium increases and vice versa. For eg - If the
spot price of a share is Rs 100 and the strike price is Rs 90, than the call option premium will be Rs 10 (100 - 90)
plus premium for time to expiry, volatility etc. If the spot price rises to Rs 110, than the call option premium will
generally rise to Rs 20 (110-90) plus premium for time to expiry, volatility etc

29. False
Explanation:
A long position in a CALL option can be closed out by taking a short position in the same CALL option with same
exercise date and exercise price.
30. It’s the value weighted average of the beta’s of the constituent securities in that portfolio.
Explanation:
Beta of a portfolio is calculated as weighted average of betas of individual stocks in the postfolio based on their
investment proportion.

31. Its a derivative product

Explanation:
The future price of an index is derived from the spot / cash price. So Index Future is a derivative product

32. Bullish trend

Explanation:
Traders can decide whether to buy or sell futures based on changes in the open interest and the futures price.
For eg - If the futures price is rising and open interest of the futures contract is also increasing, it signals a bullish
trend. Traders usually prefer to go long the futures in such situations.

33. To protect the investor's existing stock holding against an anticipated price fall
Explanation:
A short hedge using stock futures is taken to hedge the price risk of a planned future sale of a stock.
For eg. You are holding Wipro shares of Rs 25 lacs and need this money after 3 months. You can sell the 3-month
futures of Wipro Ltd. to protect the amount which you need. Even if the price falls, the future amount is secured
by this hedge. This is call Short Hedge.

34. Price of Futures = Spot + Cost of Carry

Explanation:
Cost of Carry is the relationship between futures prices and spot prices. For equity derivatives, carrying cost is the
interest paid to finance the purchase less (minus) dividend earned.
For example, assume the share of ABC Ltd is trading at Rs. 100 in the cash market. A person wishes to buy the
share, but does not have money. In that case he would have to borrow Rs. 100 at the rate of, say. 6% per annum.
Suppose that he holds this share for one year and in that year, he expects the company to give 200% dividend on
its face value of Rs. 1 i.e. dividend of Rs. 2. Thus his net cost of carry = Interest paid - dividend received = 6 – 2 = 4.

35. Index options on a broad-based equity index like Nifty

Explanation:
Options are complex financial instruments and difficult to understand when compared to futures, bonds or
mutual funds.

36. Interest rate futures

Explanation:
Although NSE and BSE allows trading in interest rate futures but it is not a part of equity derivatives.

37. Generally the Bid-Ask spreads widen

Explanation:
Gap between the bid and ask prices is known as the bid-ask spread.Volatility measures the severity of price
changes for a security. when volatility is high, price changes are drastic. Bid-ask spreads usually widen in highly
volatile environments, as Investors and market makers attempt to take advantage of agitated market conditions.

38. The matching is done online and immediately

Explanation:
F&O platforms in India offer an order driven market, wherein orders match automatically online on price time
priority basis time stamped and then immediatel processed tor potential match. It a match is not found. then the
orders are stored in difterent 'books

39. Risk Management

Explanation:
Derivatives market enables the shift of speculative trades from unorganized market to organized market. Risk
management mechanism and surveillance of activities of various participants in organized space provide stability
to the financial system.
40. Rs. 80
Explanation:
Out-of-the-money option is one with strike price worse than the spot price for the holder of option. In other
words, this option would give the holder a negative cash flow if it were exercised immediately. A call option is
said to be OTM, when spot price is lower than strike price.

41. Corporate Manager

Explanation:
In the Futures and options trading software, trading member will have a provision of defining the hierarchy
amongst users of the system. This hierarchy comprises: Corporate Manager, Branch Manager and Dealer
Corporate Manager: As a user, it is the highest level in a trading firm. Corporate Manager can perform all the
functions such as order and trade related activities, receiving reports for all branches of the trading member firm
and also all dealers of the firm. Along with this he can also define exposure limits for the branches of the firm.
This facility is available only to the corporate manager.

42. True
Explanation:
As per the Prevention of Money-Laundering Act, 2002 (PMLA) - Necessary checks and balance to be put into
place before opening an account so as to ensure that the identity of the client does not match with any person
having known criminal background or is not banned in any other manner, whether in terms of criminal or civil
proceedings by any enforcement agency worldwide

43. 9000
Explanation:
When you sell a stock future contract you make a profit if the share falls. In this case BI has fallen by Rs 9 x 1000 =
Profit of Rs 9000

44. Buying 1 May Nifty futures contract at 5500

Explanation:
5000 (50 × 100) Mr Deshmukh is shortie. he has sold Nifty futures. He will make a profit when Nifty falls. 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
So when Nifty falls to 5500 and Mr Deshmukh buys it to square up his position, he will make a profit of Rs 5000.

45. A loss of Rs. 14,000

Explanation:
You had sold IT believing that it will fall down, but it has risen - so there will be a loss.
200 - 228 = -28 Loss, -28 x 500 shares = - Rs 14000

46. In the money option

Explanation:
In an In The Money Option, the strike price is better than market price. Such options have both Intrinsic Value
and Time Value.

47. Financial Intelligence Unit - India

Explanation:
Under the Anti-Money Laundering (AML) and Combating of Financial Terrorism (CFT) regulations, certain
transactions are required to be reported to the Financial Intelligence Unit - India (FIU-IND) set up by the
Government to detect possible attempts at money laundering.

48. True
Explanation:
As per the recommendations of L.C. Gupta committee, mutual funds are allowed to hedge its equity exposure in
derivatives segment - subject to terms and conditions.

49. True
Explanation:
The prices are exclusive ie. without any brokerage. Brokerage is added later and is reflected in the contract note.

50. 400
Explanation:
A member has two clients Rohit and Mohit. Rohit has purchased 100 contracts and Mohit has sold 300 contracts
400 For a member ie. Stock Broker, the liability will be the sum of all the contracts of all his clients. The contracts
cannot be netted in between two clients. So in this case the sum ofcontracts is 100 + 300 = 400 contracts.