Mock Test-1

1. Mr. Ganesh thinks that the markets will go down, so he sells 10 lots of index futures at
3500. His predictions come true and the index falls and Mr. Ganesh buys back the futures
contract at 3410. What is the profit Mr. Ganesh has made if one lot of index is of 50?
• 35000
• 45000
• 55000
• 65000
Explanation: Mr Ganesh had sold at Rs 3500 and bought back at Rs 3410. So, he made a profit
of Rs 90.
Total Quantity sold = 10 lots x 50 (lot size) = 500
Total Profit = Rs 90 x 500 = Rs 45,000

2. _________is not a derivatives market product.

• Preference Share
• Futures
• Swaps
• Options
Explanation: Futures, Forwards, Options, Swaps etc. are all products in the derivative market.
Preference share is not a derivative product.

3. A trader sells a PQR stock Put contract of Rs 200 strike for Rs 50. The lot size is 1500.
What is the profit /loss if he buys the Put back at Rs 28? (In Rs)
• + 28500
• 28500
• + 33000
• 33000
Explanation: The trader has sold the put option at Rs 50 and bought it back at a lower price
of Rs 28. So, he makes profit of Rs 22 (50 - 28).
Rs 22 X 1500 (Lot size) = Rs 33000 profit
(Note - Here we are doing the simple calculation of subtracting the selling price from buying
price to get the profit. The market price movement of the stock is not to be taken into
consideration)

4. Counterparty risk can also be called as ______

• Credit Risk
• Default Risk
• Both 1 and 2
• Speculative Risk
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.
5. To whom is a high impact cost beneficial?
• Only buyers
• Only sellers
• Neither buyers nor sellers
• Only arbitrageurs
Explanation: Impact cost is the cost that the buyer or seller of stocks incur while executing a
transaction due to prevailing liquidity conditions in that counter.
A high impact cost will increase the purchasing price for the buyer and decrease the selling
price for the seller.
So, a high impact cost is neither beneficial to the buyer nor the seller.

6. A call option gives the buyer the right to buy the underlying at market price - State True
or False?
• True
• False
Explanation: A call option gives the buyer the right to buy the underlying at a set price i.e.,
the strike price and not the market price.
CALL OPTION: An agreement that gives an investor the right (but not the obligation) to buy a
stock, bond, commodity, or other instrument at a specified price within a specific time period.

7. When it is said that there is cash settlement of an index futures contract, it means that
the contract is settled in cash with no delivery of the underlying – State whether True or
False?
• True
• False
Explanation: Index futures are always cash settled.
Individual securities can be cash settled or by delivery.

8. When the margins are kept on the lower side, it will attract more players to join the
market - State True or False?
• True
• False
Explanation: The Clearing Corporation generally keeps the margins for derivatives trading on
the higher side as the risk of losses are high and it wants only financially strong traders to
trade in the market.
If the margins are kept on a lower side, many more traders will start trading in the derivatives
market.

9. _______ is a deal that produces profit by exploiting a price difference in a product in two
different markets.
• Hedging
• Trading
• Speculation
• Arbitrage
Explanation: Arbitrage means buying a security in one market while simultaneously selling
the same security in a different market, to benefit from price differential.

10. How can you close a short position in a futures market?

• By buying a Call Option
• By entering into a suitable forward contract
• By executing a purchase of the same futures contracts
• By executing a sale of the same futures contracts
Explanation: A short future contract i.e., a sale position can be squared up by buying the same
contract in futures market and in no other way.

11. Arbitrage is basically earning a risk-free profit by simultaneous buying and selling
replicating assets in two or more different markets - State True or False?
• True
• False
Explanation: Arbitrage is a deal that produces profit by exploiting a price difference in a
product in two different markets. Arbitrage originates when a trader purchases an asset
cheaply in one location and simultaneously arranges to sell it at a higher price in another
location.

12. An Index Option is ___________

• a derivative product
• settled in cash
• rarely traded on the Indian stock exchanges
• Both 1 and 2
Explanation: Index option is a derivative product derived from indices like Nifty, Bank Nifty,
Sensex etc. Index options are settled only in cash.

13. Clearing Member Mr. Prabhu focuses mainly on proprietary trading, while Clearing
Member Mr. Mehta does not do any proprietary trades and does trades only for clients. If
both have deposited the same amount of assets with Clearing Corporation, which of the
following statement is true?
• Mr. Prabhu enjoys a lower exposure limit than Mr. Mehta
• Mr. Prabhu enjoys a higher exposure limit than Mr. Mehta
• Both of them enjoy the same exposure limits
Explanation: Proprietary positions are calculated on net basis (buy less sell) for each contract
and that of clients are arrived at by summing together net positions of each individual client.
Margins are required to be paid up-front on gross basis at individual client level for client
positions and on net basis for proprietary positions.
Therefore, Mr. Prabhu who does only proprietary trades will get higher exposure as his
positions are calculated on net basis.
14. After the initiation of the futures contract, the price of the underlying asset has risen.
In this situation, __________
• Basically. price change in underlying asset has no effect on long or short positions in
futures
• A long position becomes unprofitable
• A short position becomes profitable
• A long position becomes profitable
Explanation: When the price of the underlying asset rises in the spot market, its price in the
futures market will also rise. So, those who have purchased the futures (long position) will
make a profit.

15. If the price volatility of the underlying stock is high then the Put option will _________
• have zero premium
• have comparatively lower premium
• have comparatively higher premium
• Volatility does not have any effect on the Put options
Explanation: Volatility is the magnitude of movement in the underlying asset’s price, either
up or down. It affects both call and put options in the same way. Higher the volatility of the
underlying stock, higher the premium because there is a greater possibility that the option
will move in-the-money during the life of the contract.
Higher volatility = Higher premium, Lower volatility = Lower premium (for both call and put
options).

16. Why are margins collected in the derivative segment?

• To earn revenue for the clearing corporation
• To minimize the number of investors entering the derivatives market
• To have friction in the market so facilitate arbitrage
• To minimize the risk of default by all parties involved
Explanation: As exchange guarantees the settlement of all the trades, to protect itself against
default by either counterparty, it charges various margins from brokers. Brokers in turn
charge margins from their customers.

17. What is an Index Option?

• It’s a derivative product
• It’s essentially settled in cash
• Index options are not allowed in Indian markets
• Both 1 and 2
Explanation: Index option is a derivative product derived from indices like Nifty, Bank Nifty,
Sensex etc. Index options are settled only in cash.

18. Can a broker take any amount of exposure once he has satisfied the minimum net worth
and minimum deposit with the exchange in the form of liquid assets?
• Yes
• No
Explanation: The amount of exposure depends on the value of the assets / liquid assets
deposited with the exchange. More the deposits - more the exposure he can get.

19. A person who provides two way quotes for various stocks is known as _________
• Arbitrageur
• Speculator
• Hedger
• Market Maker
Explanation: A market maker or liquidity provider is a company or an individual that quotes
both a buy and a sell price in a financial instrument hoping to make a profit on the bid-offer
spread.

20. A mutual fund manager is bearish on the market and wishes to reduce its exposure to
equities from 50% to 40%, without selling any of his equity holdings. Can he sell index
futures for it?
• Yes, he can sell index futures
• No, Mutual funds are not allowed to sell index futures
Explanation: FII and Mutual funds can buy/sell in futures subject to certain limits.
FII & MF position limit in all index futures contracts on a particular underlying index is Rs. 500
Crores or 15 % of the total open interest of the market in index futures, whichever is higher.
This limit would be applicable on open positions in all futures contracts on a particular
underlying index.
In addition to the above, FIIs & MF’s shall take exposure in equity index derivatives subject to
the following limits:
a) short positions in index derivatives (short futures, short calls and long puts) not exceeding
(in notional value) the FII’s/ MF’s holding of stocks.
b) long positions in index derivatives (long futures, long calls and short puts) not exceeding
(in notional value) the FII’s/ MF’s holding of cash, government securities etc.

21. In the derivative segment, once initial margin requirement is fixed, it cannot be changed
by the exchange, during the lifetime of the futures contract - State True or False?
• True
• False
Explanation: The initial margin is dependent on price movement of the underlying asset.
So, the Initial Margin levels are dynamic and recalculated continuously based on volatility
levels.

22. When a PUT option on an index is exercised, the option holder receives from the option
writer _______
• A cash amount that is equal to the excess of spot price over exercise price
• A cash amount that is equal to the excess of exercise price over spot price
• A cash amount that is equal to spot price
• No amount
Explanation: An option will only be exercised when it’s In the Money (Profitable)
A put option is In the Money when the Exercise price is higher than the spot price. So, the
excess of exercise price over the spot price will be receivable by the option holder.
(IN THE MONEY- A call option with a strike (exercise) price that is lower than the market (spot)
price of the underlying asset, or a put option with a strike price that is higher than the market
price of the underlying asset. In the money means that your stock option is worth money and
you can turn around and sell or exercise it.)

23. ‘Netting’ is the process by which a future contract is terminated by a transaction that is
equal and opposite to the original transaction - State True or False?
• True
• False
Explanation: ‘OFF SETTING' is the process by which a future contract is terminated by a
transaction that is equal and opposite to the original transaction.

24. What is an Index Future?

• It’s a synthetic option
• It’s a cash market product
• It’s a derivative product
• It’s an option
Explanation: The future price of an index is derived from the spot cash price.
So, Index Future is a derivative product.

25. What does Beta of 1 mean?

• It means that the expected percentage in stock price will be more than the percentage
change in index
• It means that the expected percentage in stock price will be twice the percentage
change in index
• It means that the expected percentage in stock price will be less than the percentage
change in index
• It means that the expected percentage in stock price will be equal to the percentage
change in index
Explanation: Beta measures the sensitivity of a stock / portfolio vis-a-vis index.
If Beta of a stock is 1, it means that a % change in the index will lead to equal % change in the
stock price.
If Beta of a stock is 2, it means that a % change in the index will lead to double % change in
the stock price.
26. Loss on derivative transactions can be set off against any other income during the year.
In case the same cannot be set off, it can be carried forward to subsequent assessment year
and set off against any other income of the subsequent year. Such losses can be carried
forward for a period of ________ assessment years.
• 4
• 8
• 12
• 16
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.

27. Which tax is applicable for equity transactions done on a recognized stock exchange?
• Securities Trading Tax
• Equity Trading and Service Tax
• Derivatives Transaction Tax
• Securities Transaction Tax
Explanation: Trading member has to pay securities transaction tax (STT) on the transaction
executed on the recognized stock exchange.

28. Among the following options, in which future contract, the contract cannot be used as
a means to acquire the underlying asset?
• Copper
• Gold
• Individual securities
• Stock index
Explanation: There is no single underlying asset in a Stock Index. It’s a combination of many
stocks which make an index. So, there is no asset as a stock index as such.

29. The daily Mark to Market gain or loss is realised ________

• in the equity spot market
• in the futures market
• in Swap trading
• in forwards market

30. The features of Futures are quite similar to _________

• Options
• Swaps
• Debentures
• Forwards
Explanation: A futures contract is similar to a forward, except that the deal is made through
an organized and regulated exchange rather than being negotiated directly between two
parties. We may say that futures are exchange traded forward contracts.
31. If the far month futures prices are less than near month futures prices, this is known as
_______
• Delta Hedging
• Contango
• Basis
• Backwardation
Explanation: If futures price is lower than spot price of an asset (or far month futures is less
than near month futures), market participants may expect the spot price to come down in
future. This expectedly falling market is called “Backwardation market”.
If futures price is higher than spot price of an underlying asset, market participants may
expect the spot price to go up in near future. This expectedly rising market is called “Contango
market”.

32. Cross margining between cash and derivative segments of an exchange helps reduce
the overall margin level applicable to investors and traders - State True or False?
• True
• False
Explanation: Cross margining is available across Cash and Derivatives segment.
If a trader has credit balance in his trading accounting the cash segment, he can use it to
margin his derivative trading, thus reducing his overall margin level.

33. The net worth requirements of Clearing Members and Trading Members is the same
for the derivatives exchange- State True or False?
• True
• False
Explanation: The Net Worth requirements of Clearing Members is higher than Trading
Members.

34. When a call option on an index is exercised, the call option holder receives from the
option writer an amount equal to excess of spot price over the strike price of that call
option - State True or False?
• True
• False
Explanation: The positive difference between a call options strike price and the market price
is the gross profit of the call option buyer which the option writer has to pay on exercise.

35. Margins in the derivative segment has to be collected from all clients, including
Financial Institutions and FIIs - State True or False?
True
False
Explanation: Margins are collected from all who trade in the derivatives segment.
36. When a new client opens a trading account with a trading member, which of the
following documents have to be compulsorily given to him?
• SEBI rules regarding trading in stock markets
• Risk disclosure documents
• All the rules of the Stock Exchange
• All of the above
Explanation: The broker is required to get a Risk Disclosure Document compulsorily signed by
the client, at the time of client registration.
This document informs clients about the kind of risks that derivatives can involve for the client.

37. If the share price of XYZ share increases by Rs 2 and the delta of its option is 0.5, then
by how much will the option price rise?
• No change in option price
• Rs 10
• Rs 2
• Rs 1
Explanation: Delta measures the sensitivity of the option value to a given small change in the
price of the underlying asset.
In this case the price has moved by Rs 2 and the delta is 0.5,
So, Option Price will move by Rs 2 x 0.56=Rs1

38. Liquid stocks in a market have low impact cost when compared to illiquid stocks - State
True or False?
• True
• False
Explanation: Impact cost basically means what additionally a trader must pay because of the
order size i.e., due to price increase if there it is a big buy order and price decrease if there is
a big sell order.
If the scrip is very liquid i.e., there are huge buyers and sellers, the impact cost will be very
low.

39. If one does a calendar spread contract in index futures, then it attracts, _______
• Lower margin than sum of two independent legs of futures contract
• No margin needs to be paid for calendar spread positions
• Higher margin than sum of two independent legs of futures contract
• Same margin as sum of two independent legs of futures contract
Explanation: Calendar spread position is a combination of two positions in futures on the
same underlying - long on one maturity contract and short on a different maturity contract.
When the market fluctuates, if there is a loss in the long position then there will be an almost
equal profit in short position.
So, Calendar spreads carry no market risk - hence lower margins are adequate.
Calendar spread carries on only basis risk. Basis risk means both the contracts will not
fluctuate identically.
40. _________ measure of the sensitivity of an option price to changes in market volatility.
• Rho
• Theta
• Gamma
• Vega
Explanation: Vega represents the amount of price changes in an option in reaction to a 1%
change in the volatility of the underlying asset.
Volatility measures the amount and speed at which price moves up and down, and is often
based on changes in recent, historical prices in a trading instrument. Vega changes when
there are large price movements (increased volatility) in the underlying asset, and falls as the
option approaches expiration.
Vega = Change in an option premium/ Change in volatility

41. A stock exchange has ON LINE SURVEILLANCE capability to monitor the ______
• Volumes
• Prices
• Positions
• All of the above
Explanation: All modern stock exchanges have highly developed online surveillance systems
to monitor the volumes/ position and prices of all listed products and also check any unusual
activity etc. in them.

42. The options which are traded on an exchange are standardised.

• True
• False
Explanation: Exchange traded options are standardised as per the rules of the exchange in
terms of time, duration, quantity etc.
Forward options are customised as per the agreement between the trading parties.

43. The basic test of whether a trade done in the future market is for hedging or speculation
is centered on the premise that there already exist a related commercial position which is
exposed to the risk due to price fluctuations.
• True
• False
Explanation: Hedging basically means doing a trade to reduce the risk of adverse price
movements in an asset. Normally, a hedge consists of taking an offsetting position in a related
security, such as a futures contract.
An example of a hedge would be if you owned a stock, then sold a futures contract stating
that you will sell your stock at a set price, therefore avoiding market fluctuations.

44. You are long in ICICI Bank Ltd futures at price Rs 500. The prices rise to Rs 520 next day.
The Mark to Market margin will be credited to your account. True or False?
• False
• True
Explanation: You are long means you have bought ICICI bank futures at Rs 500. Next day the
price rises to Rs 520, which means there is a Mark to Market gain of Rs 20. So Rs 20 x the lot
size, this amount will be credited in your ledger account with the broker.

45. The system in which trading is done through various computers which are attached to
a central computer is called Online trading.
• False
• True

46. An option with zero intrinsic value is called ________

• OTM- Out of The Money option
• ATM - At the Money option
• ITM - In the Money option
• Both - At the Money and Out of The Money options
Explanation: Only in-the-money options have intrinsic value whereas at-the-money and out-
of-the-money options have zero intrinsic value. The intrinsic value of an option can never be
negative.

47. An exchange traded option after maturity _________

• Can be traded after 2 days i.e., after pay in / pay out.
• Can be traded in the spot market
• Cannot be traded
• None of the above
Explanation: An exchange traded option can only be traded till the last date of expiry i.e., its
maturity. After that it will not be available for trading.
Forge - If 27th June is the last Thursday of the month i.e., the maturity, all options of June
month will cease to exist as soon as the market closes on 27th June.

48. Tick size depends on _______

• The Delta of the security
• It’s fixed by the exchange
• Volume in that security
• The Interest rates
Explanation: Tick size is the minimum move allowed in the price quotations. Exchanges decide
the tick sizes on traded contracts as part of contract specification. Tick size for Nifty futures is
5 paisa.

49. If you are a seller of put option, you expect ___________

• No change in the price
• Increase in the price
• Decrease in the price
• Both 1 and 2
Explanation: When you sell a put option you expect the price to rise. Even if the price remains
stable, you earn the option premium.
50. The Option which gives its holder a positive cash flow is called a ________
• At the money option
• Out of the money option
• In the money option
• Delta
Explanation: An ‘In the money’ (ITM) option gives the holder a positive cashflow, if it were
exercised immediately.
A call option is said to be ITM, when spot price is higher than strike price. And, a put option is
said to be ITM when spot price is lower than strike price.

51. In case of a member’s default, the Clearing Corporation cannot transfer clients positions
to another member or close out all open positions of defaulting member, without prior
approval from SEBI — State True or False?
• True
• False
Explanation: As per SEBI rules - The Clearing Corporation can transfer client positions from
one broker member to another broker member in the event of a default by the first broker
member. A report is then sent to SEBI regarding this.

52. There are many products in the market which give high returns in risk-free manner-
State whether True or False?
• True
• False
Explanation: Returns are related to the risk taken and hence there cannot be a product in the
market that gives high return in risk free manner.
Investors should be careful of opportunities that promise spectacular profits or "guaranteed"
returns. The deal sounds too good to resist. An individual may claim that unrealistic returns
can be realized from "Low-Risk Investment Opportunities", but one has to keep in mind no
investment is risk-free.

53. A long or short position in a futures contract can be closed by initiating a reverse trade
- State True or False?
• True
• False
Explanation: A closing transaction is one that reduces or eliminates an existing position by an
appropriate offsetting purchase or sale. This is also Known as “squaring off” your position.
A client is said to be closed a position if he sells a contract which he had bought before or he
buys a contract which he had sold earlier.

54. It is common to have derivatives contract without any expiration date - State whether
True or False?
• True
• False
Explanation: Most derivatives contract have an expiration date.

55. Fixed deposits and Bank guarantees are NOT permitted to be offered by Clearing
Members to the Clearing corporation as part of liquid assets - State whether True or False?
• True
• False
Explanation: Clearing members 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.

56. The term mark-to-market means _________

• process by which a portfolio manager checks the daily profits / losses
• the current / spot index price
• intimation from the broker to a client for additional funds
• the everyday revaluation of open positions by the exchanges to reflect profits and
losses in the market
Explanation: Mark to Market (MTM)is a process by which margins are adjusted on the basis
of daily price changes in the markets for underlying assets.
The clearing member who suffers a loss is required to pay the MTM loss amount which is in
turn passed onto the clearing member who has made a MTM profit.

57. ______ means the maximum exposures in terms of number of options and futures
contacts that an investor can hold on one side of the market.
• Outstanding Limit
• Market Limit
• Position Limit
• Upper Limit
Explanation: Position limits are the maximum exposure levels which the entire market can go
up to and each Clearing Member or investor can go up to. Position limits for the entire market
and Clearing Members and investors are defined by SEBI.

58. 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?
• True
• 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.

59. The initial margin is always equal to the mark-to-market margin - State True or False?
• True
• 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.

60. Mr. Arvind is very bullish on the market. However, he feels some specific companies
which he has in his portfolio will not perform well in future. What strategy should he
adopt?
• Sell Index futures and sell specific companies shares
• Buy Index futures and sell specific companies shares
• Sell Index futures and buy specific companies shares
• Do nothing as markets are uncertain
Explanation: Mr. Arvind should sell the shares of those specific companies and buy index
futures. By this he will profit when the index rises and avoid losses on those specific companies
if his view proves to be correct.

61. Even if you do not own the underlying stock, you can sell the stock option for that stock
- State whether True or False?
• True
• False
Explanation: Although Futures and Options were introduced as hedging tools but there is no
pre-condition that one has to own the stock to trade in futures and options.
One can easily buy and sell options without owning the underlying stock.

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

63. A trader sells a futures contract and the price rises. The trader will __________
• make a loss
• make a profit
Explanation: The trader has sold the future contract which means he believes that the prices
will fall. So, he will make a loss if price rises.
64. On the day you take position in a futures contract, the Exchange calls for ________ to
cover any loss that your position may incur.
• Initial Margin
• Mark-to-market Margin
• Ad-hoc Margin
• Call Margin
Explanation: The amount one needs to deposit in the margin account at the time of entering
a futures contract is known as the initial margin.

65. What happens to the unmatched portion of the order in an Immediate or cancel (IOC)
order?
• It will be added to the order book as limit order
• It will be executed on the next trading day
• It will be executed in the next one hour
• It will be cancelled
Explanation: Immediate or cancel (IOC): User is allowed to buy/sell a contract as soon as the
order is released into the trading system. An unmatched order will be immediately cancelled.
Partial order match is possible in this order, and the unmatched portion of the order is
cancelled immediately.

66. The option premium is affected by the difference in the exercise price and the spot price
- State True or False?
• True
• False
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 e.g. If the spot price of a share is Rs 100 and the strike price is Rs 90, then 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, then the call option premium will generally rise to Rs 20 (110-90) plus
premium for time to expiry, volatility etc.

67. In stock markets, Beta is a statistical measure of the sensitivity of the movement of a
share price to the movement of prevailing interest rates - State True or False?
• True
• False
Explanation: Beta measures the sensitivity of a stock / portfolio vis-a-vis index movement
over a period of time, on the basis of historical prices.
68. When we trade in Commodities in a future exchange, it involves buying and selling
_________
• forward contracts on commodities
• actual commodities
• future contracts on commodities
• commodity stocks
Explanation: On a future exchange, one can only deal in futures contracts of the underlying
asset- in the above case its commodities.

69. When you sell a PUT option, you expect __________

• a decrease in the price of the underlying asset
• an increase in the price of the underlying asset
• No change in the price of the underlying asset
• Both 2 and 3
Explanation: When you sell a PUT option, you receive the premium. Your view here is bullish,
i.e., the price should rise.
Even if the price does not rise and it remains the same, you still make a profit i.e., the premium
you have received is your profit.
So, a seller of a Put option can make a profit when the price rises or even remains the same.
(The maximum profit for the seller of an option is the premium he receives. But the maximum
losses can be unlimited)

70. Each investor who wishes to trade in the derivatives segments required to satisfy
minimum net worth conditions - State True or False?
• True
• False
Explanation: As per SEBI rules, in order to understand the risk profile of a client who wishes
to trade in derivatives, the broker must seek to obtain and verify specific categories of
information about its customers including their Net-worth, annual income and investment
experience and knowledge.

71. What does a Call Option gives the buyer?

• The right but not the obligation
• The obligation but not the right
• Gives both the right and obligation
• Neither the right not the obligation
Explanation: A call option gives the buyer the right but not the obligation to buy from the
seller an underlying at the prevailing market price on or before the expiry date.

72. As the strike price increases, the premium on Call Options will decrease. - State True or
False?
• True
• False
Explanation: If all the other factors remain constant but the strike price of option increases,
intrinsic value of the call option will decrease and hence its value will also decrease.

73. If the Trading Member reaches his position limit, he will __________
• allowed to take new positions for his clients but not in his proprietary account
• not be able to reverse / square up his positions
• not be able to open new positions
• be allowed to take only 5% additional exposure
Explanation: If the Trading Member reaches his position limit, he will not be able to enter any
fresh transactions which have the impact of increase his exposure.
He will enter only those transactions which have the impact of reducing his exposure. Thus,
new positions will not be permitted, but squaring up will be permitted.

74. What is the role of speculators in the market?

• They stabilise the markets
• They reduce their risks by speculating
• They maintain the Dollar-Rupee price parity
• They add to the liquidity in the futures market
Explanation: Speculators constantly buy and sell creating good liquidity.

75. Which of the following options will result in the creation of a BEAR SPREAD?
• Selling one call at lower strike and buying another call at higher strike price
• Buying one put and buying one call at the same strike
• Selling one call and buying two puts at the same strike
• None of the above
Explanation: Bear Spread can be created by:
1) Selling a low strike call and buying a high strike call OR
2) Selling a low strike Put and buying a high strike Put
Remember: Bear spread involves either 2 Calls or 2 Puts and not Call and Put.

76. Is it true that a buyer of a CALL OPTION cannot lose more than the option premium
paid?
• True only for European options
• True only for American options
• True for all type of options
• False for all type of options
Explanation: The maximum loss for buyer of any option is the premium paid.

77. What is the difference between Spot Price and Future Price known as ________?
• Impact cost
• Basis
• Rho
• Swap
Explanation: The difference between the spot price and the futures price is called ‘basis’. If
the futures price is greater than spot price, basis for the asset is negative. Similarly, if the spot
price is greater than futures price, basis for the asset is positive.

78. What is the intrinsic value of a call option if the spot price is Rs 300 and the strike price
is Rs 250?
• zero
• 50
• 650
• None of the above
Explanation: Intrinsic Value of an In the money call option is the Spot Price - Strike Price.

79. Which exchange first started trading in financial futures?

• Chicago Board Option Exchange
• Chicago Mercantile Exchange
• Chicago Board of Trade
• London International Finance Futures and Options Exchange
Explanation: In 1972, Chicago Mercantile Exchange introduced International Monetary
Market (IMM), which allowed trading in currency futures.

80. You have created a Short Position on futures contract. This can be squared up by
___________
• by executing a purchase of a Call option of the same security
• by executing a forward contract
• by executing a purchase of the same futures contract
• by executing a sale of the same futures contract
Explanation: A short future contract can be squared up by buying the same contract in futures
market and in no other way.

81. Writing a covered call is __________

• More risky than writing a naked call
• Less risky than writing a naked call
• As risky as writing a naked call
• Covered call cannot be written in Indian markets
Explanation: In a naked call, the trader has to take a view on the market and accordingly go
long or short.
The covered call strategy is used to generate extra income from existing holdings in the cash
market. Therefore, the naked call strategy is much riskier.

82. What happens when the price of the underlying rises after a future contract is initiated?
• Price changes in the underlying will not effect the price of futures
• The short position will become profitable
• The long position will become profitable
• The long position will become unprofitable
Explanation: A long future position become profitable when the price of the underlying rises
as a rise in the underlying price will result in the price of futures also rising.

83. The Clearing Corporation can transfer client positions from one broker member to
another broker member in the event of a default by the first broker member. No
SEBI approval is required for this action - State True or False?
• True
• False
Explanation: As per SEBI rules - The Clearing Corporation can transfer client positions from
one broker member to another broker member in the event of a default by the first broker
member. A report is then sent to SEBI regarding this.

84. A writer / seller of a deep out of the money CALL option is _________
• Bullish - receiver of premium
• Bullish - payer of premium
• Bearish- receiver of premium
• Bearish - payer of premium
Explanation: A seller of call option is always bearish. It does not matter if the option is In the
money or Out of the money.
All sellers i.e., of Call or Put options will receive the premium.

85. The Risk Return profile for a Future contract is symmetric while that of an Option
contract is asymmetric - State True or False?
• True
• False
Explanation: Asymmetric basically means not identical on both sides.
When one trades in Options, the gains when the share moves in one direction is significantly
different from the losses when the share moves in the opposite direction.
For e.g. - If one buys a call option and the share prices go down the loss will be limited i.e.,
restricted to the premium paid. But if the share prices move up, the profits can be
huge/unlimited. This is known an asymmetric return.
On the contrary in futures or cash market, the returns are symmetric i.e., equal value of profits
or loss is possible.

86. A portfolio with 200 stocks is only half as risky as another portfolio with 100 stocks -
State True or False?
• True
• False
Explanation: A good index is a trade-off between diversification and liquidity. A well-
diversified index reflects the behaviour of the overall market/ economy. While diversification
helps in reducing risk, beyond a point it may not help in the context.
Going from 10 stocks to 20 stocks gives a sharp reduction in risk. Going from 50 stocks to 100
stocks gives very little reduction in risk. Going beyond 100 stocks gives almost zero reduction
in risk. Hence, there is little to gain by diversifying beyond a point.
87. Mr. A is a risk averse investor. He would prefer secure investments like fixed deposits
and other debt instruments and not market oriented investments – State True or False?
• True
• False
Explanation: A risk-averse investor would prefer investments that are more secure and thus
would have higher portfolio allocations to debt and fixed income instruments.
On the other hand, an investor who is less risk averse would like to have greater exposure to
equity and other risky investments.

88. One can use Index Futures for hedging to eliminate or reduce the ________
• Unsystematic Risk
• Systematic Risk
• Sector specific Risk
• Operational Risk
Explanation: An investor can diversify his portfolio and eliminate major part of price risk i.e.,
the diversifiable/unsystematic risk but what is left is the non-diversifiable portion or the
market risk-called systematic risk.
This systematic risk can be reduced using index based derivatives like Index Futures.

89. __________ is not an application of indices.

• Venture capital funds
• Index Funds
• Index Derivatives
• Exchange Traded Funds
Explanation: Traditionally, indices were used as a measure to understand the overall direction
of stock market. However, few applications on index have emerged in the investment field
such as Index Funds, Index Derivatives, Exchange Traded Funds etc.

90. The strategy in which a trader buys a call option of lower strike price and sells another
call option with a higher strike price of the same share and same expiry date is called
______
• Butterfly spread
• Bearish spread
• Calendar spread
• Bullish spread
Explanation: A bull spread is created when the underlying view on the market is positive but
the trader would also like to reduce his cost on position. So, he takes one long call position
with lower strike and sells a call option with higher strike. As lower strike call will cost more
than the premium earned by selling a higher strike call, although the cost of position reduces,
the position is still a net cash outflow position to begin with.
Secondly, as higher strike call is shorted, all gains on long call beyond the strike price of short
call would get negated by losses of the short call. To take more profits from his long call,
trader can short as high strike call as possible, but this will result in his cost coming down only
marginally, as higher strike call will fetch lesser and lesser premium.
91. In an equity scheme, the Mutual Fund can hedge its equity exposure by selling index
futures - True or False?
• True
• False
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.

92. Who monitors the collection of Initial margin and allows exposure to members based
on that?
• The Stock Exchange
• The Clearing Corporation
• NSDL or CDSL
• SEBI

93. Losses due to Operational risks include losses due to _________

• State Government policies
• Income tax regulations
• Inadequate disaster planning
• Excessive management control
Explanation: An operational risk is defined as a risk incurred by an organisation's internal
activities. So, losses due to fraud, inadequate documentation, inadequate disaster
management, improper execution are all Operational risks.

94. Value-at-risk is calculated _________

• for a specific time frame
• at a specific confidence level
• only when stocks are very volatile
• Both 1 and 2
Explanation: The clearing corporation computes and collects the Initial margins which are
based on 99% value at risk over a one daytime horizon.
Value-at-risk provides the expected maximum loss which maybe incurred by a portfolio over
a given period of time and specified confidence level

95. Trade Guarantee Fund (TGF) is maintained for ________

• Protecting the interests of investors
• inculcating confidence in the minds of investors and brokers
• Guaranteeing the settlement of trades
• All of the above
96. As per the recommendations of the L.C. Gupta Committee, CROSS MARGINING (which
takes into account the combined position in the cash and derivative market) is not
permitted.
• False
• True
Explanation: As per the major recommendations of the L.C. Gupta Committee - Cross
margining (linking overall cash and derivative positions for margining) is not permitted.

97. An option buyer pays the option premium to the option seller.
• True
• False

98. You have bought a CALL of SBI Strike price of Rs 200 of January. To close the position,
you will buy a PUT of same strike price of January. True or False?
• True
• False
Explanation: When you buy a CALL option, to close this position you will have to sell a CALL
option of same strike price and expiry.

99. The spot price of Grasim Industries Ltd share is Rs 900, the call option of Strike Price Rs
850 is __________
• At the money
• Out of the money
• In the money
• None of the above
Explanation: In call options, when the Spot price is higher than Strike price - that call option
is In the Money.

100. In the Option segment, if you sell a CALL at a premium of Rs 45at the Strike Price of Rs
400, lot is of 200 shares, then the maximum possible Profit is __________
• Rs 9000
• Rs 18000
• Rs 80000
• Unlimited
Explanation: In the Options market, the maximum profit a seller of an option can make is the
premium he receives.
In the above case the premium received is Rs 45 x 200 shares = Rs 9000.