NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION

EXAM – PRACTICE TEST NO. 6

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 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 6

PRACTICE TEST NO. 6

Question 1 Which of the following statements is TRUE with respect to time value of options ?
(a) Only an In the Money Option has time value
(b) Only Call options have time value
(c) The time value of the option is the sum of its intrinsic value and premium
(d) The longer the time to expiration, greater is the option time value

Question 2 Hedging is __________.

(a) long security, long futures
(b) long security, short futures
(c) short security, long futures
(d) short security, short futures

Correct Answer 1 The longer the time to expiration, greater is the option time value

Answer The longer the time to expiration, greater is the option time value.
Explanation So 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.

Correct Answer 2 long security, short futures

Answer When a owner of a security fears a fall in the value due to some event ( eg - budget ) he will sell
Explanation the equivalent futures as a hedging tool.
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 6

Question 3 The Lot size of Options are ___________.

(a) Same as that of Futures
(b) Double that of futures as only the premium is payable / received
(c) Very different from futures
(d) Half of Futures

Question 4 Which of the following is the duty of the trading member?

(a) Sending the periodical statement of accounts to clients
(b) Maintaining unique client codes
(c) Ensuring timely pay-in and pay-out of funds
(d) All of the above

Correct Answer 3 Same as that of Futures

Correct Answer 4 All of the above

 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 6

Question 5 Which of the following cannot be an underlying for a Financial Derivative contract ?
(a) Foreign Exchange
(b) Interest Rate
(c) Commodities
(d) Equity Index

Question 6 VaR methodology seeks to measure the amount of value that a portfolio may stand to lose
within a certain horizon time period due to potential changes in ______________.
(a) underlying stock volatility
(b) underlying exposures
(c) underlying index volatility
(d) underlying asset spot price

Correct Answer 5 Commodities

Correct Answer 6 underlying asset spot price

 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 6

Question 7 A stock broker is allowed to buy, sell or deal in securities __________.

(a) on submission of document with stock exchange for admission
(b) only on being admitted as a member of a stock exchange
(c) on submission of document with SEBI for registration
(d) only on having a certificate of registration granted by SEBI

Question 8 Which of the following statement is true?

(a) NSE does not allow basket trading in it's F&O Segment.
(b) F&O Segment has a Basket trading facility.
(c) Basket trading has been discontinued in the F&O Segment.
(d) Basket trading is illegal in India.

Correct Answer 7 only on having a certificate of registration granted by SEBI

Correct Answer 8 F&O Segment has a Basket trading facility.

 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 6

Question 9 The value of a call option ____________ with a decrease in spot price.
(a) increases
(b) decreases
(c) remains constant
(d) either increases or decreases depending on Nifty movements

Question 10 On the derivative exchanges, all the orders entered on the Trading System are at prices
exclusive of brokerage.
(a) TRUE
(b) FALSE

Correct Answer 9 Decreases

Answer The premium decreases as the intrinsic value decreases.

Explanation

Correct Answer 10 TRUE

Answer The orders entered in the trading system does not include any brokerage. Brokerage is adjusted
Explanation when the Contract Notes are made.
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 6

Question 11 You have bought a portfolio of securities on the exchange. To eliminate the risk arising
out of market, you should _____.
(a) buy index futures
(b) sell index futures
(c) buy stock futures
(d) sell stock futures

Question 12 Nifty future is trading at 4850. An investor buys a 4900 current month call at 100. What
should be the closing price of Nifty above which the investor starts to make profits ?
(a) 4850
(b) 4900
(c) 5000
(d) 5100

Correct Answer 11 sell index futures

Answer Selling index futures as per the beta of the portfolio is a good hedging startegy.
Explanation

Correct Answer 12 5000

 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 6

Question 13 Clearing Corporation on a derivative exchange becomes a legal counterparty to all trades
and is responsible for guaranteeing settlement for all open positions - True or False ?
(a) TRUE
(b) FALSE

Question 14 Three Call series of XYZ stock - January, February and March are quoted. Which will
have the lowest Option Premium (same strikes)?
(a) March
(b) February
(c) January
(d) All will be almost equal

Correct Answer 13 TRUE

Correct Answer 14 January

Answer January - as the time value will be the lowest.

Explanation
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 6

Question 15 To safeguard against potential losses on outstanding positions, __________ is collected.

(a) Assignment Margin
(b) Initial Margin
(c) Premium Margin
(d) None of the above

Question 16 A scrip will be banned in the derivatives market if the open interest ______________.
(a) exceeds 85% of the market wide position limits
(b) exceeds 90% of the market wide position limits
(c) exceeds 95% of the market wide position limits
(d) exceeds 97% of the market wide position limits

Correct Answer 15 Initial Margin

Correct Answer 16 exceeds 95% of the market wide position limits

Answer At end of the day the exchange tests whether the market wide open interest for any scrip
Explanation exceeds 95% of the market wide position limit for that scrip.
In case it does so, the exchange takes note of open position of all client/TMs as at end of that
day for that scrip and from next day onwards they can trade only to decrease their positions
through offsetting positions.
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 6

Question 17 In case a Future Contract is not traded in a day, which of the following prices is reckoned
for daily mark to market settlement?
(a) Closing price of the underlying
(b) Theoretical price
(c) Closing price of the last traded day
(d) Closing price of the futures contract

Question 18 The Indian derivatives market has 6 underlying futures contract available at a given time -
True or False ?
(a) FALSE
(b) TRUE

Correct Answer 17 Theoretical price

Answer In case a futures contract is not traded on a day, or not traded during the last half hour, a ‘theoretical
Explanation settlement price’ is computed as per the following formula:
F = Se^rt

where : r - Cost of financing (using continuously compounded interest rate)

T - Time till expiration in years
e - 2.71828

Correct Answer 18 FALSE

Answer The Indian derivatives market has 3 and not 6, underlying futures contract available at a given
Explanation time.
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 6

Question 19 Ms. Gayatri buys a call option of strike price Rs. 300 when the spot price is Rs 337. What is
the intrinsic value of this call option?
(a) -37
(b) 37
(c) zero
(d) 637

Question 20 If the lot size of Reliance Industries future contract is 250 shares, what will be the lot size of
its Option contract ?
(a) 125
(b) 250
(c) 300
(d) 500

Correct Answer 19 37

Answer The option premium of any security consist of two variables ie. the intrinsic value and time
Explanation value.
For example if the spot price is Rs 100 and the call option price of a Rs 95 strike price option is
Rs 12, then Rs 5 (100 - 95) is the intrinsic value and the balance Rs 7 ( 12 - 5 ) is the time value.
In the above question, the intrinsic value is 337 - 300 = Rs 37.

Correct Answer 20 250

Answer The lot size of a Futures Contract and Options Contract are always the same.
Explanation
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 6

Question 21 The daily settlement of all open positions in futures contract is called –
(a) Exercising of the futures contract
(b) Mark to Mark settlement
(c) VaR settlement
(d) None of the above

Question 22 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 21 Mark to Mark settlement

Answer In futures market, the contracts have maturity of several months. So to safe gaurd against
Explanation substantial rise /fall in the prices, profits and losses are settled on day-to-day basis – called mark
to market settlement.
The exchange collects these margins from the loss making traders and pays to the gainers on
day-to-day basis.

Correct Answer 22 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 the
Explanation underlying.
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 6

Question 23 Mr. Sunil wishes to buy a futures contract of Tata Steel shares. He should _____.
(a) make payments for the full value of the contract
(b) make the margin payments as calculated by the exchange
(c) hedge his position in Tata Steel in the Options market
(d) None of the above

Question 24 You have bought a call option of XYZ stock of strike price 400 at a premium of Rs 30.
The current spot / market price is Rs 410. At what market price will this call break
even ?
(a) 370
(b) 400
(c) 430
(d) 440

Correct Answer 23 make the margin payments as calculated by the exchange

Answer To buy a futures contract, one does not have to make full payment but only the margin payment
Explanation as per the percentage decided by the stock exchange.

Correct Answer 24 430

 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 6

Question 25 What is done if a client defaults in making payments in respect to his daily settlement ?
(a) The contract is transferred to a special 'Default Account'
(b) The contract is closed out
(c) The contract is transferred to another clients account who has sufficient funds
(d) A weeks notice is given to that client

Question 26 _______ measure of the sensitivity of an option price to changes in market volatility.
(a) Rho
(b) Theta
(c) Gamma
(d) Vega

Correct Answer 25 The contract is closed out

Correct Answer 26 Vega

Answer Vega represents the amount of price changes in an option in reaction to a 1% change in the
Explanation 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
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 6

Question 27 Mr Ranjan sold a ABC stock put contract of Rs 300 strike price at Rs 28. What will be
his profit / loss if he buys it back at Rs 13. The lot size is 1000 shares.
(a) 18000
(b) -18000
(c) 15000
(d) -15000

Question 28 You own a portfolio of various stock for long term but currently you are unsure of the
market. The best possible action to safe guard your investments is :
(a) Buy more stocks
(b) Sell the Stocks
(c) Sell Index Futures as a hedge
(d) None of the above

Correct Answer 27 15000

Answer Mr Ranjan sold at Rs 28 and bought back at Rs 13, so his net profit is Rs 15 ( 28 - 13 )
Explanation The lot size is 1000, so his total profit is Rs 15 x 1000 = Rs 15000.

Correct Answer 28 Sell Index Futures as a hedge

 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 6

Question 29 The system in which trading is done through various computers which are attached to a
central computer is called Online trading.
(a) FALSE
(b) TRUE

Question 30 Forward Contracts are those contracts which can be customised as per the requirements of
the concerned parties - True or False ?
(a) FALSE
(b) TRUE

Correct Answer 29 TRUE

Correct Answer 30 TRUE

Answer Forward contracts are as per the choice of the transacting parties where as the future contracts,
Explanation the parameters quantity, expiry date etc. are customised by the exchanges.
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 6

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NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 6