NISM Series I: Currency Derivatives Mock Test (Set 3)

Explanation:

Under the FIFO method, the contract price of the contract that is squared off is determined based on the price of the first contract purchased in the series. This means that the oldest contract in terms of acquisition is considered first when calculating the profit or loss on squaring-up. This method is widely used in financial markets to ensure a consistent and fair approach to determining gains or losses on trades.

Explanation:

An option is said to be at the money if spot price is equal to the strike price.

Explanation:

The exports are higher than monthly loan payments. So only the amount over and above the loan payment is subject to currency risks and should be hedged.

Explanation:

European options can be exercised by the buyer of the option only on the expiration date.

In India, all the currency options in OTC and Exchange traded are of European type.

Explanation:

Calendar Spread (also known as intra-currency pair spread) consists of one long futures and one short futures contract. Both have the same underlying but different maturities.

Explanation:

In a Call Option, the Premium increases with increase in Spot price.

In a Put option, the Premium decreases with an increase in the Spot price.

Explanation:

OTC trades are between two or more parties and the risks are borne by them. There is no centralised risk management authority like the clearing corporation in the futures exchange.

Explanation:

A long currency option position at one maturity and a short option position at a different maturity in the same series, both having the same strike price would be treated as a calendar spread.

Explanation:

FIFO means First In First Out – which means the price of the contracts bought first will be considered first in case of square up.

Mr. Rohan has squared off only 10 contracts. So we should consider the buying price of the first 10 contracts and ignore rest of the data.

First 10 contracts were bought at 80.00 and these were sold on day 3 at 79.90

So 80 – 79.90 = .10 Loss x 10 lots x 1000 (lot size) = Rs 1000 Loss

Explanation:

Banks were allowed to run option book subject to their meeting certain parameters with respect to net worth, profitability, capital adequacy and NPA%.

Explanation:

Aditya has received Rs 10,00,000

Divide this by 50 (USDINR Rate) we get 20,000 USD

The lot size of USDINR contract is 1000

So 20000 / 1000 = 20 Lots

Explanation:

In this question, we are required to calculate the MTM for day 2. So we ignore the buying and selling of day 1.

(Mark to Market margins for brought forward positions: The previous day’s settlement price Less the current day’s settlement price x No. of contracts)

He has bought forward 40 contracts (100 – 60 )
The Settlement price of day 1 was 66.30 and of day 2 was 66.80
We have to consider these two prices to calculate the MTM
66.80 – 66.30 = 0.50 x 40 contracts x 1000 (lot size)
= 20000 positive as there is a notional profit

Explanation:

The trader has bought a PUT and Sold a CALL – In both the cases he has assumed that the USDINR will fall to make a profit.

Trade 1 – Buys a Put option at 0.38. So he has to pay a premium of Rs. 0.38. The RBI reference rate is 66. So there is no Profit or loss due to this as its the same as strike price. However he has lost the premium paid of Rs 0.38 x 1000 (lot size) = Rs 380

Trade 2 – Sell a Call option at Rs. 0.45. So he receives this premium of Rs.0.45. The RBI reference rate is 66 and the strike price is 65.50. So here is makes a loss of Rs. 0.50 (65.50 – 66) due to adverse price movement. The net loss is 0.45 (premium received) – 0.50 = 0.05 x 1000 (lot size) = Rs. 50

Total Loss from Trade 1 ( 380 ) and trade 2 ( 50 ) = Rs 430.

Explanation:

The mark-to-market gains and losses are settled in cash before the start of trading on T+1 day.

Explanation:

INR has appreciated against USD, which means USD has depreciated. So the USDINR rate will fall.

The trader has sold USDINR, so he will profit from the fall.

Tick Size is Rs .0025

100 Ticks X .0025 = 0.25

0.25 X 10 lots X 1000 ( Lot size of USDINR)

= Rs 2500 Profit

Explanation:

RBI-SEBI Standing Technical Committee on Exchange Traded Currency recommends product design, risk management and membership norms for currency futures etc.

Explanation:

A call option would be Out of the Money if the underlying price is lower than the strike price.

The underlying price (current price) ie. 62 is lower than the strike price ie. 63. ( Loss situation)

A put option would be out of the money if the underlying price is higher than the strike price.

A call option would be in the money if the underlying price is higher than the strike price.

A put option would be in the money if the underlying price is lower than the strike price.

Explanation:

When a Trading Member requires the facility of using ‘Pro-account’ through trading terminals from more than one location, such Trading Member shall request the Exchange stating the reason for using the ‘Pro-account’ at multiple locations.

The Exchange may, on a case to case basis after due diligence, consider extending the facility of allowing use of ‘Pro-account’ from more than one location.

Explanation:

Bought 13 lots and sold 6 lots, so net position is of 7 lots X 1000 (lot size) = 7000

Explanation:

In managed float, countries have controls on flow of capital and central bank intervention is a common tool to contain sharp volatility and direction of currency movement.

Explanation:

The SC(R)A ie. the Securities Contract (Regulation) Act of 1956 is the act mainly responsible for governing the trading of securities in India.

Explanation:

EUR/USD is a combination of the Euro and the US dollar. This is generally considered the most traded currency pair as it stems from two of the world’s largest and most reputable economies.

Explanation:

The seller of a Call Option has the obligation to SELL the underlying asset.

Explanation:

There are no daily price bands applicable for currency futures contracts.

However in order to prevent erroneous order entry by members, operating ranges are kept at +/-3% of the base price for contracts with tenure upto 6 months and +/-5% for contracts with tenure greater than 6 months.

Explanation:

The contracts are bought and sold are of different months, so these will be considered as different contracts and not as squared up contracts.

Open Position of Client is : 12 lots bought and 12 lots sold = 24 lots x 1000 (Lot size) = 24000

Open Poistion of the Trading Member will be his own position plus his clients open position

Trading member : 20 lots bought and 20 lots sold = 40 lots x 1000 (Lot size) = 40000 + 24000 that of his Client = 64000

Explanation:

For any currency pair, the standard practice is to write the BC code first followed by the QC code.

For example, in USDINR, USD is the Base Currency and INR is the Quoted Currency.

Explanation:

He bought 5 lots at 301500.

Per lot price = 301500 / 5 = 60300 / 1000 ( Lot size) = 60.30

He bought at 60.30 and the expiry price is 60.

So he will suffer a loss : 60.30 – 60.00 = 0.30

Total Loss : 0.30 x 5 Lots X 1000 ( Lot size )

= Rs 1500

Explanation:

Break even = strike price + premium

The person will start making a net positive cash flow for every price higher than 72.10 ( 71.50 + 0.60 premium)

So 72.10 will be his breakeven point for this transaction.

Explanation:

The lot size in the case of JPYINR it is JPY 100,000

In case of USDINR it is USD 1000; EURINR it is EUR 1000; GBPINR is GBP 1000.

Explanation:

In managed float, countries have controls on flow of capital and central bank intervention is a common tool to contain sharp volatility and direction of currency movement.

Explanation:

If EUR is to appreciate against JPY and JPY is to remain same against INR then EUR will appreciate against INR. So he will buy EURINR.

Explanation:

The formula for Interest Rate Parity is :

Future Rate = Spot Rate X (1 + Interest Rate of Quoted Currency) /

( 1 + Interest Rate of Base Currency)

= 1.65 X ( 1 + 0.04 ) / ( 1 + 0.01 )

= 1.65 X ( 1.04 / 1.01)

= 1.65 x 1.0297

= 1.699

ANOTHER EASIER WAY OF SOLVING THIS IS BY APPROXIMATE METHOD :

The difference between the interest rates is 3 % ( 4% – 1%)

3 % of 1.65 = .0495 per year

So the appx. one year future rate for GBPUSD = 1.65 + .0495 = 1.6995

Explanation:

RBI-SEBI Standing Technical Committee on Exchange Traded Currency recommends product design, risk management and membership norms for currency futures etc.

Explanation:

During 1944-1971, countries adopted the Bretton Woods System which was a blend of gold standard system and floating rate system.

All currencies were pegged to USD at a fixed rate and USD value was pegged to gold. The US guaranteed to other central banks that they can convert their currency into USD at any time. With adoption of this system, USD became the dominant currency of the world.

Explanation:

The formula for Interest Rate Parity is :

Future Rate = Spot Rate X (1 + Interest Rate of Quoted Currency) /

( 1 + Interest Rate of Base Currency)

= 70 X ( 1 + 0.08 ) / ( 1 + 0.02 )

= 70 X ( 1.08 / 1.02)

= 70 x 1.0588

= 74.117

So the interest cost is 74.117 – 70 = 4.117 for one year

For six months it will be 4.117 / 2 = 2.058

So the six month future rate will be 70 + 2.05 = 72.06

ANOTHER EASIER WAY OF SOLVING THIS IS BY APPROXIMATE METHOD :

The difference betwwen the interest rates is 6% ( 8% – 2%)

6% of 70 = 4.20 per year

for six months : 4.20 / 2 = 2.10

So the appx. six month future rate for GBPINR = 70 + 2.10 = 72.10

Explanation:

A currency futures position at one maturity which is hedged by an offsetting position at a different maturity is called as a CALENDAR SPREAD.

A Calendar spread in options or futures is established by simultaneously entering a long and short position on the same underlying asset but with different delivery months.

Explanation:

Trading members are members of an authorized Exchange. They can trade either on their own account or on behalf of their clients.

Explanation:

All popular currencies of the world like USD, EUR, SWISS FRANCS are free floating.

Explanation:

The Stock Exchange appoints an Appellate Bench consisting of five arbitrators who hear the case and then give the decision.

The judgment of the Bench is by a ‘majority’ and is binding on both the parties.

Any party who is dissatisfied with the Appellate Bench Award may challenge the same only in a Court of Law.

Explanation:

GBPUSD moving from 1.75 to 1.79 means GBP becoming stronger against USD. So he will buy GBPINR and Sell USDINR.

Explanation:

Gross open position for the trading member for the purpose of monitoring open position is the sum of all open positions of all the clients.

In the above example :

Client A has 5000 USD open

Client B has 4000 USD open

Client C has 2000 USD open

So total 11000 USD open

Explanation:

Buying EURINR – view is strengthening of EUR against INR

Selling JPYINR – view is weakening of JPY against INR

Taking a collective view – JPY weakening against EUR.

Explanation:

In managed float, countries have controls on flow of capital and central bank intervention is a common tool to contain sharp volatility and direction of currency movement.

Explanation:

Central Bank – RBI can buy / sell a lot of currencies in the best interest of the country / economic situation and this can change the normal market movements of currencies.

Explanation:

In a Day Order – the system cancels the unexecuted order automatically at the end of the day.

An ‘Immediate or Cancel’ (IOC) order is an order to buy or sell a security immediately – and if that order is not executed immediately it will be cancelled.

For eg – A trader enters an IOC order to buy 1000 shares of XYZ Ltd at Rs 100. If at that time there are sellers of 200 shares only at Rs 100, the trader will get the 200 shares and the balance order of 800 shares will get cancelled immediately.

Explanation:

Time value is difference between option premium and intrinsic value is time value of option. The time value is directly proportional to the length of time to expiration date of the option. Longer the time to expiration, higher is time value.
At expiry the option value is its intrinsic value and time value is zero.

Explanation:

INR has depreciated which means the price of USDINR will rise. As the trader has sold USDINR he will face losses in this situation.

Tick Size is Rs .0025

60 Ticks X .0025 = 0.15 X 20 lots X 1000 ( Lot size of USDINR)

= Rs 3000 loss.

Explanation:

The maximum trading volumes typically occur when Europe and the USA markets are open simultaneously. This overlap represents a significant portion of the global financial markets’ trading activity. European markets usually start trading a few hours before the USA markets open, and when both are open together, there is heightened trading due to increased participation from institutional investors, hedge funds, and other market participants from both regions. This overlap also allows for more significant market liquidity and increased trading opportunities.

Explanation:

When a Trading Member requires the facility of using a ‘Pro-account’ through trading terminals from more than one location, such Trading Member shall request the Exchange stating the reason for using the ‘Pro-account’ at multiple locations.

The Exchange may, on a case-to-case basis after due diligence, consider extending the facility of allowing the use of ‘Pro-account’ from more than one location.

Explanation:

For the stop loss buy order, the trigger price has to be less than the limit price

For e.g. If for stop-loss buy order, the trigger is Rs 64.0025, the limit price is Rs 64.2575, then this order is
released into the system once the market price reaches or exceeds Rs 64.0025. This order is added to the regular lot book with time of triggering as the time stamp, as a limit order of Rs 64.2575.