NISM Series I: Currency Derivatives Mock Test (Set 4)
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1. The commonly employed approach for valuing European options is _____________.
Explanation:
There are two common methodologies for pricing options:
– Black and Scholes: This methodology is more analytical, is faster to compute and is mainly used to price European options.
– Binomial pricing: This methodology is more computational, taken more computing power and is mainly used to price American options.
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2. Mr. Gopal invested Rs 100,000 in UK securities when the exchange rate was 100. After two years, his investment in GBP terms increased by 25%. Upon liquidating his investment and repatriating the funds to India, he exchanged them at the prevailing exchange rate of 105. What would be his actual returns in terms of INR?
Mr Gopal invested Rs 100000 at GBRINR 1000. So he invested 100000 / 100 = 1000 GBP
His investment rose by 25 % ie.1000 plus 25% = 1250 GBP
He repatriated this amount at GBPINR 105 = 1250 X 105 = 131250
In real terms the growth is from Rs 100000 to Rs 131250 ie. 31.25%
(131250 x 100 / 100000 = 131.25)
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3. What is the designated settlement date for Exchange Traded Currency futures?
Last trading day (or Expiry day) – Two working days prior to the last business day of the expiry month
Final Settlement Day – Last working day (excluding Saturdays) of the expiry month.
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4. While reconciling the cash position with the clearing house, an accountant for a clearing member discovered that for July 2017, the cumulative volume of short options across all trading members was USD 8000, and the total volume of long options was USD 6000. During that period, the net option value for each short option was INR 0.7, and the value for each long option was INR 0.8. How much cash would be contributed to the liquid net worth of the accountant’s employer by the clearing house?
All futures contracts are cash settled, i.e. through exchange of cash in Indian Rupees.
The settlement amount for a CM is netted across all their TMs/clients, with respect to their obligations on Mark-to-Market (MTM) settlement.
The Net Position in the above question is 8000 – 6000 = 2000 short
2000 x .7 = 1400
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5. What is the required minimum net worth for a company to qualify for applying to be an authorized exchange for currency futures?
To ensure financial stability and credibility, a company seeking authorization as an exchange for currency futures must have a minimum net worth of Rs 100 crore. This requirement helps to establish confidence among market participants and regulators regarding the exchange’s ability to effectively manage risks and ensure smooth functioning of currency futures trading operations.
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6. Who purchases the option, and what type of option is acquired when a car company offers a three-year warranty to its customers for Rs 10,000, covering repairs or replacement of crucial spare parts?
When you get your car insured, you pay an insurance premium to the insurance company and the insurance company guarantees to compensate you for the damages to your car during the insurance period.
In this example, you are buying a put option from the insurance company and paying it an option premium in form of insurance premium. If your car gets damaged during the insurance period, you can use your policy to claim the compensation and if all goes well and you do not need to claim the compensation, the insurance company keeps the premium in return for taking on the risk.
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7. M/s Sun Exporters protects 10,000 USD by acquiring a September 2017 put option at a strike of Rs 63.00 when the price was Rs 0.44/0.46. The company receives USD in its account on September 15th and chooses to terminate the option on the same day when the price for the same contract is Rs 0.27/0.28. If the most recent RBI reference rate is Rs 62.50, what is the loss incurred by the company upon canceling the put option?
This is a simple case of buying and selling a Put Option.
He bought the Put Option at 0.46 and sold the option at 0.27
Loss = 0.27 – 0.46 = – 0.19 x 10000 = – 1900
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8. The USDINR three-month future is priced at 65.50, and the six-month future is at 66.10. Mr. Bharat anticipates that in a month, the three-month future will be at 65.20, and the six-month future will be at 66. If Mr. Bharat engages in a spread trade and his projection materializes, what would be his profit?
In this problem, Mr. Bharat, while executing the spread trade will have to make a loss first and than a profit.
In the first leg of trade he will buy at 66.10 (6 month)and sell at 65.50 (3 month) – Thus making a loss of 0.60
In the second leg of trade (after a month) he will square up the above trades by buying at 65.20 (3 month) and selling at 66 (6 month) – Thus making a profit of 0.80
Net Profit = 0.80 – 0.60 = 0.20 x 1000 (lot size) = Rs 200
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9. An importer sells 10 lots of one-month USDINR futures at 65. Upon expiry, the settlement price is declared as 65.70. Determine the importer’s profit or loss.
He has sold USDINR expecting a weakening of prices. But the prices have risen, so he suffers a loss
65 – 65.70 = – 0.70
0.70 x 10 Lots x 1000 (lot size) = – 7000 Loss
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10. What is a fundamental assumption of Technical Analysis?
The assumption that price discounts everything essentially means the market price of a security at any given point in time accurately reflects all available information, and therefore represents the true fair value of the security. This assumption is based on the idea the market price always reflects the sum total knowledge of all market participants.
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11. In accordance with SEBI’s codes of conduct for brokers, what are the directives regarding brokers promoting their business through public media?
SEBI Advertisement and Publicity guideline : A broker should not advertise his business publicly unless permitted by the exchange.
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12. How is the correlation between the price of a CALL option and changes in the spot price described?
In General –
In a Call Option – The price of option increases with increase in spot price
In a Put Option – The price of option decreases with increase in spot price
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13. How much money (in Rupees) did the trader gain or lose on the portion of the transaction that was squared off after selling 20 lots of USDINR 1-month futures at 65.60/65.90 and closing 10 lots a week later at 64.65/64.85?
When the price was 65.60 / 65.90, the trader sold USDINR – so he sold at 65.60 as that is the Bid (Buyers) price.
When the price was 64.65 / 64.85, the trader bought USDINR, so he bought at 64.85 as that is the Ask (Sellers) price.
Out of the 20 lots bought, he has squared off only 10 lots. The profit has to be calculated only on the squared off trade ie. 10 lots
65.60 – 64.85 = 0.75 ( Profit )
Total Profit = 0.75 x 10 lots x 1000 (each lot of USDINR)
= 7500
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14. Non Farm payroll indicator measures ________ .
Nonfarm payrolls represent the number of jobs added or lost in the economy over the last month
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15. Which among these initially proposed the introduction of exchange-traded currency futures in India?
The Committee on Fuller Capital Account Convertibility had recommended that currency futures may be introduced subject to risks being contained through proper trading mechanism, structure of contracts and regulatory environment.
Accordingly, Reserve Bank of India in the Annual Policy Statement for the Year 2007-08 proposed to set up a Working Group on Currency Futures to study the international experience and suggest a suitable framework to operationalize the proposal, in line with the current legal and regulatory framework.
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16. What methodology is employed when calculating the Mark-to-Market profit/loss for carried-over positions in futures contracts?
The computational methodology for MTM –
A. For squared off position: The buy price and the sell price for contracts executed during the day and squared off.
B. For positions not squared off: The trade price and the day’s settlement price for contracts executed during the day but not squared up.
C. For brought forward positions: The previous day’s settlement price and the current day’s settlement price for brought forward contracts.
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17. Anticipating a robust bullish outlook on USDINR and a forthcoming decrease in volatility, which option strategy is the currency trader likely to employ to execute both these views?
When a person sells a Put option, he has receives the premium and also he has a bullish view.
When volatility decreases there is less movement in option prices. So buying a Call option (bullish view) may not fetch him good returns. But if he sells a PUT option (again bullish view) – this means he will benefit of the bullish move by retaining the entire premium received by him.
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18. What is the tick size for USDINR currency futures contracts in India?
For currency futures contract in India, the tick size is 0.25 paise or 0.0025 Rupee
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19. Regarding the OTC market, which statement accurately describes the value date of a forward contract?
Settlement date is also known as Value date.
Any settlement date after spot value date is called “forward” value dates, which are standardized into 1-month, 2-month, etc after spot value date. The forward market can extend up to one year.
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20. What accurately characterizes the guidelines for brokers concerning the issuance of contract notes for the execution of orders among the following options?
A Broker has to issue contract notes every trading day to his clients as well as clients of his sub brokers.
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21. Given a one-year interest rate of 1% in the US and 4% in Great Britain, along with the current GBPUSD spot rate at 1.74, what is the anticipated one-year futures rate for GBPUSD?
The formula for Interest Rate Parity is :
Future Rate = Spot Rate X (1 + Interest Rate of Quoted Currency) /
( 1 + Interest Rate of Base Currency)
= 1.74 X ( 1 + 0.01 ) / ( 1 + 0.04 )
= 1.74 X ( 1.01 / 1.04)
= 1.74 x 0.9711
= 1.689
Thus the future rate will be at a discount as Quoted Currency interest rates are less than base currency interest rates.
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22. What is the designated tick size for currency futures contracts in India?
For eg – If USDINR is 56.7500, then a upward movement of one tick will result in a price of 56.7525.
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23. While entering a limit order to SELL GBPINR one-month future at 70.60, with the current price fluctuating between 70.40 to 70.80, at what price is the order expected to be executed?
When a person enters a limit SELL order, his order cannot get executed below the limit price. However if the price rises while entering the order, he can sell it at a higher price.
So in the above case, he can sell GBPINR at the limit price of 70.60 or higher if the price rises while entering the order.
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24. In a system of 10 currencies without any designated vehicle currencies, there could potentially be _____ currency pairs or exchange rates.
Use of a vehicle currency ( like USD ) greatly reduces the number of exchange rates that must be dealt with in a multilateral system.
In a system of 10 currencies, if one currency is selected as the vehicle currency and used for all transactions, there would be a total of nine currency pairs to be dealt with (i.e. one exchange rate for the vehicle currency against each of the others),
If no vehicle currency were used, there would be 45 exchange rates to be dealt with as per below calculations :
The formula is : n ( n – 1) / 2
= 10 ( 10 -1 ) / 2
= 10 ( 9 ) / 2
= 10 x 4.5
= 45
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25. What describes a potential arbitrage trade and the achievable arbitrage profit per USD if a trader exploits the price discrepancy between the one-month USDINR OTC market (quoted at 47.75/48.00) and the corresponding futures market (quoted at 48.50/48.70), and holds the arbitrage trade until maturity?
Arbitrageurs make profits by simultaneously entering opposite side transactions in two or more markets ie. buy in one market at a lower price and sell in another at a higher price.
Here, in the OTC Market the Bid Ask price is 47.75 / 48.00. So an arbitrageur will buy at 48.00.
In Futures Market the Bid Ask price is 48.50 / 48.70. So the arbitrageur will sell at 48.50.
Thus he will make an arbitrage profit of Rs 0.50 ( 48.50 – 48.00 )
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26. At a bank quoting a USDINR rate of 54.20/54.30, what is the selling price for one unit of USD when the exporter wishes to sell USD received as export remittance?
54.20 and 54.30 are the BID and ASK price. This means there are buyers at 54.20 and sellers at 54.30.
So if the exporter wants to sell, he has to sell them to the buyer at 54.20
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27. Which option below provides the most accurate description of total open interest, specifically used for monitoring open positions throughout the day?
Positions during the day are monitored based on the total open interest at the end of the previous day’s trade.
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28. By executing a trade where he buys one lot of USD/INR and sells one lot of JPY/INR, what market view has Mr. Sunny expressed?
Buying USDINR – USD strengthening against INR
Selling JPYINR – JPY weakening against INR
Conclusion from above two statements – USD strengthening against JPY or JPY weakening against USD.
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29. Which option below provides the most accurate description of the timing for the collection of Mark-to-Market margins?
The mark-to-market gains and losses are settled in cash before the start of trading on T+1 day.
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30. True or False: Volatility is the measure of uncertainty in prices of the underlying asset.
Volatility measures the magnitude of the change of prices (up or down) of the underlying asset. Higher the volatility, higher is the option premium and vice versa.
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31. Worldwide, regulators and governments are increasingly pushing for more derivative contracts to be traded on exchanges with _______.
World over regulators and governments are now trying to move more and more derivative contracts to be exchange traded with centralized clearing and settlement.
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32. In anticipation of receiving USD 10,000 in three months, an exporter purchases a house for INR 500,000. To hedge the currency risk, the exporter executes 10 USDINR futures contracts at a price of 50. Upon receiving the payment, the exporter converts USD to INR at a bank rate of 51 for the house payment and settles the futures contract at a price of 49. In this scenario, did the exporter sell or buy USDINR futures, and is the effective price for the house lower or higher than USD 10,000?
Since the exporter is expecting USD in three months and to safe gaurd against any USD depreciation against INR, he will hedge this by selling USDINR 3 month future at 50. So the answer to the first part is SELL.
When he received the USD after three months he sold it to a bank and got a rate of 51 – so here he made a profit of 1 USD per dollar received. Also when he squared up his future trade at 49, he made a profit of 1 USD per dollar received ( 50 – 49 ). So he has made profits which will bring down the effective price of the house.
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33. Given a strong bearish outlook on EURINR with an expectation for it to decrease from the current levels of 75 to 70, which of the following options strategies should the trader contemplate to maximize profits?
When a person is bearish he can either sell a Call option or buy a Put option. But in case of selling a Call option, his profits will be limited to the extent of premium received.
So in the above case, where the trader wishes to maximise his profits, buying a Put Option is the best alternative.
Please note :
Buying Call – Bullish view
Selling Call – Bearish / Neutral view
Buying Put – Bearish view
Selling Put – Bullish / Neutral view
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34. In order to mitigate the risk associated with importing chemicals from the USA with a payment due in three months, a pharma company acquires a USDINR call option at a strike price of Rs 82, paying a premium of Rs 2.30. Upon maturity, the settlement price is Rs 85.10. What is the per-USD profit, in Rs, that the company realizes from this option strategy?
The Company buys Rs 82 call option at Rs 2.30 premium.
So the total cost = 82 + 2.30 = 84.30
The Settlement Price is 85.10
So the profit is 85.10 – 84.30 = Rs 0.80
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35. True or False: The Profit or Loss for an Option Writer is unlimited.
The Profits for a Option Writer is limited to the extent of premium received but his losses can be unlimited.
For eg if he sells a call option ( as he believes that the underlying will fall ) he collects the premium (limited profit). But in case the underlying rises to a great extent, his losses can be huge / unlimited.
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36. Who recommended the introduction of exchange-traded currency futures in India?
Accordingly, Reserve Bank of India in the Annual Policy Statement for the Year 2007-08 proposed to set up a Working Group on Currency Futures to study the international experience and suggest a suitable framework to operationalise the proposal, in line with the current legal and regulatory framework.
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37. What measures the sensitivity of option value to the risk-free interest rate?
Rho measures the impact of changes in the risk-free interest rate on the value of an option. It indicates how much the option’s value will change for a 1% change in the risk-free interest rate.
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38. The determination of prices for MARKET ORDERS is influenced by __________.
Market orders are orders for which no price is specified at the time the order is entered. For such orders, the trading system determines the price.
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39. What describes a potential arbitrage trade and the achievable arbitrage profit per EUR if a trader exploits the price difference between one-month EURINR in the OTC market (quoted at 68.75/68.90) and the corresponding futures market (quoted at 69.30/69.60), and holds the arbitrage trade until maturity?
Here, in the OTC Market the Bid Ask price is 68.75 / 68.90. So an arbitrageur will buy at 68.90.
In Futures Market the Bid Ask price is 69.30 / 69.60. So the arbitrageur will sell at 69.30.
Thus he will make an arbitrage profit of Rs 0.40 ( 69.30 – 68.90 )
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40. What is the methodology used to determine the closing price for EURINR?
The closing price for a futures contract is calculated as the last half an hour weighted average price of the contract.
However if a futures contract is not traded on a day or not traded during the last half hour, a ‘theoretical settlement price’ is computed as may be decided by the relevant authority.
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41. What category of market participant does an individual fall into if, based on their study of economics and international finance, they believe that the EUR will strengthen against the INR in the next month and execute a trade on currency futures accordingly?
Speculators : This set of market participants does not have a real exposure to foreign currency risk.
These participants assume foreign exchange risk by taking a view on the market direction and hope to make returns by taking the price risk.
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42. Determine the profit or loss incurred by a currency market trader who initially sells 20 lots of EURINR 1-month futures at a price of 62.60/62.70 and subsequently squares off 12 lots when the price is 63.20/63.40.
When the price was 62.60 / 62.70, the trader sold EURINR – so he sold at 62.60 as that is the Bid (Buyers) price.
When the price was 63.20 / 63.40, the trader bought EURINR, so he bought at 63.40 as that is the Ask (Sellers) price.
Out of the 20 lots bought, he has squared off only 12 lots.
62.60 – 63.40 = -0.80 ( Loss)
Total Loss = -0.80 x 12 lots x 1000 (each lot of EURINR)
= -9600
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43. What is the fair value of a 60-day USD/INR futures contract given one-year interest rates in the US and India at 2% and 9%, respectively, and a spot rate of USD to INR at Rs. 60.00?
Using simple calculations :
Difference between the interest rates of US and India is 9 – 2 ie 7 %
7% of Rs 60 = 4.20
4.20 is for a year ( 360 days as per banks etc)
So for 60 days it will be 4.20 / 360 X 60 = 0.70
Thus the 60 day futures contract will be 60 + 0.70 = 60.70
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44. What is the designated lot size for GBPINR futures contracts?
The lot size In the case of GBPINR it is GBP 1000
In case of USDINR it is USD 1000; EURINR it is EUR 1000; JPYINR it is JPY 100,000.
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45. By selling one lot of USD/INR and buying one lot of JPY/INR in a currency futures trade, what market view has the person expressed?
Selling USDINR – view is weakening of USD against INR
Buying JPYINR – view is strengthening of JPY against INR
Taking a collective view – JPY strengthening against USD.
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46. By purchasing 40 lots of USDINR futures contracts at a price of 49 and closing the position at the expiry with a settlement price of 49.60, what is the profit or loss incurred by the trader?
The trader went long which means he bought USDINR at 49.
Settlement price is 49.60
P/L = Selling Price – Buying Price
= 49.60 – 49
= 0.60 Profit
0.60 x 40 Lots X 1000 ( lot size of USDINR )
= 24000
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47. True or False: Exchange-traded currency options in India can be exercised at any time on or before maturity.
Options are of two types – European and American.
European options can be exercised by the buyer of the option only on the expiration date.
American options can be exercised by the buyer any time on or before the expiration date.
IN INDIA, ALL CURRENCY OPTIONS ARE OF EUROPEAN TYPE IE. EXERCISED BY THE BUYER ONLY ON THE EXPIRATION DATE.
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48. What is the term for the common third currency when two currencies are traded against it instead of directly against each other?
For eg – If an Indian trader wants to trade in say Malaysian currency Ringgt, he will trade in two currency pairs viz : US Dollars – Indian Rupees and US Dollars – Malaysian Ringgt as there more volumes and liquidity in these currency pairs rather then Indian Rupees – Ringgt.
Here US Dollars is the vehicle currency.
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49. Given Mr. Raunak’s conviction in a robust bullish trend for USDINR and his anticipation of reduced volatility, which option strategy is he likely to employ?
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50. Who is not allowed to participate in the currency futures market?
At present, FIIs and NRIs are not permitted to participate in currency futures market.
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