NISM Series I: Currency Derivatives Mock Test Set 5
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1. A trader enters a long position in a USDINR futures contract at a price of 65, buying 40 lots. Upon the contract’s expiry, the settlement price is 65.40. What is the resulting profit or loss?
Your answer is correct
Explanation:
The trader buys at 65 and sells at 65.40 (Settlement Price). So the profit is 0.40
0.40 x 40 lots x 1000 (lot size) = Rs 16000 profit
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2. Mr. Amit sells a USD put option with a strike of 66 and receives a premium of INR 0.4. What is the break-even point for these two transactions?
The breakeven point for a short put is the strike price of the option minus the premium.
So 66 – 0.40 = 65.60
(In easier terms, when a person sells PUT, he has a bullish view and believes that price will rise. He has bought at 66 and he receives .40 premium so his buying price reduces by .40 ie. 65.60 which is break even price)
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3. The current EURINR spot is 80. The current future price of EUR is at a premium to INR. A trader believes that on expiry of one month EURINR futures, the spot may remain at 80. What currency futures trade strategy would be profitable to the trader if his views come correct?
On expiry the spot and future prices tend to merge ie. become same.
So the trader should sell the EURINR future which are at a premium (lets assume it at 83) to spot price (80).
On expiry, the future price will be around 80 and he will square up his position and make a profit (83 – 80 = 3 )
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4. What is the process of actual pay-in/pay-out of mark-to-market margin or profit/loss on cancellation or on maturity of futures contract called?
Clearing means computing open positions and obligations of clearing members in the trading system. Whereas, settlement means actual pay in or pay out to settle the contract.
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5. The ______ has issued guidance notes on the accounting of index futures contracts from the viewpoint of parties who enter into such futures contracts as buyers or sellers.
ICAI – The Institute of Chartered Accountants of India
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6. An Indian investor invested Rs 390,000 in US securities when the exchange rate was 65. Two years later, he observed a 25% gain in USD terms and liquidated his investments. Upon repatriating the money to India at the prevailing rate of Rs 62, what would be his real returns (returns in INR terms)?
The investor invested Rs 390000 in US Stock when the USDINR rate was 65
So he had invested 390000 / 65 = 6000 Dollars in US Stocks.
His investment grew by 25% : 6000 x 25% = 6000 + 1500 = 7500
He is repatriating at USDINR rate of 62 : 7500 x 62 = 465000
Therefore his investment in INR terms have grown from Rs 390000 to Rs 465000
465000 x 100 / 390000 = 119.23
This is an increase of 19.23 %
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7. Total open interest, used for monitoring open positions during the day, is best described as _______.
Positions during the day are monitored based on the total open interest at the end of the previous day’s trade.
Monitoring of position limits: Clearing corporation end of day provides Exchange wise position limit applicable to various clients and member for next day.
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8. A vegetable oil factory owner has entered into a fixed-price contract with McDonald’s for the sale of a certain quantity of vegetable oil for a year. This type of contract is known as a _______.
A forward contract is a customized contract between two parties, where settlement takes place on a specific date in the future at today’s pre-agreed price.
Futures is similar to forward except that it is an Exchange-trade product.
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9. Mr. Amit, an employee of a currency broking house, is well-versed in currency movements. He holds the view that INR should appreciate against EUR in the next 6 months. Consequently, he advised some of his clients to take a short position by selling EUR against INR and provided a guarantee against any losses. However, the manager takes action against Mr. Amit for violating certain trading guidelines. To avoid punishment, Mr. Amit should have _______.
Exchange regulations specify codes of conduct related to the currency derivatives segment. All trading members must comply with these. One of the code of conduct is :
– No Trading Member or person associated with the Trading Member shall guarantee a client against a loss in any transactions effected by the Trading Member for such client.
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10. Mr. Vaibhav believes that USDINR will appreciate, and accordingly, he enters into a derivative contract to execute his view. His view proves correct, but he observes that his profits are not increasing along with the USDINR appreciation. He would have entered into a ________ derivative contract.
Buying a Call option or Selling a Put option – both have similar view ie. appreciation of the underlying.
However in Selling a Put option, the gains are limited to the premium received.
So Mr. Vaibhav must have shorted a Put Option and received the premium. Now even if the USDINR appreciates by a huge extent, his profits will be restricted to the premium received.
If he had gone long on a call option, he would have paid a premium buy his gains would have been much more in co-relation to the rise in USDINR.
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11. What is true regarding the Governing Council of the currency futures segment of an exchange?
The currency futures segment of the Exchange should have a separate Governing Council on which the representation of Trading /Clearing Members of the currency futures segment should not exceed 25%. Further, 50% of the public representatives on the Governing Council of the currency futures segment can be common with the Governing Council of the cash/equity derivatives segments of the Exchange.
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12. A ‘DERIVATIVE PRODUCT’ can be best described as a ______ .
Derivative is a product whose value is derived from the value of one or more basic variables, called bases (underlying asset, index, or reference rate).
The underlying asset can be equity, foreign exchange, commodity or any other asset. It can be traded on an exchange or on OTC.
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13. If a person has a bearish view on USDINR, which would be the appropriate strategy for the objective of maximizing the profit?
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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14. Identify the appropriate strategy for a BULLISH view on USDINR and trade objective of zero cash outgo.
When you buy an option (either Call or Put), you have to pay a premium – so buying an option is not a zero cash outgo strategy.
When you sell a Put, you have a bullish view and you receive a premium
When you sell a Call, you have a bearish view and you receive a premium
So when there is a bullish view and zero cash outgo strategy, one should sell PUT option.
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15. As a trader, you believe USDJPY will move from 90 to 95 in the next one month. As you are based in India where there is no trading in USDJPY, you would execute this view using currency future contracts of JPYINR and USDINR.
• Going long on USDINR means you are betting on the appreciation of the USD against the INR.• Going short on JPYINR means you are betting on the depreciation of the JPY against the INR.
This combination allows you to capture the movement you expect in USDJPY without trading directly in that pair, given the absence of USDJPY trading in India. It effectively replicates the directional movement you anticipate in the USDJPY pair using INR-based currency futures.
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16. If more than one contract in a series are outstanding at the time of expiry/squaring off, the contract price of the contract so squared off should be determined using the _______ method for calculating profit/loss on squaring-up.
If more than one contract in a series are outstanding at the time of expiry/ squaring off, the contract price of the contract so squared off should be determined using First-in, First-out (FIFO) method for calculating profit/loss on squaring-up.
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17. Which of the following statements is TRUE regarding Exchange Traded derivatives?
In the context of exchange-traded derivatives, all market participants are safeguarded by the risk management policies implemented by the exchange. These policies are designed to ensure the integrity and stability of the market, protecting the interests of both contracting parties and other participants. The risk management framework typically includes margining systems, position limits, and other measures to mitigate risks and maintain market integrity.
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18. When you purchase an option, does it imply that you have the right to sell the underlying asset?
The right to buy the asset is called call option and the right to sell the asset is called put option.
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19. The minimum net worth required for a company to apply to become an authorized exchange of currency futures is Rs ______ crores.
The minimum net worth required for a company to apply for authorization to become an authorized exchange for currency futures is Rs 100 crores. This financial requirement is set to ensure that the company has the necessary financial strength and stability to operate as an authorized exchange for currency futures.
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20. A sub-broker has to execute a bipartite agreement between him and his client clearly specifying rights and obligations of each party – State True or False ?
A sub-broker should enter into a tripartite agreement with his client and with the main broker specifying the scope of rights and obligations of the broker, sub-broker and such client of the sub-broker.
(Bipartite is a two party agreement and a tripartite is a agreement between three parties)
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21. The premium for an ‘In The Money’ option will generally be higher than the premium for an ‘Out of The Money’ option for the same maturity. True or False
In the Money options are profitable options where as Out of the Money options are loss making.
So the premium on In the Money options will be higher the Out of the Money options.
In the money (ITM) option: An option is said to be in the money, if on exercising it, the option buyer gets a positive cash flow.
Out of the money (OTM) option: An option is said to be out of the money, if on exercising it, the option buyer gets a negative cash flow.
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22. A wheat flour manufacturer enters into a contract with a five-star hotel chain to sell a specified quantity of wheat flour at a fixed price for a year. However, after a few months, the price of wheat rises significantly above the contracted price, and the manufacturer refuses to sell to the five-star hotel chain. What type of risk is highlighted in this contract?
Counter Party Risk – The risk to each party of a contract that the counterparty will not live up to its contractual obligations.
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23. What is the breakeven point for a client who purchases a EUR Put option with a strike price of 60, paying a premium of INR 0.45?
Breakeven point for a buyer of Put option = Strike Price – Premium
= 60.00 – 0.45
= 59.55
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24. An Indian exporter aims to fully hedge the 10,000 GBP he anticipates receiving on the 70th day from today. Contracts on the exchange are available for 30, 60, and 90 maturity days. Seeking to avoid any risk, what course of action is he likely to pursue?
He will short (sell) 10,000 GBPINR for 70 days future on OTC market, for eg – with a Bank etc. as 70 days maturity is not available on exchange.
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25. As per SEBI regulations, the Exchange must provide a minimum number of ‘OUT OF THE MONEY’ currency option contracts for each maturity.
SEBI has instructed that for every available contract – 3 out of the money (OTM) strike, 3 in the money (ITM) strike and 1 at the money (ATM) strike contracts will be available on the exchange terminal.
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26. Mr X buys GBPINR futures at various price points over two days. He buys 20 lots at 80.00 at 11.30 am and 15 lots at 80.25 at 1.30 pm on Day 1. On Day 2 he buys 25 lots at 80.50 at 11 am and 10 lots at 80.40 at 2 pm. On day 3 he sell 50 lots at 80.60. Calculate his Profit / loss on the squared off position using FIFO method.
FIFO means First In First Out.
So lets see the buying cost of the first 50 lots
[20 x 80] + [15 x 80.25] + [15 x 80.50] = 4011.25
He has squared up 50 lots
The sale price of 50 lots is 80.60 = 4030
Total Profit = 4030 – 4011.25 X 1000 ( Lot size of GBPINR )
= 18750
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27. If a trader believes that INR should depreciate against the USD in the next few months, a profitable currency futures transaction for them, assuming everything else remains the same, would be to take a long position in USDINR futures. This means buying USDINR futures with the expectation that the value of USD will increase relative to INR, allowing the trader to benefit from the anticipated depreciation of INR.
When INR depreciates against USD, the currency pair USDINR prices go up. For example if USDINR is trading at 60, a fall in INR will lead to a rise in this price to 60.50 …61 etc. So one should buy USDINR.
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28. A trader aims to sell GBPINR one month futures contract with the current price at 81.50. He places a limit order to sell at 81.70. Assuming the price fluctuates between 81 and 82 after the limit order was entered, the order is likely to be executed at 81.70.
Limit price: An order to buy a specified quantity of a security at or below a specified price, or an order to sell it at or above a specified price (called the limit price). This ensures that a person will never pay more for the futures contract than whatever price is set as his/her limit.
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29. In the currency market, if ‘T’ is the date of the transaction, the term ‘T + 1’ is referred to as the settlement date.
T : Trade / Cash Date
T + 1 : Tom
T + 2 : Spot
For a currency pair for which spot date is at T+2 and if settlement happens on the trade date, the settlement price is called as “cash” rate and if happens one day after trade date, the price is called as “tom” rate.
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30. When a PUT option is shorted, once the breakeven point is crossed, the losses continue to grow as the price of the underlying asset decreases.
When you short a PUT option, your view is that the price of underlying will rise or remain steady.
For a seller of Put option, the maximum profit is the premium he has received, but his losses are unlimited if the price of the underlying falls.
Option Views :
Long Call – Bullish
Short Call – Bearish / Steady
Long Put – Bearish
Short Put – Bullish / Steady
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31. The style of currency options traded on exchanges can be both American and European – State True or False?
In India, all the currency options in OTC market / Exchanges are of European type.
European options can be exercised by the buyer of the option only on the expiration date.
American options can be exercised by the buyer of the option on or before the expiration date.
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32. The mark-to-market gains and losses are settled in cash before the start of trading on the _______ day.
The mark-to-market gains and losses are settled in cash before the start of trading on T+1 day. This process involves reconciling the current market value of open positions with the previous day’s settlement price, and the resulting gains or losses are settled in cash the next trading day (T+1).
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33. What is the tick size for USDINR futures contracts in India?
Tick size refers to the minimum price movement of a futures contract. In the case of USDINR futures in India, the tick size is commonly set at 0.0025 rupees. This means that the contract’s price can change in increments of 0.0025 rupees, providing a standardized and regulated measure for price movements in the market.
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34. A trader in currency markets buys a long position in EURINR futures contract at a price of 65.40 and he buys 40 lots of the same. On expiry the settlement price is announced at 65.60. How much profit (+) or loss (-) does he make?
The trader buys at 65.40 and the settlement price is 65.60. So he makes a profit of 0.20
He has bought 40 lots and each lot of EURINR is of 1000.
So his total profit is 0.20 X 40 X 1000 = 8000.
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35. Under the Foreign Exchange Management Act, a bank categorized as ‘AD Category 1’ can qualify as a Trading and Clearing Member in the currency futures segment of a recognized stock exchange if it maintains a maximum net Non-Performing Asset (NPA) of ______ %.
Authorised Dealer Category I Banks
AD Category I Banks are permitted to become trading and clearing members of the currency derivatives market of recognized stock exchanges, on their own account and on behalf of their clients, subject to fulfilling the following minimum prudential requirements:
i) Minimum net worth of Rs. 500 crores.
ii) Minimum CRAR of 10 per cent.
iii) Net NPA should not exceed 3 per cent.
iv) Net profit for last 3 years.
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36. A trader is long in EURINR Call option of strike price of 75. The current spot price of EURINR is 79. What is the moneyness of this option ?
A call option would be in the money, if underlying price is higher than the strike price.
Similarly a put option would be in the money if underlying price is lower than the strike price.
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37. Assume that on 1st May, USD-INR spot was at 45, premium for June maturity put option at strike of 45.5 is INR 0.54/0.55 and premium for June maturity call option at strike of 45 is INR 0.71/0.72. A client Mr. Shah executes a trade wherein he buys put at a strike of 45.5 and sells a call at a strike of 45. On expiry the RBI reference rate is 44.75. How much net profit/loss did Mr. Shah make per USD?
Mr. Shah has bought a PUT and Sold a CALL – In both the cases he has assumed that the USDINR will fall to make a profit.
On expiry the USDINR has fallen as indicated by the RBI reference rate – so he is definitely into profits.
In first case when he bought PUT for 0.55, he has paid a premium of 0.55. The strike price is 45.50 and RBI refernce rate is 44.75. So a profit of 0.75. Deducting the premium paid ( 0.75 – 0.55 ) the profit is 0.20
In the second case when he sold a CALL option, he has received a premium of 0.71. This will be his profit as USDINR has gone done.
So the total profit is 0.20 + 0.71 = 0.91
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38. As per SEBI rules, the currency exchanges have to offer ____ series monthly contracts and ____ quarterly maturity currency futures options contract.
Exchanges have to offer three serial monthly contracts followed by three quarterly contracts of the cycle March / June / September / December.
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39. A person sells a USD Put option at strike of 60.50 and receives a premium of INR 0.40. What would be the breakeven point for the transaction?
So 60.50 – 0.40 = 60.10
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40. What is the ISO Currency Symbol of SWISS FRANC ?
The symbol for Swiss Franc is CHF.
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41. The minimum net worth for a company to be eligible for applying to become an authorized exchange for currency futures is Rs __________.
A recognized stock exchange having nationwide terminals or a new exchange recognized by SEBI may set up currency futures segment after obtaining SEBI’s approval.
The exchange shall have a balance sheet networth of at least Rs. 100 crores
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42. The intrinsic value of ‘In the money’ option and ‘At the money’ option is always greater then or equal to One – State whether True or False?
The intrinsic value of an option is the difference between spot price and the strike price.
For an ‘At The Money’ option, the intrinsic value is zero and for an ‘In the Money’ option, the intrinsic value is always greater than zero.
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43. Broker Mr. A charges a brokerage of Rs 20 per lot of USDINR futures on only one leg of the transaction if its squared off the same day. Broker Mr B charges Rs 15 per lot of USDINR futures on both the legs even if its squared up on the same day. A client buys 15 lots of USDINR futures and sells of 10 lots the same day and the balance 5 lots after 4 days. What will be the brokerage charged by broker Mr A and Mr B respectively ?
On day 1 – The client buys 15 lots and sells 10 lots the same day.
So brokerage charged by broker A (who charges only on one leg) will be 15 lots X Rs 20 = Rs 300. No brokerage on sell transaction.
Brokerage charged by broker B ( who charges on both legs ) will be 15 lots x Rs 15 + 10 lots X Rs 15 = Rs 375
After 4 days – The Client sells 5 lots
So brokerage charged by broker A will be 5 lots X Rs 20 = Rs 100
Brokerage charged by broker B will be 5 lots X Rs 15 = Rs 75
Total Brokerge : Broker A 300 + 100 = Rs 400
Broker B 375 + 75 = Rs 450
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44. Which of the following is true with respect to settlement date for exchange traded currency futures ?
The Settlement date is the last working day of the month (subject to holiday) at 12 noon.
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45. The initial deposit which is required for initiating a currency future position is known as ___________.
The initial security deposit paid by a member is considered as his initial margin for the purpose of allowable exposure limits.
Initially, every member is allowed to take exposures up to the level permissible on the basis of the initial deposit.
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46. Which of the following best describes the guidelines for brokers with respect to issuing of contract notes for execution of orders?
A Broker has to issue contract notes every trading day to his clients as well as clients of his sub brokers.
As per the SEBI’s Code of Conduct for Brokers – A stock-broker shall issue without delay to his client a contract note for all transactions in the format specified by the stock exchange.
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47. In OTC currency derivative market in India, is it possible for a corporate to write an option and receive a net premium?
An option is said to be at the money if spot price is equal to the strike price.
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48. Which of the following correctly describes the closing price of USDINR futures contract ?
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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49. The system of accounting which is used to calculate prices of currency futures contract when multiple contracts of a series are combined / squared up is __________.
FIFO – First In First Out.
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50. A trader does the following currency futures trade – sells EURINR and Buy JPYINR for an equivalent amount. What view has he executed ?
Selling EURINR – view is weakening of EUR against INR
Buying JPYINR – view is strengthening of JPY against INR
Taking a collective view – EUR weakening against JPY
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