NISM Series VIII: Equity Derivatives 'Final Test' /100 NISM Series VIII – Equity Derivatives ‘Final Test’ 1 / 100 1. The relationship between the spot price and the future price is known as ________. a) Risk premium b) Cost of Carry c) Dividend d) Payout difference Explanation:Cost of Carry is the relationship between futures prices and spot prices. For equity derivatives, carrying cost is the interest paid to finance the purchase less (minus) dividend earned. 2 / 100 2. Longer the time to maturity of a PUT option, higher will be its ____________. a) Technical and Fundamental value b) Intrinsic value c) Time value d) Arbitrage value 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. 3 / 100 3. If everything else remains constant and Stock P is more volatile than Stock Q, the call option on ______ will be priced higher, given that the prices of both stocks are the same at Rs. 500. a) Stock P b) Stock Q c) Both calls will be equally priced d) Inadequate information Explanation:More the volatility in a stock, higher will be its price of its call and put option as compared to less volatile stocks of the same price.Vega is the measure of the sensitivity of an option price to changes in market volatility. It is the change of an option premium for a given change in the underlying volatility. 4 / 100 4. Identify the accurate statement regarding a short position in a PUT option. a) Short position in a put option can be closed out by executing a short position in a call option with the same exercise date and exercise price b) Short position in a put option can be closed out by executing a long position in a put option with the same exercise date and exercise price c) Short position in a put option can be closed out by executing a long position in a put option with any exercise date and exercise price d) Short position in a put option can be closed out by executing a long position in a call option with the same exercise date and exercise price Explanation:A short position in a Put Option can be closed out (squared up) only by buying the same Put Option of the same exercise date and exercise (strike) price. 5 / 100 5. Which of the following is not encompassed in the Indian equity derivatives market? a) Individual stock options b) Options on equity market indices c) Individual stock futures d) Interest rate futures Explanation:Although NSE and BSE allows trading in interest rate futures but it is not a part of equity derivatives. 6 / 100 6. If a holiday falls on the last Thursday, what will be the last trading day for a futures series? a) The previous working day b) Two days after c) The next working day d) The first day of the next month Explanation:Expiration Day: This is the day on which a derivative contract ceases to exist. It is the last trading day of the contract. Generally, it is the last Thursday of the expiry. If the last Thursday is a trading holiday, the contracts expire on the previous trading day. 7 / 100 7. What tax is applicable to transactions conducted on a recognized Indian stock exchange? a) Derivatives Transaction Tax b) Stock Subversion Tax c) Securities Transaction Tax d) Securities Trading Tax Explanation:Securities Transaction Tax (STT) is levied on every purchase and sale of securities that are listed on the Indian stock exchanges. STT is levied on transactions involving equity, derivatives and equity oriented mutual funds. 8 / 100 8. Option premium is the price paid by the _______. a) Option buyer and option seller to a third party b) Option buyer to option seller c) Option seller to option buyer d) Option buyer and option seller to the exchange Explanation:Option Premium is the price which the option buyer pays to the option seller. 9 / 100 9. A ‘Closing buy transaction’ is a buy transaction that will have the effect of offsetting a ______. a) Short position b) Long position c) High position d) Cross position Explanation:Creating a Short Position means selling the asset on an exchange with a view to buy it back when the price falls.So a Closing Buy transaction will be used to buy back / offset the short position created. 10 / 100 10. Which of these is an order with a time stipulation? a) Limit Order b) Market Order c) Good Till Cancelled Order d) Stop Loss order Explanation:Good Till Cancel (GTC) is a type of order that enables client to place buying and selling orders with specifying time interval for which instruction of request remains valid. The maximum validity of a GTC order is 365 days. 11 / 100 11. Mr. Subu, who has a long position in a stock, can cover his position by selling ____. a) Any index stock of equal quantity b) The same stock and same quantity c) Any 'A' group stock of equal quantity d) Any security of equal quantity Explanation:To square up / cover a long position, the same quantity of the same stock has to be sold. 12 / 100 12. For extraordinary dividends exceeding 5% of the market value of the underlying security, the amount of dividend is _____ the strike price of options on the stock. a) Added to b) Divided by c) Multiplied to d) Subtracted from Explanation:In case of declaration of “extra-ordinary” dividend by any company, the total dividend amount (special and / or ordinary) would be reduced from all the strike prices of the option contracts on that stock. The revised strike prices would be applicable from the ex-dividend date specified by the exchange. 13 / 100 13. Initial Margin can be paid by ________ . a) Bank guarantee b) Acceptable securities c) Bank transfer of funds d) All of the above Explanation:The amount one needs to deposit in the margin account at the time of entering into a futures contract is known as the initial margin.This can be paid by Cash, Bank Guarantee, Fixed Deposit Receipts and approved securities etc. 14 / 100 14. Which of the following is true for an ‘In-the-money’ option? a) 'In-the-money' option cannot be profitably exercised by the holder immediately b) 'In-the-money' has a negative intrinsic value c) 'In-the-money' option has zero time value d) 'In-the-money' has a positive intrinsic value Explanation:In-the-money (ITM) option: This option would give the option holder a positive cash flow, if it were exercised immediately.The intrinsic value of an option refers to the amount by which the option is in-themoney i.e., the amount an option buyer will realize, before adjusting for premium paid, if he exercises the option instantly. Therefore, 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. 15 / 100 15. A CALL OPTION will provide the buyer with _______. a) Obligation to buy the underlying asset b) Obligation to sell the underlying asset c) Right to buy the underlying asset d) Right to sell the underlying asset Explanation:A call option gives the buyer the right but not the obligation to buy from the seller an underlying asset at the prevailing market price on or before the expiry date. 16 / 100 16. True or False: In the derivatives exchange, the net worth requirement for a clearing member is less than that of a non-clearing member. a) False b) True Explanation:In a derivative exchange, the networth requirement for a clearing member is higher than that of a non-clearing member. 17 / 100 17. The New York stock exchange has two important indices – Dow Jones (DJIA) and Standard and Poor 500 (S&P 500). The DJIA is a _______ index where as the S&P 500 is a ______ index. a) Broad , Narrow b) Fully Diversified, Fully Concentrated c) Narrow , Broad d) Very Liquid , Very Illiquid Explanation:The Dow Jones Industrial Average (DJIA) a stock market index of 30 prominent companies listed on stock exchanges in the United States.The Standard and Poor’s 500, or simply the S&P 500, is a stock market index tracking the stock performance of 500 large companies listed on stock exchanges in the United States.Therefore, Dow Jones can be considered as narrow index as it covers only 30 companies where as S&P is a broad index as it covers 500 companies. 18 / 100 18. Identify the accurate statement for an ‘In-the-money’ Call Option. a) Exercise price would be equal to the market price b) Strike price will be zero c) Strike price will be lower than the market price d) Strike price will be higher than the market price Explanation:In-the-money (ITM) option: This option would give the option holder a positive cash flow, if it were exercised immediately.A call option is said to be ITM, when market price is higher than strike price.(A put option is said to be ITM when market price is lower than strike price) 19 / 100 19. A clearing member must deposit liquid assets with the Clearing Corporation, but these liquid assets cannot entirely consist of _________. a) T Bills (Treasury Bills) b) Equity Shares c) Fixed Deposits d) Cash Explanation:Clearing member is required to provide liquid assets which adequately cover various margins and liquid Net-worth requirements. The total liquid assets comprise of at least 50% of the cash component and the rest is non-cash component – This means 50% to 100% can be the cash component. Non-cash component cannot be more than 50%.All collateral deposits are segregated into cash component and non-cash component. Cash component means cash, bank guarantee, fixed deposit receipts, T-bills and dated government securities. Non-cash component means all other forms of collateral deposits like deposit of approved demat equity securities. 20 / 100 20. What is the gain/loss for a trader who sold an ABC futures contract (contract multiplier 50) at 2500 and bought it back at 2700? a) A loss of Rs. 15,000 b) A gain of Rs. 15,000 c) A loss of Rs. 10,000 d) A gain of Rs. 10,000 Explanation:You had sold ABC futures believing that its price will fall down, but it has risen – so there will be a loss.2500 – 2700 = -200 Loss-200 x 50 shares = – Rs 10000 21 / 100 21. Identify the CORRECT statement? a) Margins in derivatives trading depend on volatility and price movement of the underlying b) There are no margins on derivatives trading for Institutional investors c) The margins paid by institutional investors are higher than retail investors d) The margins paid by retail investors are higher than institutional investors Explanation:Margins payable for a derivative instrument depends on the level of volatility in prices of that instrument. As high volatility assets carry more risk, the exchange would charge higher initial margin on them.(Both Institutional investors and Retail investors pay the same margin) 22 / 100 22. If the futures price is decreasing while open interest is rising, it suggests a ___________. a) No trade trend b) Bearish trend c) Bullish trend d) None of the above Explanation:If the futures price is declining but open interest is increasing, it indicates a build-up of short positions and a bearish trend. Traders usually tend to go short on the futures in such a scenario. 23 / 100 23. Intraday trading can be done in the case of _______ . a) All index mutual fund units b) All ETF units c) All active mutual fund units d) All of the above Explanation:Exchange Traded Funds (ETFs) is basket of securities that trade like individual stock, on an exchange. They have number of advantages over other mutual funds units as they can be bought and sold on the exchange. Since, ETFs are traded on exchanges, intraday transaction is possible. 24 / 100 24. Everest Ltd. has engaged in an agreement with Bank of Baroda, wherein Everest Ltd will receive interest at a rate of 7.5% per annum and will, in turn, pay interest to Bank of Baroda based on MIBOR, calculated on a principal amount of Rs. 25 crore for the next 3 years starting from today. This type of contract is commonly referred to as ________. a) Forward contract b) Futures contract c) Option contract d) Swap Explanation:A Swap is an agreement made between two parties to exchange cash flows in the future according to a prearranged formula. Swaps are, broadly speaking, series of forward contracts. Swaps help market participants manage risk associated with volatile interest rates, currency exchange rates and commodity prices. 25 / 100 25. As the strike price of a put option is reduced, its intrinsic value ________. a) Does not change b) Goes down c) Goes up d) None of the above Explanation:The intrinsic value of an option refers to the amount by which the option is In-the-money i.e., the amount an option buyer will realize, before adjusting for premium paid, if he exercises the option instantly.For a put option which is In-the-money, the intrinsic value is the excess of Strike price (X) over the spot price (S). Thus, the intrinsic value of put option can be calculated as X-S, with a minimum value possible as zero.For eg – If strike price is 100 and spot price is 90, the intrinsic value is 10If the strike price is reduced to 95, the intrinsic value will be 5. 26 / 100 26. SCORES is: __________ a) Exchange’s Margin Reporting System b) Collateral Reporting System of Clearing Corporation c) Customer Due Diligence and e-KYC system d) SEBI’s web-based complaints redressal system Explanation:SEBI’s web based complaints redressal system is called SCORES (Sebi COmplaints REdress System).SCORES is a centralized grievance management system with tracking mechanism to know the latest updates and time taken for resolution. 27 / 100 27. Everest Mutual Fund accumulated Rs. 500 crores from investors through a new fund offer. The fund manager intends to invest this sum in acquiring 25 high-growth stocks over the next month. To mitigate the risk associated with this planned stock purchase, he can hedge it by implementing ________. a) A long hedge using put options on each of the 25 stocks b) A short hedge using future contracts on each of the 25 stocks c) A long hedge using index futures d) A short hedge using index futures Explanation:A long hedge can be created for all the 25 stocks using put options as follows : The fund manager sells the put options of the 25 stocks as per required quantity. He has now locked his prices. If the price falls, he can buy them in the spot market (at lower prices) and square up his put options at a loss.If the prices rise, he squares up is options at a profit and buys in the spot market at a higher price.Therefore, in both the situations, his purchase price is not affected. 28 / 100 28. In periods of elevated stock market volatility, the Bid-Ask spreads typically _______. a) Narrow b) Widen c) Will become zero d) There will no change in the bid-ask spreads Explanation:Gap between the bid and ask prices is known as the bid-ask spread.Volatility measures the severity of price changes for a security. When volatility is high, price changes are drastic. Bid-ask spreads usually widen in highly volatile environments, as investors and market makers attempt to take advantage of agitated market conditions. 29 / 100 29. True or False: Assuming all other characteristics are equal, the value of an American Call Option will not be lower than that of a European option. a) The above statement is TRUE b) The above statement is FALSE c) Value depends on market conditions and this cannot be ascertained d) Inadequate information Explanation:American option: In case of an American option, the owner (buyer/holder) of such option can exercise his right at any time on or before the expiry date/day of the contractEuropean option: In case of a European option, the owner (buyer/holder) of such option can exercise his right only on the expiry date/day of the contractAmerican options are generally valued higher than European options as American options allow option holders to exercise the option at any time prior its maturity date, thus increasing the value of the option to the holder relative to European options, which can only be exercised at maturity.In India, all index and stock options are European style options. 30 / 100 30. True or False: Equity shares provided by clearing members to the clearing corporation as part of liquid assets are generally NOT subject to regular mark-to-market assessments. a) False b) True Explanation:The equity shares which are kept with clearing corporation as a part of liquid assets are marked to market at regular intervals to check if their value has fallen down. If there is a fall, additional liquid assets will have to be kept.( For eg, In NSE, the securities are valued based on the closing price of the security at NSE. The value of the securities is reduced by such haircut as may be prescribed by the Clearing Corporation from time to time to arrive at the collateral value of the security. The hair cut applicable shall be as specified in the monthly circular for approved list of securities. Only the value net of applicable haircuts shall be considered as the value of the securities pledged. Valuation of securities are done by approved custodians at periodic intervals as specified by the Clearing Corporation from time to time.) 31 / 100 31. In the Indian derivatives exchange, the matching of bids and offers occurs _______. a) At the end of each minute b) At the end of each hour c) At the day's end d) Online and immediately Explanation:In India, derivatives platforms offer an order driven market, wherein orders match automatically online on price time priority basis.Orders, as and when they are received, are first time stamped and then immediately processed for potential match. If a match is not found, then the orders are stored in different ‘books’. 32 / 100 32. The right to sell an asset at a predetermined price on or before a specified date is granted by _______. a) European Put option b) European Call option c) American Put option d) American Call option Explanation:A Put Option gives the holder the right to sell the underlying asset on or before a particular date for a certain price.American option: The owner of such option can exercise his right at any time on or before the expiry date/day of the contract.(European option: The owner of such option can exercise his right only on the expiry date/day of the contract. In India, all Index and stock options are European) 33 / 100 33. Identify the CORRECT statement from the given options – a) A trading member on a registered derivatives exchange need not be registered with SEBI b) A member, who is registered as self-clearing member on derivatives exchange can also clear trades of other trading members c) A professional clearing member has the permission to trade on his own account as well as clear trades for others d) A member. who is registered as trading member on derivatives exchange will not have clearing rights Explanation:A trading member can trade either on behalf of their clients or on their own account. They do not have clearing rights.A Trading cum Clearing Member can clear and settle their own proprietary trades, their clients’ trades as well as trades of other Trading Members and Custodial Participants. 34 / 100 34. According to the Income Tax Act, losses from derivatives transactions can be offset against which type of income in the same fiscal year? a) Income from House property b) Income from any other business c) Income from Capital Gains d) Income from Salary Explanation:Finance Act, 2005 implies that income or loss on derivative transactions which are carried out in a “recognized stock exchange” is not taxed as speculative income or loss. Thus, loss on derivative transactions can be set off against any other income during the year (except salary income). 35 / 100 35. The strategy in which Mr. Jones purchases a put option with a higher strike price and simultaneously sells another put option with a lower strike price, both on the same underlying share and with the same expiration date, is commonly referred to as ______. a) Calendar spread b) Butterfly spread c) Bullish spread d) Bearish spread Explanation:Bearish Vertical Spread using Puts : A trader is bearish on the market and so goes long in one put option with higher strike price by paying a premium. Further, to reduce his cost, he shorts another low strike put and receives a premium.This is done on the same underlying with same expiry date. 36 / 100 36. A member has two clients, M and N. Client M has purchased 300 contracts, and Client N has sold 250 contracts in the October ABC futures series. Determine the open position or outstanding liability of the member towards the Clearing Corporation in terms of the number of contracts. a) 50 b) 550 c) 300 d) Nil Explanation:While calculating the outstanding liability of a member, the total of all clients open position is taken into account. The positions cannot be netted against two clients.So in the above case the total open position is 300 + 250 = 550 contracts. 37 / 100 37. In the client’s financial statements, the balance in the Initial Margin account as of the Balance Sheet date should be categorized under the heading ________. a) Current Assets b) Investments c) Reserves and surplus d) Current Liabilities Explanation:The buyer and seller of futures contract and the seller/ writer of the options is required to pay initial margin for entering into the such contract. It should be debited to an appropriate account. In the balance sheet, such account should be shown separately under the head “Current Assets”. 38 / 100 38. Calculate the Intrinsic Value for the following Call option :Current price of the stock – Rs. 340.Call option of strike price Rs. 300 is quoted at Rs. 56 a) Rs. 40 b) Rs. 16 c) Rs. 56 d) NIL Explanation:When the Strike Price is below the Spot Price, the Call Option is ‘In the Money’ ie. profitable.Intrinsic Value for a such a Call Option = Spot Price – Strike Price= 340 – 300= 40 39 / 100 39. Determining whether a futures transaction is for hedging or speculation primarily revolves around ________. a) Whether the transaction has resulted in a profit or a loss b) Whether there already exists a related commercial position which is has a risk of loss due to price movement c) Basic intention of the person entering into the transaction d) Whether the futures position is held till expiry date 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. 40 / 100 40. The determination of the daily settlement price for equity derivatives contracts is made by ________. a) RBI b) SEBI c) ICAI d) The Clearing Corporation / The Exchange Explanation:The exchange follows a daily settlement procedure for open positions in equity index and stock futures contracts.All open positions are settled daily based on the daily settlement price of the futures contracts, which is calculated by the exchange on the basis of the last half-an-hour weighted average price of that futures contract. 41 / 100 41. If a debit balance exists in the _________, it signifies an expected loss on a futures contract. a) Exposure Margin account b) Initial Margin account c) Additional Margin account d) Mark-to-market Margin account Explanation:Accounting for open interests as on the balance sheet date : Keeping in view “prudence” principle, provisions should be created by a debit to the profit and loss account for anticipated loss equivalent to the debit balance in the “Mark-to-Market Margin Account”. 42 / 100 42. Which of the following strategies exhibits a payoff profile identical to that of a Covered Call strategy? a) Short Put strategy b) Long Put strategy c) Bearish Call spread d) Bullish Put spread Explanation:Covered call : This strategy is used to generate extra income from existing holdings in the cash market. If an investor has bought a stock and intends to hold it for some time, then he would like to earn some income on the stockholding, without selling the stock.The covered call restricts the ‘upside’ or gains from the position while leaving a scope for unlimited losses. Hence, the covered call is called a ‘synthetic short put’ position. 43 / 100 43. Value-at-risk measures the ________ . a) Credit rating of the investor b) Risk level of a financial portfolio c) Networth of the investor d) Value of proprietary portfolio Explanation:Value-at-risk measures the expected maximum loss, which may be incurred by a portfolio over a given period of time and specified confidence level. 44 / 100 44. Arbitrageurs are regarded as a crucial link connecting ______. a) Cash market and derivatives market on the same exchange b) Derivative markets in different locations c) Cash markets in different locations/exchanges d) All of the above Explanation:An arbitrage is a deal that produces risk-free profits by exploiting a mispricing in the market. A simple arbitrage occurs when a trader purchases an asset cheaply in one location/ exchange and simultaneously arranges to sell it at another location/ exchange at a higher price.Therefore, arbitrage can be between cash and derivatives market on the same exchange or cash markets in different exchanges or derivatives market in different exchanges/locations etc. 45 / 100 45. True or False: The MTM (Mark-to-Market) margin is always equivalent to the Initial margin. a) True b) False Explanation:The initial margin is collected only once, when the trader enters into a derivatives contract. The initial margin is based on the Value-at-Risk (VaR) method etc.The Mark-to-market margin is calculated and collected/paid on a daily basis depending on the price movement of the security. 46 / 100 46. What is the specified size for contracts on individual stock futures/options? a) It differs from stock to stock b) It is 100 for all stocks c) It is 1000 for all stocks d) It is 5000 for all stocks Explanation:Futures / Option contracts are traded in lots. The lot size or contract size for the index and stock futures is determined by the exchange. Contract sizes are different for each stock and index traded in the derivatives segment.The contract size can be changed by the exchange from time to time, depending upon the changes in the index level and stock prices. 47 / 100 47. Rho is linked to the ________ . a) Underlying asset price b) Time to option expiry c) Interest rates in the market d) Volatility of the stock / asset Explanation:Rho is the change in option price given a one percentage point change in the risk-free interest rate.Rho measures the change in an option’s price per unit increase in the cost of funding the underlying.Rho = Change in an option premium / Change in cost of funding the underlying. 48 / 100 48. True or False: An investor anticipating a broad stock market fall can offset potential losses by shorting a certain number of Index futures, without selling their entire portfolio of stocks. a) True b) False Explanation:Index derivatives are useful as a tool to hedge against the market risk. An investor with a diversified equity portfolio, who wants to protect his portfolio from any temporary correction in the stock market can sell index futures for this purpose. 49 / 100 49. If the ABC share price rises by Rs 5 and its option has a delta of 0.5, how much will the option price increase? a) Rs. 10 b) Rs. 1 c) Rs. 5 d) Rs. 2.50 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 5 and the delta is 0.5,So Option Price will move by Rs 5 x 0.5 = Rs 2.50 50 / 100 50. The purchaser of an option is someone who possesses the ______ but not the _______ to buy/sell the underlying asset in the contract. a) Duty , Claim b) Right , Obligation c) Claim , Duty d) Obligation , Right Explanation:Buyer of an option: The buyer of an option is one who has a right but not the obligation in the contract.For owning this right, he pays a price called ‘option premium’ to the seller of this right. He will have a right to buy the underlying asset in case of a call option and will have a right to sell the underlying asset in case of a put option. 51 / 100 51. According to the corporate hierarchy for users outlined in the trading system for stock exchanges, the exposure limits for the branches of the broking firm can only be defined by the ________. a) Branch Manager b) Dealer c) Corporate Manager d) Firm Manager Explanation:In the Futures and options trading software, trading member will have a provision of defining the hierarchy amongst users of the system. This hierarchy comprises: Corporate Manager, Branch Manager and DealerCorporate Manager : As a user, it is the highest level in a trading firm. Corporate Manager can perform all the functions such as order and trade related activities, receiving reports for all branches of the trading member firm and also all dealers of the firm. Along with this he can also define exposure limits for the branches of the firm. This facility is available only to the corporate manager. 52 / 100 52. At a price level of Rs. 6300, what would be the worth of a single lot of ABC futures contract (with a contract multiplier of 50)? a) Rs. 4,25,000 b) Rs. 6,30,000 c) Rs. 5,00,000 d) Rs. 3,15,000 Explanation:The value of the futures contract is the Price X Lot size= Rs 6300 X 50 = Rs 315000 53 / 100 53. For a one-month CALL option on PQR stock with a strike price of Rs. 700 being Out-of-the-money, identify a potential spot price for PQR stock among these options. a) Rs. 650 b) Rs. 750 c) Rs. 700 d) Inadequate information Explanation:Out-of-the-money option is one with strike price worse than the spot price for the holder of option. In other words, this option would give the holder a negative cash flow if it were exercised immediately. A call option is said to be OTM, when spot price is lower than strike price.In the above question, the strike price is 700, therefore, when the spot price of 650, it will be Out-of-the-money call option. 54 / 100 54. Identify the statement that is NOT TRUE regarding Impact Cost. a) Impact cost varies as per the transaction size b) Impact cost is the same for the seller and the buyer of the stock c) Impact cost is also to be considered while selecting stocks to be included in the index d) Impact cost of a stock is a measure of its liquidity Explanation:Impact cost represents the cost of executing a transaction in a given stock, for a specific predefined order size, at any given point of time. It is the cost that a buyer or seller of stocks incurs while executing a transaction due to the prevailing liquidity condition on the counter.Impact cost can be different for buyers and sellers. For eg. – If there less sellers of a particular security in the market, then the impact cost will be higher for the buyers and vice versa. 55 / 100 55. ________ is an example of a derivative on energy resources. a) Copper futures b) Natural gas futures c) Silver futures d) Rubber futures Explanation:Derivatives are also based on energy resources such as Oil (crude oil, products, cracks), Coal, Electricity, Natural Gas, etc. 56 / 100 56. What Exchange function is primarily dedicated to ensuring stability in the derivatives market? a) Listing b) Investor grievance handling c) Arbitration d) Risk Management Explanation:Derivatives market enables the shift of speculative trades from unorganized market to organized market. Risk management mechanism and surveillance of activities of various participants in organized space provide stability to the financial system. 57 / 100 57. What are the two most crucial factors to be taken into account when constructing an index? a) Diversification and liquidity b) Risk and return c) Impact cost and tracking error d) Liquidity and market capitalisation Explanation:A good index is a trade-off between diversification and liquidity. A well-diversified index reflects the behaviour of the overall market/economy. 58 / 100 58. Mr. Surya has taken a long position in April Futures on ABC stock at 1200. He will incur a loss if the futures price moves to ________. a) 1175 b) 1225 c) 1375 d) 1250 Explanation:A long futures position will be loss making if the price falls below the purchase price. In the above question, the purchase price is Rs 1200. Therefore, when the futures price moves to Rs 1175, there will be losses. 59 / 100 59. A trading member is required to issue which of the following documents to all its clients? a) Risk Identification Document b) Risk Control Document c) Risk Disclosure Document d) Risk Monitoring Document Explanation:Brokers are required to make their clients understand the risks involved in trading derivatives and get a copy of the Risk Disclosure Document signed by their clients at the time of client on-boarding.The Risk Disclosure Document highlights the risk involved in trading on stock exchanges, and the rights and obligations of the broker and their clients. 60 / 100 60. Which of these derivative contracts typically cannot be closed or reversed until their expiration? a) Exchange traded options b) Forward contracts c) Future contracts d) Exchange traded options on futures Explanation:Forwards are bilateral over-the-counter (OTC) transactions where the terms of the contract, such as price, quantity, quality, time and place are negotiated between two parties to the contract.The tailor made contracts and their non-availability on exchanges creates illiquidity in the contracts. Therefore, it is very difficult for parties to exit from the forward contract before the contract’s maturity. 61 / 100 61. A buyer of Out-Of-the-Money (OTM) Call option is _______ . a) Bullish and receives the premium b) Bearish and pays the premium c) Bullish and pays the premium d) Bearish and receives the premium Explanation:A buyer of a Call Option, whether ITM, ATM or OTM, is bullish and payer of premium. 62 / 100 62. To support his view that Nifty will rebound from 17500 to 17700 levels in the next week, which option-based strategy should Mr. Manoj consider using? a) He should take a long position in 17500 put and short position in 17100 put b) He should take a long position in 17500 call and short position in 17700 call c) He should take a short position in 17500 call and long position in 17700 call d) He should take a short position in 17500 call and short position in 17100 call Explanation:As Mr. Manoj is bullish on the index, he will take a long position in Call option. Also, as he feels that the index will not rise above 17700, he will take a short position for it by selling the 17700 Call option.(Buying a Call is bullish and selling a Call is a bearish/flat view) 63 / 100 63. A ______ is an entity that is not a Trading Member but handles the clearing and settlement of trades for both Trading Members and institutional clients. a) Custodial participant b) Professional clearing member c) Self clearing member d) Trading cum clearing member Explanation:Professional Clearing Member: Professional clearing member clears the trades of his associate Trading Member and institutional clients. PCM is not a Trading Member of the exchange. Typically banks or custodians become a PCM and clear and settle for Trading Members as well as for Custodial Participants. 64 / 100 64. Identify which of these is NOT an example of hedge. a) An exporter is expecting to receive dollars after 1 month, takes a short position in one-month USDINR futures to lock in his dollar price b) Mr. Patil, a stock trader is bullish on the market and therefore buys an out-of -the-money index call and sells an out-of-the-money index put option c) A fund manager is expecting market volatility after RBI policy, buys index put options to limit the loss on his portfolio d) A trader with a short index futures position buys an out-of-the-money call on the index so as to limit his loss Explanation:A hedge is basically created to safeguard an existing position. It is to minimise the losses or lock a profit.In ‘A stock trader is bullish on the market and buys an out-of -the-money index call and sells an out-of-the-money index put option’ – the trader has a view on the market and makes a trading strategy accordingly. This is not hedging. 65 / 100 65. Speculators are individuals who aim to ______ risks, whereas hedgers are those who wish to ______ risks. a) Take, Reduce b) Reduce, Decrease c) Decrease, Increase d) Increase, Take Explanation:Derivatives market helps in transfer of various risks from those who are exposed to risk but have low risk appetite to participants with high risk appetite.For example, hedgers want to give away the risk where as traders/speculators are willing to take risk. 66 / 100 66. What is the ‘ASK PRICE’? a) It is the price at which market maker is prepared to buy b) It is the price at which market maker is prepared to lend c) It is the price at which market maker is prepared to buy or sell as per market conditions d) It is the price at which market maker is prepared to sell Explanation:Bid price is the price the buyer is willing to pay and Ask price is the price at which the seller is willing to sell.For eg. If the Bid-Ask price for a security is 100 – 101, this means 101 is the ask price and this is the price at which the seller is willing to sell.The term market maker refers to a firm or individual who actively quotes two-sided markets in a particular security, providing bids and offers (known as Asks). 67 / 100 67. State whether the following statement is True or False: In a futures contract, the terms of the contract are determined by mutual agreement between the parties. a) True b) False Explanation:In futures market, the exchange (not the parties) decides all the terms of the contract other than price.(Forwards are bilateral over-the-counter (OTC) transactions where the terms of the contract, such as price, quantity, quality, time and place are negotiated between two parties to the contract) 68 / 100 68. In an ‘Immediate-Or-Cancel’ order, the unmatched portion of the order is ________. a) Is executed the next trading day b) Executed after the normal trading hours c) Is cancelled immediately d) Is added to the order book as a limit order Explanation:Immediate or cancel (IOC) order: User is allowed to buy/sell a contract as soon as this 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. 69 / 100 69. What is the approximate forward price of a share given a cash price of Rs. 750, a forward contract maturity of 6 months, and a market interest rate of 12%? a) 840 b) 940.8 c) 795 d) 772.5 Explanation:Forward/futures price of share can be calulated by adding the interest cost to its current price.6 months maturity means half year of interest cost.12% of 750 = Rs. 90 is the full year interest costHalf year interest cost = 90/2 = 45750 + 45 = 795 is closest to six month forward price 70 / 100 70. The IPF (Investor Protection Fund) for the derivatives segment is ________ . a) There is no IPF in derivatives segment b) 100% Contributed by Ministry of Finance c) Same as that of cash segment d) Independent of that of cash segment Explanation:Clearing corporations are required to have in place a Core Settlement Guarantee Fund (Core SGF). The primary objective of the Core SGF is to have a fund for each segment (for e.g., Cash, F&O, CD, etc.) to guarantee the settlement of trades executed in the respective segment of the stock exchange.The Investor Protection Fund Trust, based on the recommendations of the Member and Core Settlement Guarantee Fund Committee, compensates the investors to the extent of funds found insufficient in Defaulters’ account to meet the admitted value of claim. 71 / 100 71. Mr. Sriniwas assumes a short position in a call option without establishing any offsetting position in the underlying stock. This strategy is commonly referred to as ________. a) Writing a naked call b) Writing a covered call c) Protective put strategy d) Butterfly strategy Explanation:Naked position in options market simply means a long or short position in any option contract without having any position in the underlying asset.When one sells (short) a call it is also known as ‘writing’ a call.So the above strategy is – Writing a naked call option. 72 / 100 72. With regards to futures market, BASIS is the _______ . a) Difference in price between spot and future prices b) Volatility in the stock c) Price of the underlying stock d) Risk free rate of interest 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. 73 / 100 73. If the futures price of a stock is ______ and the open interest of the futures contract for that stock is ______, it indicates a bullish trend. a) Rising , Falling b) Rising , Rising c) Falling , Rising d) Falling , Falling Explanation:Traders can decide whether to buy or sell futures based on changes in the open interest and the futures price.For eg – If the futures price is rising and open interest of the futures contract is also increasing, it signals a bullish trend. Traders usually prefer to go long the futures in such situations. 74 / 100 74. State whether the following statement is True or False: Each forward contract can have a distinct delivery location, a unique maturity date, and a different contract size. a) False b) True Explanation:Forward contract is a contractual agreement between two parties to buy/sell an underlying asset at a certain future date for a particular price that is pre-decided on the date of contract.Since forwards are negotiated between two parties, the terms and conditions of contracts are customized. Each contract can have a different delivery location, maturity date and contract size. 75 / 100 75. State whether the following statement is True or False: The Clearing Corporation of an Exchange has the authority to prohibit a defaulting clearing member from further trading. a) True b) False Explanation:The Clearing Corporation has powers to levy additional margins, special margins, define maximum exposure limits and disable brokers from trading. 76 / 100 76. Mr. Ashish acquired 25 PUT options for stock X at a premium of Rs 20 each, with a strike price of Rs 180. On the exercise date, the stock closed at Rs 240. Given this situation, Mr. Ashish will most likely opt to _________. a) Not to exercise the option b) Exercise the option c) Exercise the option as he likes the company X and its management d) Exercise the option but should decline giving delivery of the underlying Explanation:Mr. Ashish has bought Put options assuming that prices will fall and he will make a profit.But the price has risen and he is in a loss. So he will choose not to exercise his option. His loss will be restricted to the premium paid. 77 / 100 77. What is the definition of ‘Contract Month’? a) The month in which the transaction is done b) The month of beginning of the futures contract c) The month of expiry of futures contract d) None of the above Explanation:Contract month is the maturity (expiry) month of the contract.For eg – A trader may buy a March month contract in January. But the contract month will be March. 78 / 100 78. How is it possible to close an open position in a futures contract? a) It has to be closed compulsorily before maturity b) It can be closed by intra day transactions only c) It can be closed only at maturity d) It can be closed anytime on or before the date of maturity through reversed (square-off) transaction Explanation:A futures position can be closed anytime before the maturity date by squaring off the transaction. 79 / 100 79. If you are a seller of a put option, you anticipate _________ of the underlying asset. a) No change in the price b) Increase in the price c) Decrease in the price d) Both of the above Explanation:When you sell a put option you expect the price to rise. Even if the price remains stable, you earn the option premium.Therefore, a seller of a put options gains in both ways – stable price or increase in price of the underlying. 80 / 100 80. An investor has employed a Short Hedge through stock futures. This is done to safeguard ________. a) The investor’s existing stock holding against an anticipated price fall b) Against both a stock price fall and stock price rise in the future c) Against a price rise for a planned stock purchase in the future d) Against a fall in the market as a whole Explanation:A short hedge using stock futures is taken to hedge the price risk of a planned future sale of a stock.For eg. You are holding Reliance Industries share of Rs 10 lacs and need this money after 3 months. You can sell the 3-month futures of Reliance Industries to protect the amount which you need. Even if the price falls, the future amount is secured by this hedge. This is call Short Hedge. 81 / 100 81. Which of these grievances against a trading member can the Exchange address for resolution? a) Any claim for expenses done for pursuing the matter with ISC b) Any claim for opportunity loss for a disputed trade c) Any loss in a transaction which is not within the framework of an exchange d) When excess brokerage is charged by the broker Explanation:Complaints against trading members on account of the following can be taken by an Exchange for redressal :– Non-receipt of funds / securities– Non- receipt of documents such as member client agreement, contract notes, settlement of accounts, order trade log etc.– Non-Receipt of Funds / Securities kept as margin– Trades executed without adequate margins– Delay /non – receipt of funds– Squaring up of positions without consent– Unauthorized transaction in the account– Excess Brokerage charged by Trading Member– Unauthorized transfer of funds from commodities account to other accounts etc. 82 / 100 82. Among the financial products mentioned here, which one is relatively more challenging to comprehend? a) Treasury Bills issued by Government of India b) Index options on a broad-based equity index like Nifty c) Index mutual funds replicating index like Nifty d) Index futures on a broad-based equity index like Nifty Explanation:Options are complex financial instruments and difficult to understand when compared to futures, bonds or mutual funds. 83 / 100 83. For establishing limits on his trading members clearing through him, a Clearing Member will need to consult _______. a) The Clearing Member can set the limits on his own and no consultation is required b) Clearing Corporation c) The Stock Exchange d) SEBI Explanation:A trading terminal helps the Clearing Members to monitor the open positions of all the Trading Members clearing and settling through him. A Clearing Member may set limits for a Trading Member clearing and settling through him.Clearing corporation assists the Clearing Member to monitor the intraday limits set up by a Clearing Member and whenever a Trading Member exceed the limits, it stops that particular Trading Member from further trading. 84 / 100 84. The strike price is the price at which the ________ has the right to buy (for a call option) or sell (for a put option) the underlying asset by exercising the option. a) Options Stock Exchange b) Option Writer c) Option Buyer d) Clearing Corporation Explanation:An Option is a contract that gives the right, but not an obligation, to buy or sell the underlying on or before a stated date and at a stated price. While buyer of option pays the premium and buys the right, writer/seller of option receives the premium with obligation to sell/ buy the underlying asset, if the buyer exercises his right.An option, which gives the buyer/holder a right to buy the underlying asset, is called Call option and an option which gives the buyer/holder a right to sell the underlying asset, is called Put option. 85 / 100 85. Identify the strategy characterized by ‘limited potential gain with limited potential loss’. a) Going long in index call option b) Going long in index put option c) Going short in At-the-money index put and going long in Out-of-the-money index put option, both with the same expiry date d) Going short in index call option Explanation:A limited gain and limited loss strategy can be implemented using either two calls or two puts or both calls and puts. It cannot be implemented using a single Call or Put.Spreads involve combining options on the same underlying and of same type (call/ put) but with different strikes and maturities. These are limited profit and limited loss positions. They are primarily categorized into three sections as: · Vertical Spreads · Horizontal Spreads · Diagonal Spreads. 86 / 100 86. In India, when the option holder exercises an In-The-Money (ITM) Call Option on a stock, ________. a) He/she receives cash amount equal to excess of spot price (at the time of exercise) over the strike price of the call option b) He/she receives cash amount equal to excess of strike price of the call option over the spot price (at the time of exercise) c) He/she sells the underlying stock to the option writer at a pre-specified price (strike price) d) He/she buys the underlying stock from the option writer at a pre-specified price (strike price) Explanation:Unlike index options, stock options are settled by physical delivery. All long ITM options are automatically assigned by the exchange on the expiry day to short positions in option contracts with the same series on a random basis. The final settlement takes place by physical delivery in accordance with the settlement schedule of the clearing corporation. 87 / 100 87. State whether the following statement is True or False: When the initial margin is set at lower levels, it becomes appealing for market participants to engage in transactions in the derivatives market. a) True b) 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 derivatives market.If the margins are kept on a lower side, many more traders will start trading in the derivatives market. 88 / 100 88. Identify the TRUE statement with respect to Futures Contracts? a) Futures contracts and Forward contracts are basically one and the same b) Futures contracts can be traded either on the OTC market or on an exchange c) Futures contracts can be traded only on OTC market d) Futures contracts can be traded only on an exchange 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.Futures are also standardized contracts (in terms of their lot size, maturity date, etc.) so that they can be traded on the exchange. Indeed, we may say futures are exchange traded forward contracts. 89 / 100 89. The Unique Client Code, assigned by the broker, is associated with the _________. a) Demat Account b) Aadhaar card number c) Trading Account d) PAN CARD number Explanation:In the process of on-boarding a new client, the broker allots a Unique Client Code (UCC) to the client. The UCC is linked to the PAN of the client and serves as an exclusive identification of the client. 90 / 100 90. With three series of one, two, and three months futures open simultaneously, how many potential calendar spread combinations could emerge? a) 4 b) 3 c) 2 d) 1 Explanation:The three calendar spreads can be between months 1 and 2, 2 and 3 and 1 and 3. 91 / 100 91. What type of order will you submit to purchase/sell a specific quantity of a share at a designated price or a more favorable one? a) Market order b) Limit order c) All or none order d) Good for day order Explanation:Limit order is an order to buy or sell a contract at a specified price. The user has to specify this limit price while placing the order and the order gets executed only at this specified limit price or at a better price than that. 92 / 100 92. What is Ms. Mishra’s net profit (+) or loss (-) when she sold a Put option with a strike of Rs 500 on PQR stock for a premium of Rs 50, considering a lot size of 1000, and on the expiry day, PQR stock closed at Rs. 440? a) + 10,000 b) – 20,000 c) + 20,000 d) – 10,000 Explanation:When one sells a put option, the view is bullish ie. price will rise. Here the price has fallen by Rs 60 (500-440). So there is a loss of Rs 60.When one sells an option, premium is received. Premium received is Rs 50.Therefore Net loss = 60 – 50 = 10 x lot sixe of 1000 = 10000 loss. 93 / 100 93. The volatility estimation methodology __________ . a) Is kept secret by the exchanges b) Is known to all market participants c) Is known to only institutional clients d) Is known only to clearing corporations 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.Calculation of volatility is not a secret. There are many formulas available. For example, many option traders calculate this expected volatility by running the Black-Scholes model in the reverse order. 94 / 100 94. The determination of the premium of an option is dependent on _______. a) The volatility of a stock b) Time left to expiry and interest rates c) The current stock price and strike price d) All of the above Explanation:There are five fundamental parameters on which the option price depends upon:1) Spot price of the underlying asset 2) Strike price of the option 3) Volatility of the underlying asset’s price 4) Time to expiration 5) Interest rates 95 / 100 95. How much initial margin is to be collected from both Mr. Deepak, who wants to purchase 20 contracts of the October series at Rs. 3500, and Mr. Suraj, who intends to buy 12 contracts of the November series at Rs. 3600? The lot size is 50 for both contracts, and the broker has set the initial margin at 8%. a) Rs. 5,84,500 b) Rs. 3,75,200 c) Rs. 6,12,600 d) Rs. 4,52,800 Explanation:Intial Margin from Mr. DeepakRs 3500 X 20 contracts X 50 (lot size) X 8% = Rs. 2,80,000Initial Margin from Mr. SurajRs 3600 X 12 contracts X 50 (lot size) X 8% = Rs. 1,72,800Total Margin = 280000 + 172800 = Rs. 4,52,800 96 / 100 96. Identify the TRUE statement – a) The clearing members set the limits for the trading members under him b) For enhanced risk management, the Clearing Corporation sets the limits for the trading members c) The trading members have to possess a higher level of book networth than Clearing Members d) The trading members should have the same level of Book networth as that of Clearing Members Explanation:Each Clearing Member may have several Trading Members with him. The trading limits for each such Trading Member are decided by Clearing Members on the computerized trading system.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 only squaring-off of existing positions will be permitted. 97 / 100 97. Is the statement accurate or inaccurate – A hedged portfolio will consistently yield higher returns than an unhedged portfolio? a) Incrorrect b) Correct Explanation:Hedging controls your losses but also controls your profits. It does not ensure higher profits.An open position can give you more profits or more losses. 98 / 100 98. Identify the action that allowed the trader to generate a profit of Rs. 8000 when he closed his short position of one contract in September ABC futures (Contract Multiplier 50) initiated at a price of Rs. 1200. a) Buying one September ABC futures contract at Rs. 1080 b) Buying one September ABC futures contract at Rs. 1040 c) Selling one September ABC futures contract at Rs. 1080 d) Selling one September ABC futures contract at Rs. 1040 Explanation:The trader is short ie. he has sold ABC futures. He will make a profit when the future price falls. His profit is Rs 8000 and lot size is 50, so per share he has to get Rs 160 (8000 / 50) to make a profit of Rs 8000 (160 x 50)So when the ABC futures falls to 1040 and the trader buys it to square up his position, he will make a profit of Rs 8000. 99 / 100 99. Given a stock trading at Rs 100, Mr. Ashwin acquires a Straddle with a strike price of 100, paying Rs. 10 for the Call option and Rs. 5 for the Put option. From this data, determine the accurate statement. a) This straddle has two break-even points b) The break-even point for the Put Option is Rs 95 c) The break-even point for the Call Option is Rs 110 d) All of the above Explanation:Straddle strategy involves two different types of options (call and put) with the same strike prices and same maturity. Therefore, it has two break-even points.When a call of 100 is bought by paying premium of Rs 10, the breakeven point is 100+10 = Rs.110When a put of 100 is bought by paying premium of Rs 5, the breakeven point is 100-5 = Rs. 95 100 / 100 100. _______ represents an expense for market participants but is not specified in the contract note. a) Exchange transaction charges b) Securities Transaction Tax c) SEBI turnover fees d) Impact Cost Explanation:Impact cost is the cost that a buyer or seller of stocks incurs while executing a transaction due to the prevailing liquidity condition on the counter. Lower the liquidity, higher will be the impact cost.The impact cost is not reflected in the contract notes. Your score is 0% Restart quiz Exit
