NISM Series VIII - Equity Derivatives 'Last Day Revision' Test 1 /100 NISM Series VIII – Equity Derivatives ‘Last Day Revision’ Test 1 1 / 100 1. Are Professional Clearing members restricted to acting solely on behalf of institutional clients? a) Yes b) No Explanation:Professional clearing member clears the trades of his associate Trading Member and institutional clients. 2 / 100 2. Is it true or false that trading members are required to maintain a higher level of book net worth compared to clearing members? a) True b) False Explanation:Clearing Members have to maintain higher book net worth than trading members. 3 / 100 3. True or False: To close a long or short position in a futures contract, one can initiate a reverse trade. a) True b) False Explanation:Closing a position means either buying or selling a contract, which essentially results in reduction of client’s open position (long or short). A client is said to be closed a position if he sells a contract which he had bought before or he buys a contract which he had sold earlier. 4 / 100 4. The introduction of forward contracts is driven by the idea and economic rationale to ________. a) Help hedging b) Help arbitrage c) Help trading d) Both 1 and 2 Explanation:The essential idea of entering into a forward is to fix the price and thereby avoid the price risk. By entering into forwards, one is assured of the price at which one can buy/sell an underlying asset.Thus Forward contracts are basically meant for hedgeing / managing the risks. 5 / 100 5. The introduction of forward contracts is driven by the idea and economic rationale to ________. a) Current Liabilities b) Current Assets c) Fixed Assets d) Bad Debts Explanation:The seller/ writer of the option is required to pay initial margin for entering into the option contract and its should be debited to an appropriate account, say, “Equity Index/ Stock Option Margin Account”.In the balance sheet, such account should be shown separately under the head “Current Assets”. 6 / 100 6. A person who is bullish and a payer of premium is a ____________. a) Seller of call option b) Buyer of call option c) Seller of put option d) Buyer of put option Explanation:A buyer of a Call is bullish and believes that the price will rise. He pays a premium which is his maximum loss but the profits can be unlimited. 7 / 100 7. Investor Mr. X intends to sell 11 contracts of the February series at Rs. 6300, and investor Mr. Y wants to sell 13 contracts of the March series at Rs. 6450. The lot size is 50 for both these contracts, and the initial margin is fixed at 6%. What is the total initial margin required to be collected from both these investors (sum of the initial margin of X and Y) by the broker? a) Rs 459450 b) Rs 640000 c) Rs 251550 d) Rs 374900 Explanation:Margin from Mr. XRs 6300 X 11 contracts X 50 (lot size) X 6% = 207900Margin from Mr. YRs 6450 X 13 contracts X 50 (lot size) X 6% = 251550Total Margin = 207900 + 251550 = 459450. 8 / 100 8. A trader has initiated a short position of one contract in September ABC futures (contract multiplier 50) at a price of Rs. 1800. Upon closing this position after a few days, he found that he had made a profit of Rs. 5000. What would have been the closing action that allowed him to generate this profit? (Please ignore brokerage costs). a) Selling 1 Sept ABC futures contract at 1700 b) Selling 1 Sept ABC futures contract at 1900 c) Buying 1 Sept ABC futures contract at 1700 d) Buying 1 Sept ABC futures contract at 1900 Explanation:To make a profit of Rs 5000, he has to earn Rs 100 per share ( 5000 / 50 (lot size) = 100 )Since he has gone short, he will make a profit when the price falls and he buys at the reduced price.He has sold at Rs 1800, so when he buys back at Rs 1700 he make Rs 100 profit per share.Rs 100 X 50 ( Lot size ) = Rs 5000 profit. 9 / 100 9. The option that grants the holder the right to purchase the underlying asset on or before a specific date for a predetermined price is known as _________. a) European call option. b) American call option c) American put option d) European put option Explanation:In case of American options, buyers can exercise their option any time before the maturity of contract.In case of European options, owner of such option can exercise his right only on the expiry date/day of the contract. 10 / 100 10. A call option provides the holder with the right to buy how much of the underlying asset from the option writer? a) The specified quantity or less than the specified quantity b) Only the specified quantity c) The specified quantity or more than the specified quantity d) None of the above Explanation:Only the specified quantity as per the lot size of the option contract. 11 / 100 11. What is the value closest to the forward price of a share if the cash price is Rs 425, forward contract maturity is 12 months, and the market interest rate is 12%? a) 482 b) 425 c) 476 d) 437 Explanation:12 months maturity means full one year of interest cost.So 12% of 425 = 425 x 12 / 100 = 51425 + 51 = 476 is closest to the one year forward price 12 / 100 12. What is the most appropriate strategy for a trader who is very bearish on specific companies but bullish on the market as a whole? a) Sell the shares of those specific companies in futures and buy index futures b) Sell the shares of those specific companies in futures and also sell index futures c) Buy the shares of those specific companies in futures and sell index futures. d) Do nothing Explanation:The trader should sell the shares of those specific companies in futures and buy index futures. By this he will profit when the stock prices of those specific companies fall and index rises – if his view proves correct. 13 / 100 13. The concept in which the derivative trader obtains higher exposure for a small portion of the margin amount brought by him is known as ___________. a) Speculation b) Delta Hedgeing c) Leverage d) Arbitrage Explanation:A trader in the future’s market pays a relatively small margin for market exposure in relation to the contract value. This is known as leverage. 14 / 100 14. Which of the following issue(s) that exist in forward contracts are addressed by futures contracts? a) A central agency for monitoring b) Counter party risk c) Settlement problems d) All of the above 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. There is a risk of an economic loss from the failure of counterparty to fulfil its contractual obligation.Futures markets were innovated to overcome the limitations of forwards. A futures contract is an agreement made through an organized exchange. The clearing corporation associated with the exchange guarantees settlement of these trades. 15 / 100 15. Losses incurred on derivative transactions can be carried forward for a period of 8 assessment years – True or False? a) True b) False Explanation:Loss incurred on derivatives transactions which are carried out in a recognized stock exchange can be carried forward for a period of 8 assessment years. 16 / 100 16. A short position in a CALL option can be closed out by taking a long position in a PUT option with the same exercise date and exercise price – True or False? a) True b) False Explanation:A short position in a CALL option can be closed out by taking a long position in a same CALL option with same exercise date and exercise price. 17 / 100 17. Which of the following complaints can be addressed by the exchange for resolution? a) Excess Brokerage charged by Trading Member / Sub-broker b) Claims of sub-broker/authorized persons for private commercial dealings with the trading member c) Complaints pertaining to trades not executed on the Exchange by the complainant d) Claims for notional loss, opportunity loss for the disputed period or trade Explanation:Exchanges provide assistance if the complaints fall within the purview of the Exchange and are related to trades that are executed on the Exchange Platform. Excess Brokerage charged by Trading Member / Sub-broker comes under this assistance. 18 / 100 18. Mr. Ravi holds 10 call options on a stock with a purchase price of Rs. 20 per call and a strike price of Rs. 350. If, on the exercise date, the stock price is Rs. 310, disregarding transaction costs, Mr. Ravi will likely choose ___________. a) Not to exercise the option b) To exercise the option c) May or may not exercise the option depending on whether he likes the company or not d) May or may not depending on whether he is in town or not Explanation:Mr. Ravi has bought a Call Option assuming that the price will rise.The price has fallen and he is in a loss. So he will choose not to exercise his option.His loss is restricted to the premium he has paid. 19 / 100 19. Trading members are required to maintain a higher level of Capital Adequacy (as per balance sheet) than clearing members – True or False? a) True b) False Explanation:Clearing Members are permitted to settle their own trades as well as the trades of the other non-clearing members known as Trading Members who have agreed to settle the trades through them.Thus the Capital Adequacy requirement is higher for Clearing Members. 20 / 100 20. What is the maximum loss a trader can incur if he sold a call option on a share with a strike price of Rs. 200 and received a premium of Rs. 12 from the option buyer? a) Rs 188 b) Rs 200 c) Rs 12 d) Unlimited Explanation:When a trader sells a Call option he is bearish / neutral on that scrip.But in case the price rises, he makes losses and theoretically price can rise to any levels – so his losses can be unlimited.In this eg, he has sold Rs 200 call at Rs 12. In case the price rises, the call price will also rise and theoretically it can rise to any levels leading to ‘unlimited losses’ 21 / 100 21. Securities Transaction Tax (STT) is levied on ________. a) Sale of Derivatives b) Purchase of Derivatives c) Purchase of Equity Shares d) Only 1 and 3 Explanation:STT is levied on transactions involving equity, derivatives and equity oriented mutual funds.It is levied on purchase and sale of equity shares.STT is applicable only on all sell transactions for both futures and option contracts. 22 / 100 22. How is the contract size in the futures market determined? a) SEBI b) The Stock Brokers c) The Stock Exchange d) The Parties to the contract Explanation:The Contract size (Lot size) is specified by the exchange. (minimum value of Rs 5,00,000). 23 / 100 23. In Options, the seller of a contract pays an upfront premium at the time of entering into the contract – True or False? a) True b) False as the premium is paid on maturity c) False as the premium is paid by the buyer and not the seller d) None of the above Explanation:In Options (Both Call and Put), the premium is paid by the buyer of options and not the seller of options. The seller receives the premium. 24 / 100 24. True or False: In the event of a Clearing member’s default, the margin paid on their own account can be utilized by the clearing corporation to satisfy its dues from the member, while the margins of the clients remain unaffected. a) True b) False Explanation:In case of Clearing Member default, margins paid by the Clearing Member on his own account alone would be used to settle his dues. 25 / 100 25. What is the term for the process in which a futures contract is concluded by executing a transaction that is equal and opposite to the original transaction? a) Off setting b) Hedgeing c) Netting d) Mark to market Explanation:A closing transaction is one that reduces or eliminates an existing position by an appropriate offsetting purchase or sale. 26 / 100 26. What type of contract is it when Mr. Mohan agrees with Mr. Soham to purchase 500 bags of Cotton at Rs 800 per bag, with the delivery of goods and payment scheduled for four months later, wherein both parties have both rights and obligations? a) Futures b) Options c) Forwards d) Swaps Explanation:Forward contract is an agreement made directly between two parties to buy or sell an asset on a specific date in the future, at the terms decided today. There is no Stock Exchange, Commodity Exchange etc.involved. 27 / 100 27. The ‘ASK’ price is always ___________. a) Equal to bid price b) Lower than the bid price c) Greater than the bid price d) None of the above Explanation:Bid and Ask price means the Buyer and Seller price.For eg price of a stock as quoted on a stock market is Rs. 100 – 101.So 100 is the Bid price and 101 is the Ask price.The Ask will always be higher than Bid price. 28 / 100 28. A trading member must provide the following documents to any individual wishing to open a Trading Account. a) SEBI guidelines on the subject b) All the rules & regulations of the exchange c) Risk disclosure document d) Complete version of all the laws of SEBI Explanation:The broker is required to get a Risk Disclosure Document signed by the client, at the time of client registration. 29 / 100 29. A Client Registration form includes the client’s _____________. a) Investment objectives b) Background c) Beneficial identity d) All of the above Explanation:While opening a clients account, the broker should know some important details of his clients. Therefore the Client Registration form asks for deatils on the backgroung of the client ( to know if there is a criminal background or is not banned in any other manner, whether in terms of criminal or civil proceedings by any enforcement agency worldwide).The client should be identified by the intermediary by using reliable sources including documents/information. The intermediary should obtain adequate information to satisfactorily establish the identity of each new client and the purpose of the intended nature of the relationship. 30 / 100 30. Mr. Anand instructs his broker to purchase a specific number of contracts at the prevailing market price; this instruction is referred to as ____________. a) Limit order b) Stop loss order c) Arbitrage order d) Market order Explanation:A market order is an order to buy or sell a contract at the best bid/offer price currently available in the market. Price is not specified at the time of placing this order. 31 / 100 31. True or False: The shorter the time to maturity of a call option, the higher the associated time value. a) False b) True Explanation:Other things being equal, options tend to lose time value each day throughout their life. This is due to the fact that the uncertainty element in the price decreases.Thus shorter the time to maturity, lower will be the time value. 32 / 100 32. True or False: A futures contract is highly standardized, with minimal aspects (excluding the price) open to negotiation. a) False b) True Explanation:Terms of the future contracts are standardized wrt. quantity, time period etc. Only price is decided by the demand supply and other market situations.A forward contract on the other hand is not standardized. 33 / 100 33. Which type of options align with the statement that the maximum potential loss for the option buyer is limited to the premium paid, while profits can vary depending on the movement of the underlying price? a) True for American options only b) True for European options only c) True for all types of options d) False for all types options Explanation:The difference between American and European options is relating to the time of exercising the contract. Profit potential in both of them is same. 34 / 100 34. Who determines the daily settlement prices of equity derivatives? a) SEBI b) Clearing Corporation c) RBI d) Brokers Association Explanation:One of the responsibilities of the Clearing Corporation is to decide the Daily Settlement Prices. 35 / 100 35. A Writer of an option _________. a) Has obligation in the contract b) Receives the premium c) Has choice in the contract d) Both 1 and 2 Explanation:The writer of an option is one who receives the option premium and is thereby obliged to sell/buy the asset if the buyer of option exercises his right. 36 / 100 36. Is it correct to assert that the declaration of ordinary cash dividends results in a decrease in put option values? a) False b) True Explanation:Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date.Put options gets more expensive due to the fact that stock price always drop by the dividend amount after ex-dividend date.In case of call options, they can get discounted by as much as the dividend amount. 37 / 100 37. What factor or factors play a role in influencing option pricing among the following? a) Volatility of the underlying shares b) Time to expiration c) Interest rates d) All of the above Explanation:There are five fundamental parameters on which the option price depends upon:1) Spot price of the underlying asset2) Strike price of the option3) Volatility of the underlying asset’s price4) Time to expiration5) Interest ratesThese factors affect the premium/ price of options in several ways. 38 / 100 38. Is it accurate to say that in a naked call option strategy, the writer does not presently own the underlying asset? a) False b) True Explanation:An options strategy in which an investor writes (sells) call options on the open market without owning the underlying security.This strategy is sometimes referred to as an “uncovered call” or a “short call”. 39 / 100 39. Stock price is ____________. a) Same as exercise price of an option b) Same as strike price of an option c) Same as in the near month future contract d) The price of the underlying in the spot market Explanation:Stock price or Spot price means the current market price of that stock in the cash market. 40 / 100 40. What would be your situation if you have purchased a futures contract and the price decreases? a) Make a notional loss b) Given information is incomplete to arrive at a conclusion c) Make a notional profit d) None of the above Explanation:For eg. You bought a futures contarct of 1000 shares at Rs 500. The price drops to Rs 480. Therefore there is a notional loss of Rs. 20 (500 – 480) x 1000 shares = Rs 20,000.This is a notional loss and not an actual loss. The actual profit / loss will happen only when you square up the contract. 41 / 100 41. Is it correct to say that the derivatives segment of a Stock Exchange falls under the governance of the same council as the cash segment? a) True b) False Explanation:The derivatives exchange/segment has a separate governing council and no common members are allowed between the Cash segment Governing Board and the Derivatives segment Governing Council of the exchange. 42 / 100 42. Is it accurate to state that institutional investors pay higher margins for derivatives trading compared to individual investors? a) False b) True Explanation:The margin requirement is same for both individual investors and institutional investors. 43 / 100 43. What factor contributes to the perception that futures trading is riskier than equity trading? a) High liquidity b) High pressure c) High volatility d) High leverage Explanation:Traders can trade in derivatives by paying a small margin ( around 25 to 30% of the total contract value), This leverage increases the risk as the trader can take up poistions beyond his capacity. 44 / 100 44. What is the term for the strategy in which Mr. A purchases a call option with a lower strike price and simultaneously sells another call option with a higher strike price, both on the same underlying share and expiration date? a) Bear Spread b) Bull Spread c) Calendar Spread d) Butterfly Spread Explanation:A bull call spread is constructed by buying a call option with a low strike price, and selling another call option with a higher strike price. 45 / 100 45. Is it accurate to state that a portfolio consisting of 50 different stocks is twice as risky as another portfolio containing 100 stocks? a) True b) False Explanation:A good index is a trade-off between diversification and liquidity. A well-diversified index reflects the behaviour of the overall market/ economy. While diversification helps in reducing risk, beyond a point it may not help in the context.Going from 10 stocks to 20 stocks gives a sharp reduction in risk. However, going from 50 stocks to 100 stocks gives very little reduction in risk. Going beyond 100 stocks gives almost zero reduction in risk. Hence, there is little to gain by diversifying beyond a point. 46 / 100 46. The seller of a put option realizes a gain if the price of the underlying asset _____________. a) Increases b) Decreases c) Does not change d) Both 1 and 3 Explanation:The seller of PUT option is either bullish or neutral. He gains the premium received if the underlying increases or remains flat. 47 / 100 47. What is the primary rationale behind the imposition of position limits? a) To encourage high networth investors to provide direction to the market b) Give direction to the market to move up or down as determined by SEBI c) Prevent the market being unduly influenced by Central Govt policies d) Prevent the market being unduly influenced by the activities of an individual/group of investors Explanation:Position limits are the maximum exposure levels which the entire market can go up to and each Clearing Member / Trading member or investor can go up to.Thus no investor can take an extra ordinary large position and influence the direction of a scrip / market. 48 / 100 48. What is the intrinsic value of a 110 Call option if the market price of the share is Rs 120 and the Call is quoted at Rs 24? a) Rs. 20 b) Rs. 10 c) Rs. 34 d) Rs. 130 Explanation:Option Premium consists of two variables – Intrinsic Value and Time Value.In the above case, the cash market price is 120 and the strike price is Rs 110. So the Intrinsic value is Rs 10 ( 120 – 110 ). The balance of option premium ( 24 – 10 ) ie. Rs 14 is the time value. 49 / 100 49. Which type of contracts experience daily gains or losses due to the mark-to-market mechanism? a) Equity Cash Market contracts b) Contracts in Swaps c) Forward Contracts d) Future market contracts Explanation:Futures contracts have two types of settlements: (A) the mark-to-market (MTM) settlement which happens on a continuous basis at the end of each day, and (B) the final settlement which happens on the last trading day of the futures contract. 50 / 100 50. Is it correct to state that both the time value and intrinsic value of a call option are consistently positive or zero? a) False b) True Explanation: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.Time value also can never be negative. 51 / 100 51. Is it accurate to say that options contracts lack symmetry concerning the rights and obligations of the involved parties? a) True b) False Explanation:The buyer of an option has a right but not the obligation in the contract. Also his risks are limited to the extent of premium paid.The writer/seller of an option is one who receives the option premium and is thereby obliged to sell/buy the asset if the buyer of option exercises his right. His risks are unlimited.Thus Option contracts are not symmetrical as the buyers and sellers have different obligations and risk factors.On the other hand obligations and returns in Futures are symmetrical for both buyer and sellers. 52 / 100 52. What among the following does not represent an application of indices? a) Index derivatives b) Private equity funds c) Exchange traded funds d) Index funds Explanation:Private Equity Funds are not connected to any index nor are they listed on a stock exchange. 53 / 100 53. Under what conditions would a trader realize a profit from a short position in September futures? a) When he sells another September future at a lower price b) When he sells October futures at a lower price. c) He square of this short position by buying the September future at lower price d) When he buys a October future at a lower price Explanation:Profit can be made in a short position when the price falls and the same is bought back.For eg – You sold a stock at Rs 100 ie. created a short position. When price falls to say Rs 80 and you buy it back, you make a profit of Rs 20.In case of futures, you have to square up in the same expiry month. 54 / 100 54. If a trader initially sold an ABC Stock Futures Contract at Rs.354 with a lot size of 900 and later buys back the contract at Rs.341, what is the resulting profit or loss for the trader? a) – Rs 11700 (Loss) b) Rs 11700 c) Rs 8300 d) – Rs 8300 (Loss) Explanation:He sold at Rs 354 and bought back at Rs 341 which means he has made a profit.Rs 354 – Rs 341 = Rs 13Rs 13 X 900 (Lot size) = Rs 11700 Profit 55 / 100 55. In the context of an Out-of-the-Money (OTM) Put option, what is the specific condition or characteristic? a) Strike price would be zero b) Exercise price would be equal to the market c) Strike price would be lower than the market price d) Strike price would be higher than the market price Explanation:A put option is said to be OTM when spot (market) price is higher than strike price.A call option is said to be OTM, when spot (market) price is lower than strike price. 56 / 100 56. Does diversification serve as a means to manage Systematic Risks? a) True b) False Explanation:Systematic risks are risks which are associated with movement of entire market due to economic / political and other factors. These cannot be controlled by diversifying ones portfolio as the entire portfolio will fall in case of a negative news.The Systematic risks can be controlled by hedging in the F&O section.Unsystematic risk ie. Company / Industry specific risk can be reduced to a certain extent by diversifying the portfolio. 57 / 100 57. What does Delta measure in relation to an option premium, indicating the anticipated change in the option premium for a one-unit change in ________? a) Treasury interest rates b) Time to option expiry c) Volatility of underlying asset d) Spot price of underlying asset Explanation:Delta measures the sensitivity of the option value to a given small change in the price of the underlying asset. 58 / 100 58. In an In the money PUT option____ a) Exercise price would be equal to the market price b) Strike price would be higher than the market price c) Strike price would be lower than the market price d) Strike price would be zero Explanation:A put option is said to be In The Money when market price is lower than strike price. 59 / 100 59. Who can perform the clearing of trades on a stock exchange? a) By the clearing members b) By the trading members c) Both by clearing members and trading members d) None of the above Explanation:The clearing of trades on a stock exchange can be done by both clearing members and trading members. Clearing members are entities that are responsible for ensuring the settlement of trades and managing the associated risks. Trading members, on the other hand, are individuals or firms that execute trades on behalf of investors. Together, they contribute to the smooth functioning of the clearing process by facilitating the settlement of trades and managing various aspects of the transaction lifecycle. Therefore, the correct option is “both by clearing members and trading members.” 60 / 100 60. What is the term for the risk component unique to specific events of a company and/or industry, which could be mitigated to some extent through portfolio diversification? a) Arbitrage Risk b) Unsystematic Risk c) Interest Rate Risk d) Systematic Risk Explanation:The risk that is specific to an industry or firm. Examples of unsystematic risk include losses caused by labor problems, nationalization of assets etc. Also called diversifiable risk 61 / 100 61. Is it a yes or no: Does trading in derivatives become expensive due to high margins? a) Yes b) No Explanation:Cost components of futures transaction include margins, transaction costs (commissions), taxes etc.So higher the margins more expensive the trading. 62 / 100 62. Is it true or false that a default by a member in the derivatives segment will not be treated as a default in the cash segments of that exchange? a) False b) True Explanation:A default by a member in the derivatives segment will be treated as default in all segments of that exchange and as default on all exchanges where he is a member. 63 / 100 63. Is it true or false that a Trading cum Clearing Member is accountable to the exchange for both his transactions and the positions of his trading members under him? a) False b) True Explanation:Trading cum Clearing Member: This is a Clearing Member (CM) who is also a Trading Member (TM) of the exchange. Such CMs may clear and settle their own proprietary trades, their clients’ trades as well as trades of other Trading Members. 64 / 100 64. Is it true or false that for portfolio hedging by institutions and mutual funds, index-based derivatives are more suitable and much more cost-effective than derivatives based on individual stocks? a) True b) False Explanation:A portfolio consists of many stocks and not all stocks are available for trading in the futures/derivatives market. Also many stock futures have low volumes. Therefore institutions use index based derivatives for hedging. Although it may not give a perfect hedge but with proper choice of index futures, a good hedge can be created. 65 / 100 65. Is it true or false that daily ‘Trading Price Limits’ specify the maximum percentage by which the price of a futures contract can increase above or decrease below the previous day’s settlement price? a) True b) False Explanation:A price limit is the maximum range that a futures contract is allowed to move up or down within a single day. Price limits are re-calculated every day. When price limits are reached in one day, the variable price limits might be implemented to expand the initial limits to the variable amount for the next trading day. 66 / 100 66. On what basis is the initial margin calculated? a) Fixed at 25% for most of the scrips and 35% for volatile scrips b) Value-At-Risk (VAR) based margining. c) Average price movement in the last 5 working days d) As per the The Black & Scholes Model Explanation:Initial margin requirements are based on 99% value at risk over a one day time horizon. 67 / 100 67. Contract month means_____ a) Month of beginning of the futures contract b) Month in which the transaction is done c) Month of expiry of the futures contract d) None of the above Explanation:Contract month is the maturity month of the contract.For eg – A trader may buy a March month contract in January.So March will be the contract month. 68 / 100 68. What are the securities that clearing members deposit with the clearing corporation as part of their liquid assets? a) Marked to market on a periodical basis b) May or may not be marked to market depending on the decision of the Stock Exchange c) Is not marked to market as they are blue chip shares d) None of the above Explanation:As per Prof. J. R. Verma Committee recommendations the securities placed with the Clearing Corporation shall be marked to market on a periodical basis (weekly). 69 / 100 69. If the tick size in an Index Futures contract is 0.2 of an index point and the index multiple is Rs. 50, what is the value of ‘a tick’? a) Rs 100 b) Rs 50 c) Rs 2.50 d) Rs 10 Explanation:Rs 50 X 0.2 = Rs 10.Each tick movement will result in profit or loss of Rs 10 for the Index buyer or seller resp. 70 / 100 70. What is the net profit or loss for Mr. A, who sold a put option with a strike of Rs.400 on PQR stock for a premium of Rs.32, given that the lot size is 500 and on the expiry day, PQR stock closed at Rs.350? a) -9000 (Loss) b) 9000 (Profit) c) -25000 (Loss) d) 25000 (Profit) Explanation:Mr. A sold a PUT option, that means he has a bullish or neutral view on PQR stock.However, PQR stock has fallen by Rs 50 ( 400 – 350 ).Which means he has lost Rs 50.Since he has sold a PUT, he will receive the premium which is Rs 32.So his net loss will be Rs 50 (Loss) – Rs 32 (Premium Recd) = Rs 18Total Loss = Rs 18 x 500 (lot size) = Rs. 9000 71 / 100 71. Is it true or false that a futures contract is typically identified by its delivery month? a) True b) False Explanation:A key characteristic of a futures contract that designates when the contract expires and when the underlying asset must be delivered. The exchange on the futures contract is traded will also establish a delivery location and a date within the delivery month when the delivery can take place.Not all futures contracts require physical delivery of a commodity, and many are settled in cash.Delivery Month is also referred to as “contract month.” 72 / 100 72. Is it true or false that an American put option grants the buyer the right, but not the obligation, to sell an underlying asset to the writer at a specified price on or before the expiry date? a) True b) False Explanation:The owner of American option can exercise his right at any time on or before the expiry date/day of the contract.The owner of European option can exercise his right only on the expiry date/day of the contract. 73 / 100 73. Is it true or false that a high initial margin level enhances the solvency and financial capability of the clearing corporation? a) True b) False Explanation:Higher initial margin collection from trading members reduces the chances of their defaults thus improving the solvency & financial capability of the clearing corporation. 74 / 100 74. Is it a yes or no: Does the difference between the exercise price of the option and the spot price affect the option premium? a) Yes b) No Explanation:The Option premium is a combination of intrinsic value and time value and other factors.The Intrinsic value is difference between Spot and Exercise Price (Strike Price).Exercise price remains constant whereas the Spot price fluctuates.So the option premium will fluctuate as per the movement in Spot price. 75 / 100 75. What will happen to a Call option if the market price is less than the exercise (strike) price? a) Seller of the option will exercise it b) Expire worthless c) Will definitely get exercised d) None of the above Explanation:If market price is below strike price, the option expires worthless as the buyer will incur the maximum loss of his premium paid and the seller will earn the premium received. 76 / 100 76. As a trading member, Mr. Hitesh has a client who bought 12 contracts of the March series index futures, and another client who sold 10 contracts of the March series index futures. What is Mr. Hitesh’s exposure? a) Netted out at 2 contracts b) Grossed up at 22 contracts c) The Exchange will decide to either gross up or net out the exposure depending upon his past record d) Maximum of 10 and 12 which is 12 contracts Explanation:The open position of all the clients of a trading member are grossed up to arrive at the total exposure of the trading member. 77 / 100 77. In a forward contract, the party that agrees to sell the underlying asset on a certain specified date for a certain specified price is said to have assumed _______. a) A square off position b) A long position c) A short position d) A trade off position Explanation:Trade off basically means- an exchange where you give up one thing in order to get something else. In a forward contract for eg – the farmers sells his crop two months hence in exchange of some amount of money. 78 / 100 78. What does an increase in interest rates lead to? a) Expiration of the option automatically b) No effect on put options c) Decrease the premium on put options d) Increase the premium on put options Explanation:High interest rates means high cost of capital and this will result in an increase in the value of a call option and a decrease in the value of a put option. 79 / 100 79. Is it true or false that all active members of the Exchange must make an initial contribution towards the Trade Guarantee Fund of the Exchange? a) True b) False Explanation:Main objectives of Trade Guarantee Fund (TGF):– To guarantee settlement of bonafide transactions of the members of the exchange.– To inculcate confidence in the minds of market participants.– To protect the interest of the investors in securities.All active members of the Exchange are required to make initial contribution towards Trade Guarantee Fund of the Exchange. 80 / 100 80. Is it true or false that trading members should maintain money and securities deposited by clients in a separate client account? a) True b) False Explanation:As per SEBI reules – Brokers should keep margins collected from clients in a separate bank account.They should maintain separate client bank account for segregation of client money. 81 / 100 81. Does a clearing member in a derivative exchange have a higher net worth requirement compared to a non-clearing member, i.e., a member who solely clears their trades? a) True b) False Explanation:Clearing Member Eligibility Norms : Net-worth of at least Rs.300 lakhs.The Net-worth requirement for a Clearing Member who clears and settles only deals executed by him is Rs. 100 lakhs. 82 / 100 82. Is it true or false that the initial margin requirement would be higher when there is higher price volatility? a) True b) False Explanation:If the price of a stock is very volatile, the risk of losses increases. So the Stock Exchanges collect higher initial margins in such cases. 83 / 100 83. In case of __________ , the gain or loss is realized on a daily basis due to the mark-to-market mechanism. a) Forward contracts b) Future contracts c) Swaps d) Option contracts Explanation:Futures contracts have two types of settlements: (A) the mark-to-market (MTM) settlement which happens on a continuous basis at the end of each day, and (B) the final settlement which happens on the last trading day of the futures contract.Mark to Market (MTM) is a process by which margins are adjusted on the basis of daily price changes in the markets for underlying assets.(Options contracts have two types of settlements: Daily premium settlement and Final settlement) 84 / 100 84. A calendar spread in index futures is treated as _________ in a far month contract when the near months contract is expired. a) Long position b) Short position c) Hedged position d) Naked position Explanation:A calendar spread becomes a naked/open position, when the near month contract expires or either of the legs of spread is closed. 85 / 100 85. The main objective of derivatives is to enable market participants to ___ a) Speculate b) Arbitrage c) Trade d) Manage the risks 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 are willing to take risk. 86 / 100 86. Higher the interest rate, the higher the CALL option premium – State True or False ? a) True b) False Explanation:High interest rates will result in an increase in the value of a call option and a decrease in the value of a put option. 87 / 100 87. A buyer or holder of the option is the contracting party possessing ____________. a) The right and the obligation b) The right but not the obligation c) The obligation but not the right d) None of the above Explanation:A Call option gives the buyer the right, but not the obligation to buy the underlying at the strike price.A put option gives the buyer of the option the right, but not the obligation, to sell the underlying at the strike price. 88 / 100 88. Is it true or false that trading members in the derivatives segment of the exchanges are not obligated to register with SEBI? a) False b) True Explanation:SEBI has powers for Registering and regulating the working of stock brokers, sub–brokers, etc. A trading member on both the segments i.e. Cash and Derivative segments has to register with SEBI and Stock Exchanges. 89 / 100 89. Which unique principle of futures trading enables individuals to engage in trading without the necessity of making or receiving delivery of the underlying assets? a) Price uncertainty b) Traded on a recognised exchange c) Standardisation of contracts d) Cash settlement Explanation:In a cash settlement method, the parties to a transaction settle by receiving or paying the gains or losses related to a contract in cash (ie. money transfer) 90 / 100 90. What is the opening day of the April series for index futures on the National Stock Exchange? a) Last Friday of February month b) Last Friday of March month c) Last Friday of April month d) Last Friday of Jan month Explanation:There are 3 series of index futures active all the time. A new series is introduced as the older series expires.Lets assume the Jan, Feb and March series are active currently.On the last Thursday of Jan, the Jan series will expire.So that next day ie. on the last Friday of Jan, the April series will be activated. This will be the opening day for April series. Thus we will have three series active ie. Feb, March and April. 91 / 100 91. Operational risks include losses due to______ a) Inadequate contingency planning b) Natural calamities c) Power failure d) All of the above Explanation:An operational risk is defined as a risk incurred by an organisation’s internal activities. So losses due to fraud, inadequate documentation, inadequate disaster management, improper execution are all Operational risks. 92 / 100 92. Is it true or false that the total number of outstanding or unsettled contracts in the market at any given time is referred to as “open interest”? a) True b) False Explanation:An open interest is the total number of contracts outstanding (yet to be settled) for an underlying asset. 93 / 100 93. Is it true or false that the clearing corporation can use the margins deposited in client accounts to settle the dues owed by a clearing member for trades on the clearing member’s account? a) True b) False Explanation:Clients money cannot be used by the Clearing or Trading member for his trades. 94 / 100 94. With eligible liquid assets deposited by a clearing member at Rs.75 lakhs and the exchange’s minimum liquid net worth requirement set at Rs.50 lakhs, and considering no transactions have been initiated yet, what is the available trading margin (in lakhs)? a) 50 b) 75 c) 125 d) 25 Explanation:Liquid Networth is defined as Liquid Assets minus Initial Margin.In above case he has deposited Rs 75 lakhs as liquid assets. Rs 50 lakhs is the requirement, so the balance Rs 25 lakhs will be used as initial margin. 95 / 100 95. Does the efficiency of a cash market necessitate the efficiency of a futures market? Yes or No? a) Yes b) No Explanation:The prices of futures are derived from the underlying cash market prices. So an efficient cash market is required for an efficient futures market. 96 / 100 96. Is it true or false that if the price of a futures contract rises, the mark-to-market margin account of the holder with a short position in that contract is credited for the gain? a) True b) False Explanation:In a short position, if the price increases, there is a loss. So, the mark to market margin will be debited. 97 / 100 97. Is it true or false that the absolute minimum capital adequacy requirement for derivative brokers is identical to that for the cash market? a) True b) False Explanation:The absolute amount of minimum capital adequacy requirement for derivative brokers/dealers has to be much higher than for cash market.Further, if a broker/dealer is involved both in cash and futures segments, or in several exchanges, the capital adequacy requirement should be satisfied for each exchange/segment separately. 98 / 100 98. What is known as Rho? It is the change in the option premium for a unit change in ________. a) Price of the underlying asset b) Market volatility c) Liquidity d) Risk free interest rate Explanation:Rho is the change in option price given a one percentage point change in the risk-free interest rate. 99 / 100 99. The ask price is the price at which___ a) the trader is prepared to sell the share b) the clearing corporation settles the transaction c) the trader is prepared to purchase the share d) the trader is prepared to either buy or sell the share Explanation:BID ASK price means Buyer and Seller price – eg Rs 100 – 101So Ask price is the price at which the trader is prepared to sell the share. 100 / 100 100. In India, futures and options on individual stocks are permitted on __________. a) Only those stocks which are simultaneously listed on all the stock exchange in India b) All stocks with stock price of more than Rs.100 or Rs 50 in A and B group resp. c) All stocks listed on any of the exchanges d) A few selected stocks only Explanation:Only those stocks are included to be traded in the derivatives segment which meet the SEBI / Exchange criteria for derivatives trading. Your score is 0% Restart quiz Exit
