Explanation:

The amount one needs to deposit in the margin account at the time entering a futures contract is known as the initial margin.

Explanation:

Long Strangle As in case of straddle, the outlook here (for the long strangle position) is that the market will move substantially in either direction, but while in straddle, both options have same strike price, in case of a strangle, the strikes are different. Also, both the options (call and put) in this case are out-of-the-money and hence the premium paid is low.

Explanation:

A stock index contains a basket of high market cap stocks. So its very difficult to manipulate it when compared to individual stocks.

Explanation:

Payment of Initial Margin by a broker cannot be netted against two or more clients. So he will have to pay the margin for the open position of each of his clients.

So margin payable for Mr. Raj is : 10 x 5200 x 50 at 10% = Rs 2,60,000

Margin payable for Mr. Rahul is : 5 x 5250 x 50 at 10% = Rs 1,31,250

Total = Rs 3,91,250.

Explanation:

Clearing member is required to provide liquid assets to cover various margins and liquid networth requirements. The total liquid assets comprise of at least 50% of the cash component and the rest is non cash component.

1. Cash Component:

• Cash

• Bank fixed deposits (FDRs) issued by approved banks and deposited with approved custodians or Clearing Corporation.

• Bank Guarantees (BGs) in favour of clearing corporation from approved banks in the specified format.

• Units of money market mutual fund and Gilt funds where applicable haircut is 10%.

• Government Securities and T-Bills

2. Non Cash Component:

• Liquid (Group I) Equity Shares as per Capital Market Segment which are in demat form, as specified by clearing corporation from time to time deposited with approved custodians.

• Mutual fund units other than those listed under cash component decided by clearing corporation from time to time deposited with approved custodians.

Explanation:

Option Premium is the price which the option buyer pays to the option seller.

Explanation:

Contract month is the month in which futures contract expires.

At the expiry of the nearest month contract, a new contract with 3 months maturity will start. Thus, at any point of time, there will be 3 contracts available for trading.

Explanation:

A Trading Member can also be a Clearing Member by meeting additional requirements.

Explanation:

The minimum price movement in a scrip is called TICK. It is minimum move allowed in the price quotations. Exchanges decide the tick sizes on traded contracts as part of contract specification.

The difference between the spot price and the futures price is called basis.

Explanation:

Basis means the difference between Spot Price and Future Price or difference between two future price of the same underlying.

Basis risk is the chance that the basis will have strengthened or weakened from the time the hedge is implemented to the time when the hedge is removed – ie. the risk that the two future prices will not fluctuate identically.

Explanation:

Specific risk or unsystematic risk is the component of price risk that is unique to particular events of the company and/or industry. This risk is inseparable from investing in the securities. This risk could be reduced to a certain extent by diversifying the portfolio.

Explanation:

An exchange traded option can only be traded till the last date of expiry ie. its maturity. After that it will not be available for trading.

For eg – If 27th June is the last Thursday of the month ie. the maturity, all options of June month will cease to exist as soon as the market closes on 27th June.

Explanation:

The Option premium is collected by the exchange but is given to the seller of option.

Explanation:

An In the money (ITM) option would give holder a positive cash flow, if it were exercised immediately.

A call option is said to be ITM, when spot price is higher than strike price. And, a put option is said to be ITM when spot price is lower than strike price. In our examples, call option is in the money

Explanation:

When you buy a CALL option, to close this position you will have to sell a CALL option of same strike price and expiry.

Explanation:

Margin to be collected from Mr Shah : Rs 740 X 8 contracts X 250 (Market lot) at 6%

= Rs 1480000 x 6% = Rs 88,800

Margin to be collected from Mr Patel : Rs 754 X 5 contracts X 250 (Market lot) at 6%

= Rs 942500 x 6% = Rs 56,550

So the total margin : 88,800 + 56,550 = Rs 145350

Explanation:

A call option is a financial instrument that gives the buyer the right, but not an obligation, to buy a set quantity of a security at a set strike price at some time on or before expiration.

In easy terms – what ever may be the market price, the buyer will get the security at the set price or strike price as he has paid a premium for it.

Explanation:

Out of the Money Option – A call option with a strike price that is higher than the market price of the underlying asset, or a put option with a strike price that is lower than the market price of the underlying asset. An out of the money option has no intrinsic value, but only possesses time value.

As in the above example, LKK is trading at Rs 300. For such a stock, call options with strike prices above Rs 300 would be out of the money calls, while put options with strike prices below Rs 300 would be out of the money puts. Out of the money options are significantly cheaper than in the money or at the money options.

Explanation:

All modern stock exchanges have highly developed online surveillance sytems to monitor the volumes / position and prices of all listed products and also check any unusual activity etc. in them.

Explanation:

Professional clearing member clears the trades of his associate Trading Member and institutional clients. He need not be a member of an exchange.

Explanation:

This involves keeping a close eye on the financial health of trading members, ensuring they maintain sufficient capital to cover potential losses. Adequate capitalization is essential for financial stability.

Continuous assessment of the positions held by trading members helps identify and manage potential risks. Regular evaluation allows for timely actions to address changing market conditions or exposure levels.

The practice of collecting margins involves obtaining financial collateral from members. Margin requirements serve as a protective measure by ensuring that traders have the financial capacity to cover potential losses and participate responsibly in the market.

Explanation:

Covered Call strategy is used to generate extra income from existing holdings in the cash market. If an investor has bought shares and intends to hold them for some time, then he would like to earn some income on that asset, without selling it, thereby reducing his cost of acquisition.

So he sells a call option of that stock and benefits from the premium received.

Explanation:

To do a long straddle strategy one has to buy a call and a put option of the same strike price and expiry. Together, they produce a position which will lead to profits if the market / stock is very volatile and it makes a big move – either up or down.

For eg- A person buys a Rs 200 call at Rs 30 and a Rs 200 put at Rs 20 of a stock. If the stock rises significantly the call will rise greatly but his put will fall by maximum Rs 20. So he makes a good profit. If the stock falls significantly, he loses his call money buy gains greatly in the put option as it rises.

Thus the Long Straddle is used when a trader expects a big move in the stock – in any direction is ok.

Explanation:

Position limits are the maximum exposure levels which the entire market can go up to and each Clearing Member or investor can go up to.

Position limits for the entire market and Clearing Members and investors are defined by SEBI.

Explanation:

There are always 3 contracts running. So for eg. we will have Jan-Feb-Mar contracts trading in January.

When January contracts expire on last Thursday of January, on Friday the April contracts will be introduced and so we will have Feb-Mar-April contracts.

Explanation:

A clearing member is required to bring in an additional incremental deposits of Rs.10 lakhs to clearing corporation for each additional TM (Trading Member), in case the Clearing Member undertakes to clear and settle deals for other TMs.

Explanation:

Writing an option means selling an option. Any person can write an option after he has fullfilled the necessary formalities like client registration, margin payments etc.

Explanation:

Securities Transaction Tax (STT) is payable by the Trading Members / Brokers on the stock market transactions and this is collected from their clients.

Explanation:

Explanation:

Time value of the option depends upon how much time is remaining for the option to expire.

Longer the maturity of the option greater is the uncertainty and hence the higher premiums.

Explanation:

Put Option is an option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying security at a specified price within a specified time. This is the opposite of a call option, which gives the holder the right to buy shares.

So an Option, which gives buyer a right to buy the underlying asset, is called Call option and the option which gives buyer a right to sell the underlying asset, is called Put option. There is no obligation when you buy an option.

Explanation:

Responsibilities of the Clearing House / Corporation include:

– Collection of Margins on timely basis

– Smooth operation of the Market

– Daily Clearing and Settlement etc.

Explanation:

The maximum profit for a seller of an option is the premium he receives. In this case he has received Rs 40. The Lot size is 1000.

So the maximum profit he can make is 40 x 1000 = Rs 40,000.

Explanation:

Protective Put is a a risk-management strategy that investors can use to guard against the loss of unrealized gains.

The put option acts like an insurance policy – it costs money, which reduces the investor’s potential gains from owning the security, but it also reduces his risk of losing money if the security declines in value.

Explanation:

Rho is the change in option price given a one percentage point change in the risk-free interest rate.

Beta a measure of systematic risk of a security that cannot be avoided through diversification.

Explanation:

As per the Expectancy Model of Future Pricing – If future prices are higher than spot prices (over the normal cost of carry) we can expect the spot prices to go up in future. This is called as Contango.

Similarly, if the future prices are lower than spot prices, we can expect the spot prices to go down and this is called as Backwardation.

Explanation:

The networth of the member shall be computed as follows:

– Capital + Free reserves
– Less non-allowable assets which are :

o Fixed assets
o Pledged securities
o Member’s card
o Non-allowable securities (unlisted securities)
o Bad deliveries
o Doubtful debts and advances
o Prepaid expenses
o Intangible assets
o 30% marketable securities

Explanation:

At the Money – A situation where an option’s strike price is identical to the price of the underlying security. Both call and put options will be simultaneously “at the money.”

For example, if XYZ stock is trading at 100, then the XYZ 100 call option is at the money and so is the XYZ 100 put option. An at-the-money option has no intrinsic value, but may still have time value. Options trading activity tends to be high when options are at the money.

Explanation:

An ‘In the money’ (ITM) option gives the holder a positive cash flow, if it were exercised immediately.

A call option is said to be ITM, when spot price is higher than strike price. And, a put option is said to be ITM when spot price is lower than strike price.

Explanation:

Although Equity Markets can give good returns but they are quiet risky to invest. So only a less risk averse investor would prefer to invest in equity.

A more risk-averse investor would prefer investments that are more secure and thus would have higher portfolio allocations to debt and fixed income instruments.

(Risk Averse person is reluctant to take risk. A more risk averse person plays very safe and does not take any risk. A less risk averse person can take some risks)

Explanation:

To get a hedge, one has to multiply the beta of his portfolio with the value of the portfolio and them sell that value of index futures.

Explanation:

Mr Shah bought at Rs 180 and sold at Rs 187, so he made a profit of Rs 7.

Lot size is Rs 2000 and he has purchased 2 lots, so 4000 shares x Rs 7 profit = Rs 28,000

Explanation:

Some of the reports which a derivatives segment of a Stock Exchange has to provide to SEBI are:

– Occasions when the 99% Value at Risk limit has been violated

– Defaults by broker-members

– Daily market activity report

– Daily market report

Explanation:

A call option seller has a neutral to bearish perspective regarding the underlying price.

A call option buyer has a bullish view.

Explanation:

When you buy a CALL option, it can only be squared up by selling the same CALL option.

Explanation:

A put option gives the buyer the right to sell the underlying asset at the strike price.
By selling a put option, the seller (also known as the writer) is obligated to buy the asset if the buyer decides to exercise the option.
The seller profits when the price of the underlying asset rises or remains stable, indicating a positive outlook or belief in an upward market movement, hence the term “bullish view”.

Explanation:

A buyer of a CALL Option has a bullish view – so he will expect the market / script to move up to make a profit.

Explanation:

A Call Option gives the holder the right to buy 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.

Therefore, an American Call option gives the holder the right to buy an asset for a certain price on or before a specified date.

(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)

Explanation:

In call options, when the Spot price is higher than Strike price – that call option is In the Money.

Explanation:

A calendar spread contract in index futures attracts LOWER margin than sum of two independent legs of futures contract. This because the risk is very less on calender spreads.

Explanation:

Stock Split has an effect on Options, Strike Price etc. but has no impact on the index as such.

Explanation:

Future Price essentially means Spot Price + Cost of Carry ie. interest cost etc.

On the expiry day ie. the last day, the cost of interest etc. will be nil, so the Future Price and Spot price should ideally be same.

Explanation:

Please memorise : Rho = change in INTEREST rate.

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 as they can be bought and sold on the exchange.

Since, ETFs are traded on exchanges intraday transaction is also possible.

Explanation:

A position in futures can be reversed by squaring up in the same month and not in a different month. So in the above case the position can be reversed by selling the stock future in January month.

Explanation:

In the futures market, profits and losses are settled on day-to-day basis – called mark to market (MTM) settlement.

The exchange collects these margins (MTM margins) from the loss making participants and pays to the gainers on day-to-day basis.

Therefore all futures positions – for both Index and Stocks are marked to market on a daily basis.

Explanation:

As you have sold a futures contract, you will make a loss when the price will move up.

You do not want to make a loss of more then Rs 10,000. The lot size is 2000.

10,000 / 2000 = 5 – which means if the price moves up by Rs 5 ( from 300 to 305) , you will make a loss of Rs 10,000.

So you will put a STOP LOSS buy order at 305. Which means in case the prices move up, the trade will be executed and the contract will be squared up at Rs 305, resulting in a maximum loss of Rs 10,000.

Explanation:

In a bearish outlook, a trader might choose to sell (short) the futures contract at the current elevated price, anticipating a future decline. This enables the trader to later buy the contract back at a lower price, pocketing the difference as profit.

Explanation:

You are long means you have bought ICICI bank futures at Rs 500. Next day the price rises to Rs 520, which means there is a Mark to Market gain of Rs 20. So Rs 20 x the lot size, this amount will be credited in your ledger account with the broker.

Explanation:

Option premium consists of two components – intrinsic value and time value. For an option, intrinsic value refers to the amount by which 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. 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.

For eg – If the spot price is Rs 200, and the call option premium of a Rs 195 strike price is Rs 25, then Rs 5 is the intrinsic value ( 200 – 195 ) and balance Rs 20 is time value.

Explanation:

When the interest rates falls, the cost of carry also falls, thus reducing the premium on call options.

On the other hand, the premium on put options will rise with a fall in interest rates.

Explanation:

In futures both buyer and seller pays the margin as both are heavily exposed to market risks.

In options, only the seller has to pay the margin as buyers have a limited risk.

Explanation:

If you have bought a CALL option, then to close the position you will have to sell a CALL option Rs 200 strike price.

Explanation:

A future contract can be squared up by selling the same contract and in no other way.

Explanation:

Mr Singh has purchased a CALL and on the expiry day he is in a profitable postion as the price of the stock has risen and the spot price is above the strike price. So he will exercise his option.

Explanation:

Hedgeing basically means making an investment 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.

In the above question, if an investor own 30-40 stocks and feels the market (and so his stocks) will go down due to a upcoming event, he will short the index to minimise his losses.

Investors use this strategy when they are unsure of what the market will do.

Explanation:

The minimum networth for Clearing members of the derivatives clearing corporation/house shall be Rs.300 Lakhs (Rs 3 crores). The networth of the member shall be computed as follows:

– Capital + Free reserves
– Less non-allowable assets which are :

o Fixed assets
o Pledged securities
o Member’s card
o Non-allowable securities (unlisted securities)
o Bad deliveries
o Doubtful debts and advances
o Prepaid expenses
o Intangible assets
o 30% marketable securities

Explanation:

A situation where an option’s strike price is identical to the price of the underlying security. Both call and put options will be simultaneously “at the money.” For example, if XYZ stock is trading at 75, then the XYZ 75 call option is at the money and so is the XYZ 75 put option.

At the money option would lead to zero cash flow if it were exercised immediately. Therefore, for both call and put ATM options, strike price is equal to spot price.

Explanation:

Hedgers use derivatives to manage risks, Arbitrageurs use Cash market and Derivative market to make money by using the price differences. Speculators take open positions and take the risks.

Explanation:

When you buy a CALL option, your losses are limited to the extent of premium paid, but your profits, theoretically can be unlimited as the price of the underlying can rise to any levels.

When the price of an underlying rises, the price of an CALL option will also rise and so you can have unlimited profits.

Explanation:

Intrinsic value in options is the in-the-money portion of the option’s premium. For example, If a call options strike price is Rs15 and the underlying stock’s market price is at Rs 25, then the intrinsic value of the call option is Rs 10.

Option premium consists of two components – intrinsic value and time value. For an option, intrinsic value refers to the amount by which 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. 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.

Explanation:

In the unorganized markets, there is a huge risk of counter party default etc. In the organized markets for derivatives the Clearing Corporation guarantees the clearing and settlement of all trades even if there is a default of any participant.

Explanation:

Hedge Ratio = Value of the portfolio x Beta of the portfolio / Value of index futures contract

= 9,00,000 x 1.3 / 8000

= 146.25

Contracts required for a good hedge = 146.25 / Contract size = 146.25 / 75 = 1.95

Since one cannot hedge 1.95 contracts, the hedge will be for 2 futures contracts.

Explanation:

Clearing Corporation is responsible for clearing and settlement of all trades executed on the F&O Segment of the Exchange.

Clearing Corporation acts as a legal counterparty to all trades on this segment and also guarantees their financial settlement.

Explanation:

The maximum possible loss for a buyer of any option is the premium paid. Here you have paid Rs 37 as premium to buy a put option, so the maximum possible loss is Rs 37.

More Explanation – Buying a PUT means expecting the price to fall. When the price falls, the premium rises and you make a profit. When price rises, the premium falls so the buyer of put makes a loss. In above case the premium can technically fall from Rs 37 to zero, so the maximum loss is Rs 37.

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.

Explanation:

Tick size is the minimum move allowed in the price quotations. So a 5 paise tick size will lead to a upward tick of .05.

Explanation:

The forward contracts are negotiated between two parties, the terms and conditions of contracts are customized as per their requirements. These are OTC contracts.

Explanation:

Mr. Prashant has bought one lot ie. 2000 shares and does not want to have a loss of more than Rs 3000. So 3000 / 2000 = Rs 1.50. So per share he should not lose more than Rs 1.50.

His buying price is Rs 75. So 75 – 1.50 = 73.50 will be his stop loss price price.

When the share falls to Rs 73.50 , he will stand to lose Rs 3000.

Explanation:

SEBI has now permitted physical deliveries also.

Explanation:

Profit = Rs 28000 , Lot size = 500 , So per share profit = 28000/500 = Rs 56

Since he has a short position, he will be in a profit if the share falls and he buys at a lower price.

So the price has to fall by Rs 56 from Rs 350 = Rs 294

Explanation:

In an OTC market, no exchange is involved.

Explanation:

Theta is the change in option price given a one-day decrease in time to expiration. It is a measure of time decay.

Explanation:

Over the Counter options are made as per the needs of the trading parties – so they are customised.

Future options are standardised as per the rules of stock exchange.

Explanation:

Any one, whether he holds the underlying asset or not, can buy / write options.

Explanation:

Nifty options are derived from the NSE index ie. Nifty and so its an derivative product.

Explanation:

Bearish Vertical Spread using puts – The trader is bearish on the market and so goes long in one put option by paying a premium. Further, to reduce his cost, he shorts another low strike put and receives a premium.

Explanation:

A bear call spread is a limited profit, limited risk option strategy that can be used when the options trader is moderately bearish on the underlying security.

It is entered by buying call options of a certain strike price and selling the same number of call options of lower strike price (in the money) on the same underlying security with the same expiration month.

Explanation:

Uniform settlement cycle across all exchanges is recommended but the exchanges can fix their settlement cycle as per their wish and what suits them best.

Explanation:

A broker collects the initial margins from his clients as per their positions and pays to the exchange.

A low level of initial margin collected from clients can lead to defaults of clients in case of major movement of stock prices. So if clients defaults, it also increases the chances of the broker defaulting.

Explanation:

In futures market, the contracts have maturity of several months. So to safe gaurd against substantial rise /fall in the prices, profits and losses are settled on day-to-day basis – called mark to market settlement.

The exchange collects these margins from the loss making traders and pays to the gainers on day-to-day basis.

Explanation:

Long term investors buy stocks in Cash market for delivery. Hedgers and Speculators are active in the derivative markets.

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).

Explanation:

The most important of the ‘Greeks’ is the option’s is “Delta”. This measures the sensitivity of the option value to a given small change in the spot price of the underlying asset. It may also be seen as the speed with which an option moves with respect to price of the underlying asset.

Explanation:

Vega represents the amount of price changes in an option in reaction to a 1% change in the volatility of the underlying asset.

Volatility measures the amount and speed at which price moves up and down, and is often based on changes in recent, historical prices in a trading instrument. Vega changes when there are large price movements (increased volatility) in the underlying asset, and falls as the option approaches expiration.

Vega = Change in an option premium/ Change in volatility

Explanation:

Clearing Corporation or the Clearing House is responsible for clearing and settlement of all trades executed on the F&O Segment of the Exchange.

Clearing Corporation acts as a legal counterparty to all trades on this segment and also guarantees their financial settlement.

The Clearing and Settlement process comprises of three main activities, viz., Clearing, Settlement and Risk Management.

Explanation:

To protect ones portfolio against any downturn by going short in index is called Hedgeing.

Arbitrage is a tool to use price differences in different markets to make a profit.

Explanation:

A call option with a strike price that is lower than the market price of the underlying asset, or a put option with a strike price that is higher than the market price of the underlying asset.

For example, consider a stock that is trading at Rs 100. For such a stock, call options with strike prices below Rs 100 would be In the money calls ( ie Rs 80, Rs 90 calls) while put options with strike prices above Rs 100 (Rs 110 , Rs 120 calls etc.)would be In the money puts.

For easy understanding, those calls or puts which are profitable are In the Money.

Explanation:

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

In the above question, lets assume a trader has gone long in index options in current month and short in index options in third month. Incase he does not close his position by the end of current month, his current month option will expire and the third month option contract will become an open position as there is no opposite option contract in his account.

Explanation:

Short Selling means the selling of a security that the seller does not own.

Short sellers assume that they will be able to buy the stock at a lower amount than the price at which they sold short.