NISM Series VIII: Equity Derivatives Mock Test (Set 2) /50 NISM Series VIII – Equity Derivatives Mock Test (Set 2) 1 / 50 1. In Option Spreads, there is a combination of options constructed in such a way that there is limited profit or limited loss – True or False? a) False b) True Your answer is Incorrect Your answer is correct Explanation:Option 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. 2 / 50 2. If the price volatility of the underlying stock is high, then the Put option will ______. a) have comparatively higher premium b) have zero premium c) have comparatively lower premium d) volatility does not have any effect on the Put options Your answer is Incorrect Your answer is correct 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 because there is a greater possibility that the option will move in-the-money during the life of the contract.Higher volatility = Higher premium, Lower volatility = Lower premium (for both call and put options). 3 / 50 3. It’s not common to have derivatives contracts without any expiration date – True or False? a) True b) False Your answer is Incorrect Your answer is correct Explanation:Most derivatives contract have an expiration date. 4 / 50 4. When a dealer is conducting trades in both their account and for clients, these two types of trades have to be completely segregated – True or False? a) True b) False Explanation:The trades done by dealers are in the ‘PRO’ account ie. Proprietary account and the trades done by Clients are in the ‘CLI’ account.‘Proprietary Trading’ is when a member trades on exchange on its own behalf. As directed by SEBI and in pursuance of byelaws members are advised to specify the nature of the order in terms of order being a ‘Client order’ or ‘Proprietary order’. 5 / 50 5. Whom does the Clearing Member need to consult to set limits on the trading members clearing through him? a) No consultation is required with anyone as the Clearing Member can set the limits of his trading members on his own b) Clearing Corporation c) The respective Stock Exchange d) SEBI Your answer is Incorrect Your answer is correct Explanation:A trading terminal helps the Clearing Members to monitor the open positions of all the Trading Membersclearing 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. 6 / 50 6. Mr. Arvind is very optimistic about the market, but he believes that some specific companies in his portfolio will not perform well in the future. What strategy should he adopt? a) Sell Index futures and Buy specific companies shares b) Sell Index futures and Sell specific companies shares c) Buy Index futures and Sell specific companies shares d) Do nothing as markets are uncertain Explanation:Mr. Arvind should sell the shares of those specific companies and buy index futures. By this he will profit when the index rises and avoid losses on those specific companies if his view proves to be correct. 7 / 50 7. _______ refers to the maximum exposure, in terms of the number of options and futures contracts, that an investor can hold on one side of the market. a) Outstanding Limit b) Upper Limit c) Market Limit d) Position Limit Your answer is Incorrect Your answer is correct 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. 8 / 50 8. How do you close a short position in a futures market? a) By executing a purchase of the same futures contracts b) By entering into a suitable forward contract c) By buying a Call Option d) By executing a sale of the same futures contracts Your answer is Incorrect Your answer is correct Explanation:A short future contract ie. a sale position can be squared up by buying the same contract in futures market and in no other way. 9 / 50 9. When exercising a call option on an index, the option holder receives from the option writer a cash amount equal to the excess of the spot price (at the time of exercise) over the strike price of the call option – True or False? a) False b) True Your answer is Incorrect Your answer is correct Explanation:When a person buys a Call Option of an index, he is expecting the index to rise. On exercise, if the spot price of the index is over and above the strike price at which the buyer had bought the Call, he will receive the difference between the spot price and strike price. 10 / 50 10. What is the purpose of hedging? a) It minimises business losses b) It maximises business profits c) It produces a more clearer outcome d) Hedging can be used only in currency markets and not in equity markets Your answer is Incorrect Your answer is correct Explanation:Hedging produces a more clearer outcome. The classic example is the farmer who sells futures contracts to lock into a price for delivering a crop on a future date. The buyer might be a food-processing company, which wishes to fix a price for taking delivery of the crop in the future.Another case is that of a company due to receive a payment in a foreign currency on a future date. It enters into a forward transaction with a bank agreeing to sell the foreign currency and receive a predetermined quantity of domestic currency. 11 / 50 11. A trader sells a futures contract, and if the price rises, the trader will ________. a) make a profit b) make a loss Your answer is Incorrect Your answer is correct Explanation:The trader has sold the future contract which means he believes that the prices will fall. So he will make a loss if price rises. 12 / 50 12. What does a beta greater than 1 indicate? a) It means that the expected percentage change in stock price will be more than the percentage change in index b) It means that the expected percentage change in stock price will be twice the percentage change in index c) It means that the expected percentage change in stock price will be less percentage change in index d) It means that the expected percentage change in stock price equals the percentage change in index Your answer is Incorrect Your answer is correct Explanation:Beta measures the sensitivity of a stock / portfolio vis-a-vis index movement over a period of time, on the basis of historical prices.If Beta of a stock is 1, it means that a % change in the index will lead to equal % change in the stock price.Suppose a stock has a beta equal to 2. This means that historically a security has moved 20% when the indexmoved 10%. 13 / 50 13. Intrinsic value of an option is sum of Option premium and Time value – State whether True or False? a) True b) False Your answer is Incorrect Your answer is correct Explanation:Intrinsic value is basically the difference between Spot price and Strike price.Option premium consists of two components – intrinsic value and time valueFor eg. If the current option premium for a Rs 500 strike price Call option is Rs 70 and the current spot price is Rs 550, than Rs 50 is the intrinsic value (550 -500) and the balance Rs 20 (70 – 50) is the time value. 14 / 50 14. Which of these statements is accurate? a) Money and securities deposited by clients can be attached as per the decision of the Stock Exchange b) Money and securities deposited by clients can be attached as per the decision of the clearing corporation c) Money and securities deposited by clients cannot be attached for meeting the brokers obligation on his proprietary account d) Money and securities deposited by clients can be attached for meeting the brokers obligation on his proprietary account Your answer is Incorrect Your answer is correct Explanation:The securities or money deposited by clients cannot be attached for meeting broker’s obligation on his proprietary account.The broker has to maintain separate client bank account for segregation of client money.Also brokers should keep margins collected from clients in a separate bank account. 15 / 50 15. The Intrinsic Value is zero for out-of-the-money options but always positive for in-the-money options – State True or False? a) False b) True Explanation:In-the-money options have positive 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. 16 / 50 16. There is higher flexibility in fixing forward contract specification as compared to futures contract specifications – State True or False? a) True b) False Your answer is Incorrect Your answer is correct Explanation:Futures are standardized contracts introduced by the exchanges. They have certain limitations in the context of limited maturities, limited underlying set, lack of flexibility in contract design and increased administrative costs on account of MTM settlement etc.Forward contracts are customised between two parties and there is complete flexibility in designing the contract specifications as per mutual consent. 17 / 50 17. Speculator accepts the risks in search of profits – State True or False? a) True b) False Your answer is Incorrect Your answer is correct Explanation:Speculators try to predict the future movements in prices of stocks, commodities, currencies etc. and accordingly buy or sell. There is risk in such activities but the speculators take these risks in order to make profits. 18 / 50 18. A Clearing Member must deposit a certain amount with the clearing corporation, and this deposit forms part of the security deposit. a) Rs. 150 lakhs b) Rs. 20 lakhs c) Rs. 50 lakhs d) Rs. 100 lakhs Your answer is Incorrect Your answer is correct 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.– Deposit of Rs. 50 lakhs to clearing corporation which forms part of the security deposit of the Clearing Member.– Additional incremental deposits of Rs.10 lakhs to clearing corporation for each additional TM, in case the Clearing Member undertakes to clear and settle deals for other TMs. 19 / 50 19. Exposure levels of Clearing Members are directly correlated with the Liquid Assets maintained with the Clearing Corporation. a) Negatively b) Positively c) exponentially d) Not related Your answer is Incorrect Your answer is correct Explanation:Exposure levels of Clearing Members are positively correlated with the Liquid Assets maintained with the Clearing Corporation.More the liquid assets deposited with the Clearing Corporation, higher will be the exposure levels available to the Clearing Member. 20 / 50 20. When regular cash dividends are announced, the values of Call Options will go down – True or False? a) False b) True Your answer is Incorrect Your answer is correct Explanation:Cash dividends issued by stocks have a 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.In case of call options, the values get reduced / discounted by as much as the dividend amount.Put options get more expensive as the stock price will drop by the dividend amount after the ex-dividend date. 21 / 50 21. In the world of index futures, if you have an open position, you can close it or settle it by ________. a) either by cash or delivery on maturity b) exchange for gold on maturity c) delivery on maturity d) cash settlement on maturity Your answer is Incorrect Your answer is correct Explanation:Index futures are always cash settled on maturity i.e. the difference between trade price and settlement price is received or paid. 22 / 50 22. The person holding a long position in a PUT option will profit if the price of the underlying asset _________. a) Decreases b) Does not change c) Increases d) If the option expires worthless Explanation:The buyer of a Put Option is bearish. He believes that the price of the underlying will fall.When the price falls, the value of the put option rises. So he will benefit only if the price decreases. 23 / 50 23. When the price of a futures contract goes up, the margin account ______. a) of the seller of futures contract will be debited for the loss b) of the buyer of futures contract will be credited for the gain c) Both 1 and 2 d) None of the above Your answer is Incorrect Your answer is correct Explanation:The buyer of futures will have a notional gain and so his margin account will be credited by the notional gain amount.The seller of futures will have a notional loss if the price rises and his margin account will be debited by the notional loss amount. 24 / 50 24. A forward contract _______. a) cannot be cancelled b) can be cancelled if the counter party also agrees to it c) can be cancelled but only after the expiry date d) can be cancelled even without the consent of the counter party Your answer is Incorrect Your answer is correct Explanation:Forwards are negotiated between two parties and the terms and conditions of contracts are customized.Any alteration in the terms of the contract or cancellation of the contract is possible if both parties agree to it. 25 / 50 25. Suppose you’re a trading member, and you’ve purchased 14 contracts of April series index futures while selling 7 contracts of April series index futures on your own account. What will be your exposure on these transactions? a) It will be netted to 7 contracts b) The Stock Exchange can decide to either to gross up or net out the exposure depending on the past record of the trading member c) It will grossed up to 21 contracts d) Higher of 14 and 7 ie. 14 contracts Your answer is Incorrect Your answer is correct Explanation:Since its the same index futures contract, the exposure will be netted ie. 14 – 7 = 7 contracts. 26 / 50 26. A mutual fund manager is negative about the market and wants to decrease the fund’s exposure to stocks from 50% to 40%, without selling any existing stock holdings. Can the manager achieve this by selling index futures? a) No, Mutual funds are not allowed to sell index futures b) Yes, he can sell index futures Your answer is Incorrect Your answer is correct Explanation:FII and Mutual funds can buy/sell in futures subject to certain limits.FII & MF position limit in all index futures contracts on a particular underlying index is Rs. 500 Crores or 15 % of the total open interest of the market in index futures, whichever is higher. This limit would be applicable on open positions in all futures contracts on a particular underlying index.In addition to the above, FIIs & MF’s shall take exposure in equity index derivatives subject to the following limits:a) Short positions in index derivatives (short futures, short calls and long puts) not exceeding (in notional value) the FII’s/ MF’s holding of stocks.b) Long positions in index derivatives (long futures, long calls and short puts) not exceeding (in notional value) the FII’s/ MF’s holding of cash, government securities etc. 27 / 50 27. For a derivative exchange, the net worth requirement for a clearing member is always less than that for a non-clearing member – True or False? a) True b) False Your answer is Incorrect Your answer is correct Explanation:In a derivative exchange, the networth requirement for a clearing member is higher than that of a non-clearing member. 28 / 50 28. Theta is the rate of change in the option premium for a unit change in ________. a) interest rates b) time to expiry c) volatility d) price of the underlying asset Your answer is Incorrect Your answer is correct Explanation:Theta is the change in option price given a one-day decrease in time to expiration. It is a measure of time decay. (Please memorize the details for Delta, Gamma, Theta, Rho etc.) 29 / 50 29. Future prices are generally more transparent than forward prices – True or False? a) True b) False Your answer is Incorrect Your answer is correct 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. Since the futures are traded in an organised manner and mostly done through screen based trading, they are much more transparent than forwards. 30 / 50 30. Derivative brokers/ dealers are expected to know their clients and to exercise care to ensure that the derivative product being sold by them to a particular client is suitable to his understanding and financial capabilities – State True or False? a) False b) True Your answer is Incorrect Your answer is correct Explanation:Derivatives brokers/ dealers should avoid recommending opening futures/ options transaction unless they have a reasonable basis for believing that the customer has such knowledge and financial experience that he or she is capable of evaluating, and financially able to bear, the risks of the transaction. 31 / 50 31. Is it true that a buyer of a CALL OPTION cannot lose more than the option premium paid? a) True only for European options b) False for all type of options c) True only for American options d) True for all type of options Explanation:The maximum loss for buyer of any option is the premium paid. 32 / 50 32. Why is screen-based trading better than floor trading? a) There is no need to route the order through an exchange b) There is transparency in trade execution and execution price c) The technology needs are lower d) There are no set up costs in screen based trading Your answer is Incorrect Your answer is correct Explanation:Screen based (Trading thro’ computers) trading is fully transparent.All the derivatives exchanges in India provide a fully automated screen-based trading platform for index futures, index options, stock futures and stock options. These trading systems support an order driven market and simultaneously provide complete transparency of trading operations. Derivative trading is similar to that of trading of equities in the cash market segment.All these exchanges have developed software for the F&O market to facilitate efficient and transparent trading in futures and options instruments. 33 / 50 33. Mr. Roshan is a Chartered Accountant and Mr. Ramesh is a Commerce Graduate. Both are clearing members of a recognized exchange. Based on this information, identify the TRUE statement. a) Mr. Roshan will enjoy higher exposure limits than Mr. Ramesh b) Both of them will enjoy the same exposure limits c) Mr. Ramesh will enjoy higher exposure limits than Mr. Rohit d) Insufficient information to draw a conclusion Explanation:Position limits are the maximum exposure levels which can be assumed by each investor or Clearing Member or the market as a whole. Such position limits are defined by SEBI.The exchanges lay down exposure limits either in rupee terms or as percentage of the Trade Guarantee Fund (TGF)/Settlement Guarantee Fund (SGF).Thus, exposure limits is dependent on the funds deposited by the Clearing member and not his education qualifications. 34 / 50 34. What happens to the intrinsic value of a Put Option when the Strike Price decreases? a) The intrinsic value goes down b) Their is no change in the intrinsic value c) The intrinsic value goes up Your answer is Incorrect Your answer is correct 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.Therefore the intrinsic value of put option goes down as strike price is taken down. 35 / 50 35. Mr. Sanjay bought a ABC stock Put contract of Rs 300 strike for Rs 50. Lot size is 2000. What is his profit (+) or loss (-), if he sells the Put at Rs. 56? a) +10000 b) -12000 c) -10000 d) +12000 Your answer is Incorrect Your answer is correct Explanation:This a simple question of calculation. Bought at Rs 50 and sold at Rs. 56. Which means there is a profit of Rs 6.Rs 6 x 2000 (Lot size) = Rs 12000 profit 36 / 50 36. If a speculator buys a naked Call Option, this means they believe the price of the asset will _________. a) Bullish view b) Bearish view c) Myopic view d) Mixed view Your answer is Incorrect Your answer is correct Explanation:A naked position means a positional view – bullish or bearish. It’s the opposite of a hedge position.A buyer of a Call option has a bullish view. 37 / 50 37. What does the term ‘Near Month’ in futures contracts mean? a) 'Near Month' is the month of expiry of the futures contract b) Prices'Near Month' is the month of beginning of the futures contract c) 'Near Month' is the current month of the futures contract d) None of the above Your answer is Incorrect Your answer is correct Explanation:Futures contract have a maximum of 3-month trading cycle – the near month contract (which is the 1st / Current month ) the next month contract (which is the 2nd month ) and the far month contract (which is the 3rd month ).Thus, on May 10th, 20XX, index and stock futures contracts on the NSE are available for trading for the near month (May 20XX), the next month (June 20XX) and the far month (July 20XX). 38 / 50 38. ‘Rho’ is connected to the ___________ . a) Time to expiry of the option b) Interest rates in the market c) Volatility of the underlying d) Price of the underlying 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. 39 / 50 39. In connection with the futures market, basis is ________ . a) The current interest rate in the economy b) Underlying market price c) Volatility in the market d) The difference between the futures price and spot price Your answer is Incorrect Your answer is correct 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. 40 / 50 40. Identify the transaction which is an example of a speculative trade using futures. a) When a person buys a stock in the cash market and simultaneously shorts the overpriced stock futures contract b) When a person buys a under priced index futures contract of one month and simultaneously selling the overpriced index futures contract of another month c) When a person takes a long position in the stock futures in expectations of announcement of excellent results d) When a person takes a short position in index futures to protect against a decline in his portfolio value Explanation:Speculative transactions in future are those transactions which :– Do not result in delivery– Are not done for hedging– Are not a part of a strategy or arbitrageWhen a person takes a long position in the stock futures in expectations of announcement of excellent results is pure speculative transaction as its not a hedge or a strategy or arbitrage. 41 / 50 41. In the Indian stock market, ______ can create an option. a) Individuals b) Market Makers c) Foreign portfolio investors d) All of the above Your answer is Incorrect Your answer is correct Explanation:All of the above can write (sell) options in Indian stock market.Individuals like traders, hedgers, arbitrageurs etc. can write options as per their plans.FIIs bring foreign capital to India, they invest in the F & O (Future and option market). FIIs can also write options or short futures, as required by their strategy.The market maker is a key stock market participant and like any trader or arbitrageur, he is also there for the profit and buy/write options. 42 / 50 42. The BID PRICE is always _________. a) Lower than ASK PRICE b) Higher than ASK PRICE c) Equal to ASK PRICE Your answer is Incorrect Your answer is correct Explanation:Bid price is the price buyer is willing to pay and ask price is the price seller is willing to sell.For example the prices as seen on the screen will be – Reliance Inds 2500 – 2501, where 2500 is the bid price and 2501 is the ask price.So the Bid price is always lower than Ask price. 43 / 50 43. One of the reason that future trading has become expensive is due to higher margins – True or False? a) False b) True Your answer is Incorrect Your answer is correct Explanation:Cost components of futures transaction include margins, transaction costs (commissions), taxes etc.So, higher the margins more expensive the trading. 44 / 50 44. Who gives the first payment to the exchange when starting a futures contract? a) Only buyers pay initial margin b) No margins are payable to the exchange by buyer or seller c) Only sellers pay the initial margin d) Both the buyer and seller pay initial margin to the exchange Your answer is Incorrect Your answer is correct 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.In case of futures, The buyer and seller are required to pay iinitial margin as decided by exchanges for entering into futures contract.(In case of Options, the initial margin is paid only by the sellers. The option buyers have to pay the premium) 45 / 50 45. Which participant of a stock exchange doesn’t directly trade but handles clearing and settlement for Trading Members and institutional clients? a) A Professional clearing member b) Custodial participant c) A Self-clearing member d) A Trading-cum-clearing member Your answer is Incorrect Your answer is correct 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. 46 / 50 46. Losses from derivative transactions conducted on a recognized stock exchange can be carried forward for a period of ________. a) 10 assessment years b) 8 assessment years c) 5 assessment years d) 7 assessment years Your answer is Incorrect Your answer is correct Explanation:Loss on derivative transactions can be set off against any other income during the year (except salary income). In case the same cannot be set off, it can be carried forward to subsequent assessment year and set off only against any other non-speculative business income of the subsequent year.Such losses can be carried forward for a period of 8 assessment years. 47 / 50 47. In which document are the risks associated with trading in derivatives required to be outlined? a) It can be conveyed verbally to the client b) The Risk Disclosure document c) Contract Note which is sent to the client d) None of the above Your answer is Incorrect Your answer is correct Explanation:The broker is required to get a Risk Disclosure Document signed by the client, at the time of client registration. This document informs clients about the kind of risks that derivatives can involve for the client. It makes the client aware and informed about the various risks associated with derivatives trading. 48 / 50 48. The Beta of a portfolio represents the _________. a) Simple average of the beta’s of the constituent securities in that portfolio b) Value weighted average of the beta’s of the constituent securities in that portfolio c) Sum of the betas the constituent securities in that portfolio d) Same as the beta of the stock with the highest market capitalization Your answer is Incorrect Your answer is correct Explanation:Portfolio beta is a weighted average of betas of individual stocks in the portfolio based on their investment proportion.For example, if there are four stocks in a portfolio with betas 0.5, 1.1, 1.30 and 0.90 having weights 35%, 15%, 20% and 30% respectively, the beta of this portfolio would be 0.87 ( = 0.5*0.35 +1.10*0.15 +1.30*0.20 +0.90*0.30) 49 / 50 49. What does the risk of bad delivery mean in an index futures contract? a) The risk is there but quiet low b) The risk is very high c) The risk is around 25% of the total deliveries d) The risk does not exist Your answer is Incorrect Your answer is correct Explanation:Index futures are financial contracts whose underlying asset is a specific index like Nifty 50 or Bank Nifty.According to the SEBI regulations, all index futures contracts are cash-settled i.e. there is no delivery of stocks. As there is no delivery, risk of bad delivery does not arise.(Bad delivery means delivery of securities which cannot be legally transferred to the buyer due to some issue with the securities. For eg. Fake or stolen securities). 50 / 50 50. When is the maturity date for the monthly series of NSE index futures? a) Last Wednesday of the month b) First Wednesday of the month c) Last Thursday of the month d) First Thursday of the month Your answer is Incorrect Your answer is correct Explanation:The Nifty, the Bank Nifty futures contracts and the stock futures contracts listed on the NSE expire on the last Thursday of the respective month (or the day before if the last Thursday is a trading holiday). Your score is 0% Restart quiz Exit
