NISM Series VIII: Equity Derivatives Mock Test (Set 3) /50 NISM Series VIII – Equity Derivatives Mock Test (Set 3) 1 / 50 1. In the futures market, a long position can only be offset with the same counterparty from whom the contract was originally purchased – True or False? a) True b) False Your answer is Incorrect Your answer is correct Explanation:Futures contracts are traded on screen based derivatives market where the identity of the buyer and seller is unknown to each other. A trade can be squared off with any buyer or seller whose quotes are available on the screen.The Clearing Corporation acts as a legal counterparty for every contract and guarantees the trades. 2 / 50 2. The broker is obligated to obtain a signed Risk Disclosure Document from the client during the client registration process – True or False? a) True b) False 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 well informed. 3 / 50 3. If Meghna intends to sell 34 contracts of ABC futures at Rs. 2450 (with a contract multiplier of 50) and the initial margin requirement is 7%, what is the total initial margin she needs to pay? a) Rs. 5831 b) Rs. 83300 c) Rs. 291550 d) Rs. 4165000 Your answer is Incorrect Your answer is correct Explanation:Margin to be collected from Meghna : Rs 2450 X 34 contracts X 50 (Market lot) at 7%= Rs 4165000 x 7% = Rs 291550 4 / 50 4. Arbitrage involves achieving a risk-free profit by simultaneously buying and selling identical or replicating assets in two or more different markets – True or False? a) True b) False Your answer is Incorrect Your answer is correct Explanation:Arbitrage is a deal that produces profit by exploiting a price difference in a product in two different markets. Arbitrage originates when a trader purchases an asset cheaply in one location and simultaneously arranges to sell it at a higher price in another location. 5 / 50 5. In the event of a member’s default, the Clearing Corporation cannot transfer client positions to another member or close out all open positions of the defaulting member without prior approval from SEBI – True or False? a) True b) False Your answer is Incorrect Your answer is correct Explanation:As per SEBI rules – The Clearing Corporation can transfer client positions from one broker member to another broker member in the event of a default by the first broker member.A report is then sent to SEBI regarding this. 6 / 50 6. The Clearing Corporation of an Exchange guarantees the performance of exchange-traded contracts – True or False? a) True b) False Your answer is Incorrect Your answer is correct Explanation:Clearing Corporation acts as a legal counterparty to all trades on this segment and also guarantees their financial settlement. 7 / 50 7. Under what conditions is it profitable to exercise options? a) In the Money b) At the Money c) Out of the Money d) None of the above Your answer is Incorrect Your answer is correct Explanation:IN THE MONEY – 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. In the money means that your stock option is worth money and you can turn around and sell or exercise it.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. 8 / 50 8. The seller of a call option can potentially incur an unlimited loss – True or False? a) True b) False Your answer is Incorrect Your answer is correct Explanation:A seller of a Call Option expects the price to fall. But as the price of the underlying rises, he begins to make losses. Theoretically the price can rise to any levels and so the call option seller may make unlimited losses. 9 / 50 9. ‘Bulls’ are investors who anticipate that the market will experience an upward movement – True or False? a) True b) False Your answer is Incorrect Your answer is correct Explanation:Investors who believe that the markets will rise are called Bulls and investors who believe that markets will fall are known as Bears. 10 / 50 10. The initial margin is always equivalent to the mark-to-market margin – True or False? a) True b) False Your answer is Incorrect Your answer is correct Explanation:Mark to Market is a process by which margins are adjusted on the basis of daily price changes in the markets for underlying assets. So this margin is as per the daily price movements.Initial margin is usually fixed depending on the price volatility. Higher the volatility, higher the initial margin. 11 / 50 11. What is the expectation of a seller of a Put Option? a) No change in the price of the underlying b) An increase in the price of the underlying c) Both 1 and 2 d) A decrease in the price of the underlying Your answer is Incorrect Your answer is correct Explanation:A seller of put option expects the price to rise.Even if the price remains stable, the seller earns the option premium.(Note – Buyer of Put option is bearish and a seller of Put option is bullish / neutral) 12 / 50 12. In the derivatives segment, who is responsible for paying the margins as stipulated by the Clearing Corporation? a) Arbitrageurs b) Financial Institutions c) Clients d) All of the above Your answer is Incorrect Your answer is correct Explanation:All those who trade in the derivatives segment have to pay margins without exception. 13 / 50 13. When the price of a future contract decreases, the margin account ______ . a) of the buyer of futures contract will be debited for the loss b) of the seller 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 loss and so his margin account will be debited by the notional loss amount.The seller of futures will have a notional profit if the price falls and his margin account will be credited by the notional gain amount. 14 / 50 14. Mr. Ganesh, anticipating a market decline, sells 10 lots of index futures at 3500. His prediction proves correct, and he later buys back the futures contract at 3410. Calculate Mr. Ganesh’s profit, considering one lot of the index is valued at 50. a) 45000 b) 65000 c) 35000 d) 55000 Your answer is Incorrect Your answer is correct Explanation:Mr Ganesh had sold at Rs 3500 and bought back at Rs 3410. So he made a profit of Rs 90.Total Quantity sold = 10 lots x 50 (lot size) = 500Total Profit = Rs 90 x 500 = Rs 45,000 15 / 50 15. Options contracts involve two types of settlements: ______ premium settlement and final settlement. a) Daily b) Weekly c) Monthly d) Yearly Your answer is Incorrect Your answer is correct Explanation:Options contracts have two types of settlements: Daily premium settlement and Final settlement.Daily Premium Settlement :The buyer of an option pays the premium, while the seller receives the same. The amount payable and receivable as premium are netted to compute the net premium payable or receivable amount for each client for each option contract. The clearing members who have a premium payable position are required to pay the premium amount to the clearing corporation and in turn this amount is passed on to the members who have a premium receivable position. This is known as daily premium settlement.The premium payable amount and premium receivable amount are directly credited/ debited to the clearing member’s clearing bank account on T+1 day, where T is the trade date. 16 / 50 16. Investors who believe that the markets will fall are known as Bulls – True or False? a) True b) False Your answer is Incorrect Your answer is correct Explanation:Investors who believe that the markets will fall are known as Bears.Investors who believe that the markets will rise are known as Bulls. 17 / 50 17. Which statement(s) below is/are true for a Futures Contract? a) Futures Contracts are traded on an exchange b) Futures Contracts are settled through clearing corporation of the exchange c) Futures Contracts are standardized contracts d) All of the above Explanation:Futures contract are standardised in terms of size of the contract, time to expiry etc. They are always traded on a recognised exchange and the settlement is through a clearing corporation. 18 / 50 18. What is Tick size? a) Tick size is the size of the futures contract b) Tick size is the maximum permitted movement in the price of the contract c) Tick size is the minimum permitted movement in the price of the contract d) Tick size is the average of the high and low permitted prices Your answer is Incorrect Your answer is correct Explanation:Tick Size is the minimum move allowed in the price quotations. 19 / 50 19. In a calendar spread transaction, the trader takes opposite position in two futures contract with _______ . a) Two differently delivery months and two different underlying assets b) Two differently delivery months and same underlying asset c) One stock and one index of same delivery months d) Two different underlying assets and same delivery month Your answer is Incorrect Your answer is correct Explanation:Calendar spread position is a combination of two positions in futures on the same underlying – long on one maturity contract and short on a different maturity contract. For instance, a short position in near month contract coupled with a long position in far month contract is a calendar spread position. 20 / 50 20. When a seller engages in SHORT SELLING a stock, it means _________. a) He does not own the stock he is supposed to deliver b) He has to deliver the stock within a short time c) He has more than a months time to deliver the stock which he sold d) He owns the stock he is supposed to deliver Explanation:Selling Short means Seller does not own the stock he is supposed to deliver.He has done a sale trade because he expects the price to fall and has to buy back the stock (either with a profit or loss) before the end of trading on that day. 21 / 50 21. The simultaneous purchase and sale of two different tenors futures contracts in the same underlying is known as a _________. a) Long hedge b) Spread trade c) Limit order d) Short hedge Explanation:In case of a Spread Trade, two opposite positions (one long and one short) are taken either in two contracts with same maturity on different products or in two contracts with different maturities on the same product. 22 / 50 22. If the volatility of the underlying stock is decreasing, the premium of a call option would _________. a) Decrease b) Increase c) will not change d) None of the above Explanation:Lower the volatility lower the risk and so lower the premium.The stocks which are highly volatile will have comparatively higher option premiums as there involves a lot of risk trading in such stocks. 23 / 50 23. The excess of premium in an option over the intrinsic value is known as the time value – True or False? a) True b) False Your answer is Incorrect Your answer is correct Explanation:Option premium consists of two components – intrinsic value and time value. Option premium is the sum of intrinsic value and time value.Time value is the difference between premium and intrinsic value. ATM and OTM options will have only time value because the intrinsic value of such options is zero. 24 / 50 24. As per news, the Government can lose a vote of confidence and this can affect the stock markets pretty badly. If you are an active trader, what is the ideal step you will take? a) Buy Blue Chip shares b) Sell index futures c) Buy index futures d) Double your portfolio holdings Your answer is Incorrect Your answer is correct Explanation:In case of a negative news like fall of a Government, the stock markets generally fall. Its difficult to judge which stocks will fall more. So, the best way is to short the index futures as the index is bound to fall in response to a negative news and the active trader can profit from it. 25 / 50 25. In stock markets, Beta is a statistical measure of the sensitivity of the movement of a share price to the movement of prevailing interest rates – True or False? a) True b) False 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. 26 / 50 26. The trades executed by dealers in their own account must be completely segregated from the trades conducted in their clients’ accounts – 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’. 27 / 50 27. The Time value of an option is the portion of the option premium associated with the remaining time until the expiry of the option contract and the potential changes in the underlying components that determine the option’s value during that time – True or False? a) True b) False Explanation:Time value of the option depends upon how much time is remaining for the option to expire.If all other factors affecting an option’s price remain same, the time value portion of an option’s premium will decrease with the passage of time. This is also known as time decay. 28 / 50 28. In the Options segment, when you buy a PUT, you anticipate the market/scrip to move ________. a) Range bound b) Down c) Up d) One cannot buy a PUT in options market. Explanation:A buyer of a PUT option has a negative / bearish view and so he expects the market / script to move down to make a profit. 29 / 50 29. What advantage does screen-based trading have over floor trading? a) There is no need to route the order through an exchange b) There are no set up costs in screen based trading c) There is transparency in trade execution and execution price d) The technology needs are lower Explanation:Screen based (Trading thro’ computers) trading is fully transparent. 30 / 50 30. A ‘Closing buy transaction’ will have the effect of partly or fully offsetting ________. a) A long position b) A high position c) A short position d) A cross position Explanation:Creating a Short Position means selling the asset on an exchange with a view to buy it back when the price falls.So a Closing Buy transaction will be used to buy back / offset the short position created. 31 / 50 31. Mr. P and Mr. Q are clearing members of a stock exchange, each maintaining Rs 7 crores of liquid assets, including equity shares and other assets, with identical exposure limits on day one. In light of this, which statement below is accurate? a) The minimum exposure possible for the two brokers will remain same for ever, even if they withdraw the asset deposited subsequently b) The minimum exposure possible for the two brokers may change from time to time based on the changes in those asset valuations, even if they do not withdraw the assets deposited c) The minimum exposure possible for the two brokers will remain the same forever as long as they do not withdraw the assets deposited d) None of the above Explanation:The exposure depends on the value of assets deposited. Although both P and Q have deposited assets worth Rs.7 crores, the assets could be different (equity shares of different companies) and the value of these will become higher or lower as time passes. So the exposure limits will also change accordingly. 32 / 50 32. Ms. Deepika is bearish on the market, so she anticipates the market to _____. a) Fall b) Rise c) Move sideways d) Remain constant Your answer is Incorrect Your answer is correct Explanation:Investors who have a bearish on the stock or index expect the stock price or index level to fall, take a short position in the stock futures or index futures contract.(Investors who have a bullish view on the underlying stock or index expect the stock price or index level to increase and they take a long position in the stock futures or index futures contract). 33 / 50 33. Identify the True formula for Cost of Carry model. a) Price of Futures = Spot price b) Price of Futures = Cost of carry c) Price of Futures = Spot – Cost of carry d) Price of Futures = Spot + Cost of carry Your answer is Incorrect Your answer is correct Explanation:Cost of Carry is the relationship between futures prices and spot prices. For stock derivatives, carrying cost is the interest paid to finance the purchase.For example, assume the share of XYZ Ltd is trading at Rs. 500 in the cash market. A person wishes to buy the share, but does not have money. In that case he would have to borrow Rs. 500 at the rate of, say, 12% per annum. So 1% ie. Rs 5 ( 1% of Rs 500) is the per month interest cost. and this Rs 5 is the cost of carry.The future price (ideally) at the beginning of month will be Spot Price + Cost of Carry ie. Rs 500 + Rs 5 = Rs 505. 34 / 50 34. Identify the FALSE statement. a) For Put Options : With decrease in strike price, the premium on put decreases b) For Put Options : With increase in strike price, the premium on put increases c) For Call Options : With increase in strike price, the premium on call increases d) For Call Options : With decrease in strike price, the premium on call increases Your answer is Incorrect Your answer is correct Explanation:If all the other factors remain constant but the strike price of option increases, intrinsic value of the call option will decrease and hence its value will also decrease.For example, when the underlying index is at 17562, a call option with a strike price of 17600 will trade at a higher price than a call option with the same maturity but with a strike price of 17700. This is because the intrinsic value is progressively lower for higher strike prices of calls.(On the other hand, with all the other factors remaining constant, increase in strike price of option increases the intrinsic value of the put option which in turn increases its option value. Thus, a put option with a strike price of 17700 will trade at a higher premium than a put option with the same maturity but a strike price of 17600). 35 / 50 35. __________ ensures the performance of exchange-traded contracts. a) Custodians b) Depositories c) SEBI d) Clearing Corporation Your answer is Incorrect Your answer is correct Explanation:Clearing Corporation is responsible for clearing and settlement of all trades executed in the F&O Segment of the Exchange. According to the legal principle of ‘novation’, the Clearing Corporation becomes the central counterparty to all trades that take place on the exchange’s derivatives platform.A clearing corporation guarantees contract performance (settlement of transactions). 36 / 50 36. If there is no cross-margining between the cash and derivative segments of an exchange, this will _________. a) Reduces the volumes for given level of risk capital in the economy b) Promotes economic inefficiency c) Increase the cost of trading d) All of the above Explanation:Cross margining is available across Cash and Derivatives segment.If a trader has credit balance in his trading account in the cash segment, he can use it to margin his derivative trading, thus reducing his overall margin level.If cross margining is not there, more margin will have to be deposited with the exchange which will increase the cost of trading. 37 / 50 37. How should a seller of an option record the premium received in their books of accounts? a) It should be treated as a Liability b) It should be treated as an Asset c) It should be treated as an Expense d) It should be treated as an Income Explanation:The buyer/ holder of the option is required to pay the premium. In the books of the buyer/ holder, such premium should be debited to an appropriate account, say, “Equity Index/ Stock Option Premium Account”.In the books of the seller/ writer such premium received should be credited to an appropriate account, say, “Equity Index/ Stock Option Premium Account”. 38 / 50 38. Among the various complaints against a trading member listed below, identify the one that can be addressed by the exchange for redressal? a) Non-receipt of funds or securities b) Claims for notional loss for the disputed period c) Complaints relating to land dealings between a client and a trading member d) Complaints in respect of transactions which are already subject matter of arbitration proceedings 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. ‘Non-receipt of funds/securities’ comes under this assistance. 39 / 50 39. Mr. X sells one ABC stock futures contract at Rs. 745. What is his profit (+) or loss (-) if he buys back the contract at Rs. 754? Considering a lot size of 1500, what is the result? a) +13500 b) -13500 c) +9800 d) -9800 Explanation:When you sell a stock future contract you make a profit if the share price falls or you make a loss if the price rises.In this case, ABC stock futures has risen by Rs. 9 (754 – 745). So there will be a loss.Rs. 9 x 1500 (Lot size) = Loss of Rs 13500 40 / 50 40. Identify the CORRECT statement. a) A short position in a put option can be closed out by taking a long position in a put option with the same exercise price and exercise date b) A short position in a put option can be closed out by taking a long position in a put option of any exercise price and exercise date c) A short position in a put option can be closed out by taking a long position in a call option with the same exercise price and exercise date d) A short position in a put option can be closed out by taking a short position in a call option with the same exercise price and exercise date Explanation:A closing transaction for an option involves the sale or purchase of an option contract with the same terms (contract specifications), i.e., an option with the same strike price and same expiry date. 41 / 50 41. Hedgers and speculators are two crucial participants in a securities market, finding a balance due to their distinct needs as _________. a) Both hedgers and speculators want to take risk b) Both hedgers and speculators want to avoid risk c) Hedger wants to takes risk while speculators wants to avoids risk d) Hedger wants to avoids risk while the speculator wants to takes risk Explanation:Corporations, Investing Institutions, banks and governments all use derivative products to hedge or reduce their exposures to market variables such as interest rates, share values, bond prices, currency exchange rates and commodity prices.Speculators/Traders try to predict the future movements in prices of underlying assets and based on the view, take positions in derivative contracts. They take a risk to make profits.Hedgers aim to hedge their risk where as speculators take the risk which hedgers plan to offload from their exposure. 42 / 50 42. Mr. Harish had acquired 20 call options on a stock, paying a premium of Rs 10 per call (Strike price of Rs. 125). On the exercise date, the stock price closed at Rs. 100. Solely considering economic rationale, Mr. Harish _________. a) Should exercise the option but he should not take delivery of the underlying b) Should not exercise the option c) Should exercise the option d) Should exercise the option as he likes the management of the company Your answer is Incorrect Your answer is correct Explanation:Mr. Harish has purchased a call option which means he believed that the price of that call will go up. Instead the price has fallen. So he should not exercise the option and the maximum loss he will suffer is the premium paid by him. 43 / 50 43. What occurs if a ‘Day Order’ is not executed during the day? a) The Order will be executed on the next trading day b) The Order will be executed in the after-hours c) The Order will be executed in the auction market d) The Order will be cancelled automatically at the end of the day Explanation:A Day order is an order which is valid for a single day on which it is entered. If the order is not executed during the day, the trading system cancels the order automatically at the end of the day. 44 / 50 44. Is it true that at expiration, the value of an option is its intrinsic value? a) Yes, its true for all options b) No, its not true for all options c) Yes, its true but only for Call options d) Yes, its true but only for Put options Explanation:At expiration, the exercise settlement value for each unit of the exercised contract is computed as follows:Call options = Closing price of the security on the day of exercise – Strike pricePut options = Strike price – Closing price of the security on the day of exercise.In other words, the final settlement amount is equal to the intrinsic value of the option at expiration. 45 / 50 45. The strategy involving options with different strike prices but the same expiry dates is known as _________. a) Calendar spreads b) Straddle c) Vertical spreads d) Diagonal spreads Explanation:Spreads are option strategies which 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.Vertical spreads are created by using options having same expiry date but different strike prices. These can be created either using calls as combination or puts as combination. 46 / 50 46. In an American Put Option, the buyer obtains the right, but not the obligation, to _______ the writer an underlying asset at a specified price _________. a) Buy from ; on the expiry date b) Buy from ; on or before the expiry date c) Sell to ; on the expiry date d) Sell to ; on or before the expiry date Explanation:American option: The owner (buyer/holder) of an American option can exercise his right at any time on or before the expiry date/day of the contract.A Put Option gives the buyer/holder a right to sell the underlying asset.Therefore an American Put Option gives the buyer the right but not the obligation to sell to the writer an underlying asset at a specified price on or before the expiry date. 47 / 50 47. Identify which of these is not an application of indices? a) Index funds b) Exchange traded funds c) Private equity funds d) Index derivatives Explanation:Private Equity Funds are not connected to any index nor are they listed on a stock exchange.Traditionally, indices were used as a measure to understand the overall direction of stock market. However, few applications on index have emerged in the investment field such as Index Funds, Index Derivatives, Exchange Traded Funds etc. 48 / 50 48. What is the minimum price movement in a scrip called? a) Badla Rate b) Tick c) Touchline d) Market Lot Explanation:Tick size is the minimum price movement of a trading instrument.Exchanges decide the tick sizes on traded contracts as part of contract specification. The exchange informs the lot size and the tick size for each of the contracts traded on F&O segment from time to time. For eg. Tick size for Nifty futures is 5 paisa. 49 / 50 49. Delta refers to the Rate of change in the _______. a) Option premium for a unit change in spot price of the underlying b) Option premium per day c) Option premium for a unit change in interest rate d) Option premium for a unit change in volatility of the underlying Explanation:Option premiums change with changes in the factors that determine option pricing i.e., factors such as strike price, volatility, term to maturity, etc. The sensitivities most commonly tracked in the market are known collectively as “Greeks” represented by Delta, Gamma, Theta, Vega and RhoThe most important of the ‘Greeks’ is the option’s “Delta”. This measures the sensitivity of the option value to a given small change in the 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.Delta = Change in option premium/ Unit change in price of the underlying asset 50 / 50 50. What is the rate of Securities Transaction Tax (STT) on the sale of an index or stock futures contract? a) 0.0125% b) 0.01% c) 0.05% d) 0.1% Explanation:Form 1st April 2023, the STT rates were revised and the STT on sale of stock futures / index is 0.0125% on the price at which such futures is traded. Your score is 0% Restart quiz Exit
