NISM Series VIII: Equity Derivatives Mock Test (Set 4) /50 NISM Series VIII – Equity Derivatives Mock Test (Set 4) 1 / 50 1. The mark-to-market margin debits for stock futures are conducted on a daily basis, but the mark-to-market margin credits are performed on a weekly basis. True or False? a) True b) False Explanation:In the futures and options market, profits and losses (Debits and Credits) are settled on day-to-day basis – called mark-to-market (MTM) settlement. 2 / 50 2. Tick size is _________ . a) The maximum permitted movement in the price of the contract b) Average of the high and low prices c) Contract Lot size d) The minimum permitted movement in the price of the contract Explanation:Tick Size is minimum move allowed in the price quotations.Exchanges decide the tick sizes on traded contracts as part of contract specification. For eg. – Tick size for Nifty futures is 5 paisa. 3 / 50 3. A forward contract is _________. a) is a type of Option b) is settled and cleared through a Clearing Corporation c) a bilateral commitment of trade between two parties d) is entered through an Exchange Explanation:Forward Contract – It is a contractual agreement between two parties to buy/sell an underlying asset at a certain future date for a particular price that is pre-decided on the date of contract. 4 / 50 4. What is the ideal number of shares that should be present in an index? a) Around 100 to comprehensively cover all sectors b) Depends on the objective of the index c) Below 50 d) Exactly 50 Explanation:Stocks in the index are chosen based on certain pre-determined qualitative and quantitative parameters, laid down by the Index Construction Managers. Once a stock satisfies the eligibility criterion, it is entitled for inclusion in the index.Generally, final decision of inclusion or removal of a security from the index is taken by a specialized committee known as Index Committee. 5 / 50 5. The longer the time to maturity of the PUT option, the higher the time value will be. 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. Longer the time to maturity, higher will be the time value.The effect of time to expiration on both call and put options is similar to that of volatility on option premiums. Generally, longer the maturity of the option greater is the uncertainty and hence the higher premiums. If all other factors affecting an option’s price remain same, the time value portion of an option’s premium will decrease with the passage of time. 6 / 50 6. Brokers and dealers of derivative exchanges must also be registered with SEBI, in addition to their registration with the stock exchange. True or False? a) True b) False Explanation:In addition to their registration as brokers of existing stock exchanges, Derivative brokers/dealers & clearing members are required to seek registration from SEBI. 7 / 50 7. As a Call option moves more Out-Of-The-Money, the absolute value of Delta will _________. a) Not change b) Decrease c) Increase d) None of the above Explanation:A Call option moving more Out of the Money means the price of its underlying has fallen.Delta for call option buyer is positive. This means that the value of the contract increases as the share price rises and falls as the share price falls. 8 / 50 8. Counterparty risk can also be referred to as ___________. a) Credit Risk b) Default Risk c) Both 1 and 2 d) Speculative Risk Explanation:Counterparty risk is the risk of an economic loss from the failure of counterparty to fulfil its contractual obligation.This risk is also called default risk or credit risk. 9 / 50 9. A penalty or suspension of registration of a stock broker from the derivatives exchange/segment under SEBI (Stock Broker and Sub-broker) Regulations, 1992 can occur if _________. a) The stock broker indulges in manipulating, or price rigging or cornering of the market b) The stock broker fails to resolve the complaints of the investors c) The stock broker fails to resolve the complaints of the investors d) All of the above Explanation:A penalty or suspension of registration of a stock – broker under the SEBI (Stock Broker)Regulations, 1992 can be ordered if:– The stock broker violates the provisions of the Act– The stock broker does not follow the code of conduct– The stock broker fails to resolve the complaints of the investors– The stock broker indulges in manipulating, or price rigging or cornering of themarket– The stock broker’s financial position deteriorates substantially– The stock broker fails to pay fees– The stock broker violates the conditions of registration– The stock broker is suspended by the stock exchange 10 / 50 10. At the time of final settlement, the seller/writer of the option will recognize the adverse difference he paid to the buyer as _________ in his profit and loss account. a) Loss b) Expenses c) Debt d) Profit Explanation:On exercise of the option, the seller/writer will pay the adverse difference, between the final settlement price as on the exercise/ expiry date and the strike price. Such payment will be recognised as a loss. 11 / 50 11. It is the responsibility of the Clearing Corporation to continuously analyze and modify the initial margin requirements as stock markets tend to be very volatile. State True or False? a) True b) False Explanation:Initial Margin levels should be dynamic and calculated continuously based on volatility levels. The Clearing Corporation does this activity using modern mathematical tools. 12 / 50 12. Fixed deposits and bank guarantees are not allowed to be offered by Clearing Members to the Clearing Corporation as part of liquid assets – True or False? a) True b) False Explanation:Clearing member is required to provide liquid assets which adequately cover various margins and liquid Net-worth requirements. He may deposit liquid assets in the form of cash, bank guarantees, fixed deposit receipts, approved securities and any other form of collateral as may be prescribed from time to time. 13 / 50 13. The absolute amount of the minimum capital adequacy requirement for a derivative clearing member is higher than that of the spot market – True or False? a) True b) False Explanation:The absolute amount of minimum capital adequacy requirement for derivative brokers/dealers is much higher than for cash market as the risk involved are higher.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. 14 / 50 14. What will be the value of one lot of ABC futures contract (contract multiplier 50) at a price level of Rs. 6900? a) Rs. 460000 b) Rs. 345000 c) Rs. 690000 d) Rs. 289000 Explanation:The value of the futures contract is the Price X Lot size= Rs 6900 X 50 = Rs 345000 15 / 50 15. If the price of ABC futures contract is Rs. 3200 and the contract size is 150, what will be the value of one lot? a) Rs.480000 b) Rs.320000 c) Rs.240000 d) Rs.540000 Explanation:Value of a futures contract is the price multiplied by the contract size.In the above question :3200 * 150 = Rs.480000 16 / 50 16. In the derivatives market, the mark to market margin is equal to the initial margin – State True or False? a) True b) False 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. 17 / 50 17. When the option is exercised on maturity, the option premium is adjustable against the exercise price on settlement – True or False? a) True b) False Explanation:The premium paid is adjusted against the exercise price on settlement, if the option is exercised on maturity. 18 / 50 18. A call option gives its holder the right to buy ‘any quantity’ of the underlying asset from the writer of the call option at a pre-specified price – True or False? a) True b) False Explanation:A call option gives its holder the right to buy ONLY THE SPECIFIED QUANTITY (lot size of the option contract) of the underlying asset from the writer of the call option at a pre-specified price. 19 / 50 19. Losses incurred on derivative transactions on a ‘recognized stock exchange’ can be carried forward to __________ subsequent assessment year and set off against any other non-speculative business income of the subsequent year. a) 8 b) 5 c) 12 d) 15 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. 20 / 50 20. What is the term used for the price at which the underlying asset can be bought or sold on exercise of an option? a) Risk Premium b) Spot Price c) Option Premium d) Strike Price Explanation:Strike price or Exercise price is the price per share for which the underlying security may be purchased or sold by the option holder. 21 / 50 21. In an ‘Opening Buy Transaction,’ the effect will be that of creating or increasing ________. a) Arbitrage position b) Cross position c) Long position d) Short position Explanation:Opening a position means either buying or selling a contract, which increases client’s open position (long or short).Opening a Buy transaction means creating or adding LONG positions with a view that the price will increase. 22 / 50 22. The initial margin in the derivatives market depends on the volatility of the underlying market. Usually, _________. a) Higher the volatility, Higher the initial margin b) Higher the volatility, Lower the initial margin c) Lower the volatility, Higher the initial margin d) None of the above Explanation:If the stock is very volatile it could result in looses to the trader in a short period of time. So to safe guard the trading member and the trader, higher initial margin are levied on volatile stocks. 23 / 50 23. In general terms, if the number of participants in a market is more, the liquidity will be low – True or False? a) True b) False Explanation:Liquidity in the context of stock market means a market where large orders are executed without moving the prices.So if there are more the participants, higher should be the liquidity. 24 / 50 24. All types of investors should allocate some portion of their portfolio to derivative products to increase the portfolio returns irrespective of their risk tolerance levels – True or False? a) True b) False Explanation:Derivatives are ideally used as a hedging product and not investment products. Also, as a stand alone investment, they can prove to be very risky. So investors who do not want to take risks, senior citizens etc. should not trade / invest in derivative products. 25 / 50 25. If the interest rate increases, the premium on a CALL option will also increase – 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. 26 / 50 26. The Clearing Corporation gives exposure limits to Clearing Members based on the number of Trading Members using the services of that Clearing Member – True or False? a) True b) False Explanation:Clearing Corporation gives exposure limits to Clearing Members based on deposits and not the number of members with that clearing member. 27 / 50 27. In derivative exchanges, the exposure amount possible for each member broker is linked to the amount of deposits/margins kept by the member with the clearing house – True or False? a) True b) False Explanation:Higher the deposits / margins kept, more will be the exposure amount available to the member brokers. 28 / 50 28. What is Unsystematic Risk ? a) Unsystematic Risk can be reduced through diversification b) Unsystematic Risk is related to risk in a specific security and not pertaining to overall market c) Both 1 and 2 d) None of the above Explanation:Unsystematic risk is the component of price risk that is unique to particular events of the company and/or industry. For example : Strike in a factory or threats from cheaper imports to steel industry.This risk is inseparable from investing in the securities. This risk could be reduced to a certain extent by diversifying the portfolio. 29 / 50 29. How can risks be managed in the derivatives segment by the stock exchange? a) By having a well organized control systems and audit procedures b) By implementing a effective margin system c) By periodic evaluation of member positions d) All of the above Explanation:All the above steps need to be taken to control risks in the derivative segment. 30 / 50 30. Once the initial margin requirement is established in the derivative segment, it cannot be altered by the exchange throughout the lifespan of the futures contract – True or False? a) True b) False Explanation:The initial margin is dependent on price movement of the underlying asset.So the Initial Margin levels are dynamic and recalculated continuously based on volatility levels. 31 / 50 31. What occurs with the unmatched portion of the order in an Immediate or Cancel (IOC) order? a) It will be added to the order book as a limit order b) It will be executed on the next trading day c) It will be executed in the next one hour d) It will be cancelled Explanation:Immediate or cancel (IOC): User is allowed to buy/sell a contract as soon as the order is released into the trading system. An unmatched order will be immediately cancelled.Partial order match is possible in this order, and the unmatched portion of the order is cancelled immediately. 32 / 50 32. What market-wide position limit must a stock meet to be eligible for launch in the futures and options contracts within the exchange-traded equity derivatives segment in India? a) At least Rs. 500 crores b) At least Rs. 100 crores c) At least Rs. 2500 crores d) At least Rs. 1000 crores Explanation:A stock on which stock option and single stock futures contracts are proposed to be introduced shall conform to broad eligibility criteria for a continuous period of six months. One of the criteria is :The market wide position limit (MWPL) in the stock shall not be less than Rs 500 crores on a rolling basis. 33 / 50 33. What is the term for an investor instructing their broker to buy a specific number of contracts at or below a designated price? a) Market Order b) Spread Order c) Limit Order d) Arbitrage Order Explanation:Limit order is an order to buy or sell a contract at a specified price. The user has to specify this limit price while placing the order and the order gets executed only at this specified limit price or at a better price than that. 34 / 50 34. Which law or rules make it necessary to report suspicious transactions? a) Foreign Account Tax Compliance Act (FATCA) b) Anti-Money laundering (AML) and Combating of Financial Terrorism (CFT) Regulations c) SEBI Insider Trading Regulations d) Foreign Exchange Management Act (FEMA) Explanation:Under the Anti-Money Laundering (AML) and Combating of Financial Terrorism (CFT) regulations, certain suspicious transactions are required to be reported to the Financial Intelligence Unit – India (FIU-IND) set up by the Government to detect possible attempts at money laundering. 35 / 50 35. Why are the profits from calendar spreads in index futures relatively small? a) Because the market risk is low in calendar spreads b) Because calendar spreads are OTT transaction c) Because calendar spreads are special transactions guaranteed by RBI d) Because calendar spreads are not traded on an Exchange 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.Calendar spreads carry only basis risk and low or no market risk ie. no risk even if market rises or falls by a big amount – hence lower margins are adequate. 36 / 50 36. A hedger aims to balance out the price risk on his stocks, so he will engage in _________. a) A long positions in futures b) Both a long or short position in futures c) A long position in Call d) A short positions in futures Explanation:Hedgers face risk associated with the prices of underlying assets and use derivatives to reduce their risk.If a person has a portfolio of equity stocks, he can sell futures to offset the price risk. 37 / 50 37. Mr. Ankur sold a Call option with a strike price of Rs. 500 on XYZ stock for a premium of Rs. 50. The lot size is 1000. On the expiry date, the XYZ stock closed at Rs. 520. What is the total profit or loss for Mr. Ankur? a) Profit of Rs. 20,000 b) Loss of Rs. 20,000 c) Profit of Rs. 30,000 d) Loss of Rs. 30,000 Explanation:When a person sells a Call option, he has a bearish view and makes a profit if the price falls.In this case the price has risen. So he loses Rs 20 ( 500 – 520).When an option is sold, premium is received. He has received a premium of Rs 50As he has received Rs 50 and lost Rs. 20, he will make a net profit of Rs 30Lot size is 1000. Total Profit = Rs 30 x 1000 = Rs 30,000 38 / 50 38. Who has the ability to engage in trading derivative products? a) Any broker who is registered with SEBI for trading in derivatives products can trade in derivatives b) Any member of a registered Stock Exchange c) Any broker who is registered with SEBI can trade in derivative products d) All of the above Explanation:A normal equity market SEBI registered broker cannot deal in derivatives. The broker has to be specially registered for dealing in derivative products with SEBI to deal in derivatives. 39 / 50 39. How much of the underlying asset does the holder of a Call Option have the right to buy from the option writer? a) he specified quantity or less than the specified quantity b) The specified quantity or more than the specified quantity c) Only the specified quantity Explanation:Only the specified quantity as per the lot size of the option contract. 40 / 50 40. Contracts that have been initiated but are not yet offset by a subsequent sale, purchase, or by making or taking delivery are considered as _________. a) Open Positions b) Squared-off Positions c) Clear Positions d) Offsetting Positions Explanation:Outstanding / unsettled position in various derivative contracts is called “Open Position”.For instance, if Mr. X shorts 5 contracts on Infosys futures and goes long on 3 contracts of Reliance futures, he is said to be having open position, which is equal to short on 5 contracts of Infosys and long on 3 contracts of Reliance. If on the next day, he buys 2 Infosys contracts of same maturity, his open position would be – short on 3 Infosys contracts and long on 3 Reliance contracts. 41 / 50 41. According to SEBI’s guidelines, derivative trading occurs through ________. a) Kerb trading b) Open outcry method in the trading ring c) Online screen based trading system d) Auctions at public mandis Explanation:Derivatives trading as per SEBI’s guidelines takes place through an online screen based electronic trading system.In case of electronic trading, there are screen-based broker dealing terminals, instead of the trading pit. Futures and options trading in India is electronic in nature, with the bids and offers, and the acceptance being displayed on the terminal continuously. 42 / 50 42. Ms. Seema, a stock market trader, is pessimistic about specific companies but optimistic about the overall market. Identify the most suitable strategy to capitalize on this perspective. a) She should not do anything b) She should buy the shares of those specific companies and sell index futures c) She should sell the shares of those specific companies and also sell index futures d) She should sell shares of those specific companies and buy index futures Explanation:The trader should sell the shares of those specific companies in futures and buy index futures. By this she will profit when the stock prices of those specific companies fall and index rises – if her view proves correct. 43 / 50 43. Why is the Clearing Corporation regarded as highly significant in the derivatives market? a) Clearing Corporation collects margins from members b) Clearing Corporation deals with exchanges c) Clearing Corporation provides settlement guarantee and assumes role of counterparty for each trade d) Clearing Corporation related with stocks Explanation:Clearing corporations are required to have in place a Core Settlement Guarantee Fund (SGF).The primary objective of the Core SGF is to have a fund for each segment to guarantee the settlement of trades executed in the respective segment of the stock exchange. The Clearing Corporation acts as a legal counterparty for every contract. 44 / 50 44. A client has asked for a quarterly settlement of his running account. In this connection, identify the INCORRECT statements. a) Both A and C are incorrect b) Both A and B are incorrect c) Both B and C are incorrect d) None of the above Explanation:With a view to prevent any misuse of a client’s funds by the broker, SEBI has made it mandatory for brokers to settle the running account of client funds on a monthly or quarterly basis as per the mandate of the client.To bring uniformity in the settlement of running accounts, brokers are now required to settle the running account after considering the client’s EOD obligations as on the date of settlement across all the Exchanges on the first Friday of the quarter, in case of clients requiring a quarterly settlement, and on the first Friday of the month in the case of clients opting for a monthly settlement. 45 / 50 45. Identify the CORRECT statement . a) Brokers of a stock exchange are not expected to disclose the investment risks to their clients b) Sales agents of the brokers should not use high pressure luring tactics c) Penny stocks are and good investment options for senior citizens d) Low income families can use derivatives instruments to get rich quickly Explanation:As per ethical Sales Practices to be followed by brokers :Sales agents of brokers must at all times:– Be courteous and professional.– Shall refrain from making false assumptions, in particular over potential returns on their investments.– Avoid the use of high pressure/ luring tactics. 46 / 50 46. Complete the sentence: The shorter the time to expiry of a PUT Option, the lesser will be its _________. a) Intrinsic Value b) Settlement Value c) Assignment Value d) Time Value 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. 47 / 50 47. Which of the following participants would primarily be involved in a derivatives market? a) Long-term investors b) Speculators c) Both Speculators and Hedgers d) Hedgers Explanation:There are broadly three types of participants in the derivatives market – hedgers, traders (also called speculators) and arbitrageurs.Long-term investors invest in the cash market and take delivery of the securities. 48 / 50 48. Which of these is NOT included in the Indian equity derivatives market? a) Options on equity market indices b) Interest rate futures c) Options on individual stocks d) Futures on individual stocks Explanation:Although NSE and BSE allows trading in Interest rate futures but it is not a part of equity derivatives. 49 / 50 49. For calculating the net worth of a clearing member, which of these is/are NOT taken into consideration? a) His Fixed Assets b) His membership card c) His pledged securities d) All of the above Explanation:The networth of the member shall be computed as follows:Capital + Free reservesLess non-allowable assets which are :– Fixed assets– Pledged securities– Member’s card– Non-allowable securities (unlisted securities)– Bad deliveries– Doubtful debts and advances– Prepaid expenses– Intangible assets– 30% marketable securities 50 / 50 50. In _________, the strike price and market price are equal. a) At-the-money option b) Same-the-money option c) In-the-money option Explanation:At-the-money (ATM) 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 / market price. Your score is 0% Restart quiz Exit
