NISM Series VIII: Equity Derivatives Mock Test (Set 6)

Explanation:

Mr. Sam is a fund manager which means his fund already has a portfolio of stock. He thinks that the stock market can fall so he will sell index futures to create a hedge.

In case the market falls, he will have a loss on his stocks but will earn on his index futures position.

Explanation:

Arbitrage means buying a security in one market while simultaneously selling the same security in a different market, to benefit from price differential.

Explanation:

American option: The owner of such option can exercise his right at any time on or before the expiry date/day of the contract.

A Put Option gives the holder the right to sell the underlying asset on or before a particular date for a certain price

(European option: The owner of such option can exercise his right only on the expiry date/day of the contract. In India, Index options are European)

Explanation:

Naked position in options market simply means a long or short position in any option contract without having any position in the underlying asset.

When one sells (short) a call it is also known as ‘writing’ a call.

So the above strategy is – Writing a naked call option.

Explanation:

If futures price is lower than spot price of an asset or if the far month future prices are lower than current month futures prices, it is called “Backwardation market”.

Explanation:

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

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.

Strike price or Exercise price is the price for which the underlying security may be purchased or sold by the option holder.

Explanation:

Yes, a mutual fund can sell index futures for hedgeing purposes.

For eg – If a fund manager of an equity mutual fund feels that the stock markets can fall in the near future, he can hedge his position by selling Nifty / Sensex futures.

Explanation:

The Clearing Corporation generally keeps the margins for derivatives trading on the higher side as the risk of losses are high and it wants only financially strong traders to trade in the market.

If the margins are kept on a lower side, many more traders will start trading in the derivatives market.

Explanation:

Professional clearing member clears the trades of his associate Trading Member and Institutional clients.

Explanation:

Option contracts are not symmetrical as the buyers and sellers have different obligations and risk factors. The buyer has limited risk where as seller of an option has unlimited risk.

On the other hand, obligations and returns in Futures are symmetrical for both buyer and sellers. Both gain or lose in equal proportion as per the price movements.

Explanation:

Index option is a derivative product derived from indices like Nifty, Bank Nifty, Sensex etc.

Index options are settled only in cash.

Explanation:

SEBI consists of a Board of Directors who are appointed by the Union Government of India.

Explanation:

Delta measures the sensitivity of the option value to a given small change in the price of the underlying asset.

Explanation:

Client A has bought and sold the same underlying ie. NSE Nifty futures. So his risk is limited to the net position which will be his open position.

Here Client A has bought 10 lots and sold 7 lots, so his open position is 3 lots.

Explanation:

Generally, a shortage / scarcity of any commodity will lead to a rise in the spot as well as futures prices.

For eg. A drop in the manufacturing of oil by OPEC countries will lead to a rise in the international oil prices.

Explanation:

Derivatives Market serves following specific functions:

– Derivatives market helps in improving price discovery based on actual valuations and expectations.

– Derivatives market helps in transfer of various risks from those who are exposed to risk but have low risk appetite to participants with high risk appetite. For example hedgers want to give away the risk where as traders are willing to take risk.

– Derivatives market helps shift of speculative trades from unorganized market to organized market. Risk management mechanism and surveillance of activities of various participants in organized space provide stability to the financial system.

Explanation:

On BSE and NSE, the expiry day is the last Thursday of the expiry month. If the last Thursday is a trading holiday, then the expiry day is the previous trading day.

Explanation:

A buyer of a Call Option in an index is bullish. 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.

(The buyer had also paid the premium while buying the Call. So his actual profit will be the difference between spot and strike price less the premium paid)

Explanation:

The buy or sell price cannot be any price which the trader deems fit. It has to be within the daily circuit filter limits set by the exchange.

Explanation:

In normal market, price of a call option rises with a rise in the underlying stock price and the premium falls if the price of the underlying stock falls.

So, if the price of Wipro falls, the value of Wipro call option will also fall.

Explanation:

A stop-loss order gets activated when the trigger price is reached and enters the market as a market order or as a limit order.

Explanation:

Final exercise settlement is effected for all in-the-money option contracts on the last trading day of an option contract. Long positions at in-the money strike prices are assigned to short positions in option contracts with the same series at the client level on a random basis.

For option contracts that are to be cash settled, it is done by debit/credit of relevant clearing accounts of relevant clearing members with the respective clearing bank towards the exercise settlement value for each unit of the option contract and other option contracts are settled through delivery. Open positions in options shall cease to exist after exercise or on expiration day, as the case may be.

Explanation:

The Clearing Corporation has powers to levy additional margins, special margins, define maximum exposure limits and disable brokers from trading.

Explanation:

SEBI consists of a Board of Directors who are appointed by the Union Government of India.

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 and you buy back the contract.

In this case, ABC stock futures has risen by Rs. 6 (274 – 268). So there will be a loss.

Rs. 6 x 1500 (Lot size) = Loss of Rs 9000

Explanation:

The margin requirement is same for both individual investors and institutional investors.

Explanation:

OA market maker or liquidity provider is a company or an individual that quotes both a buy and a sell price in a financial instrument hoping to make a profit on the bid-offer spread.

Explanation:

All of the above can write (sell) options in Indian stock market.

Explanation:

In a Forward Contract, there is no such authority. Forward contract is agreement between two parties to buy/sell an underlying asset and no other authority like a Stock Exchange or SEBI is involved.

Explanation:

Liquid assets can comprise of Cash, Bank Guarantees, Govt. Securities etc. but not foreign exchange.

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.

Calculation of volatility is not a secret. There are many formulas available. For example, many option traders calculate this expected volatility by running the Black-Scholes model in the reverse order.

Explanation:

If the futures price is rising but open interest is declining, it indicates short-covering. It usually indicates that existing short positions are being squared up.

Explanation:

Good Till Cancel (GTC) is a type of order that enables client to place buying and selling orders with specifying time interval for which instruction of request remains valid. The maximum validity of a GTC order is 365 days.

Explanation:

A short futures position will be profitable if the price falls below the sale price. In the above question, the sale price is Rs 2300. Therefore, when the futures price falls to Rs 2250, there will be profits.

Explanation:

Value at Risk calculates the expected maximum loss, which may be incurred by a portfolio over a given period of time and specified confidence level.

Explanation:

Various future contract position in the same underlying ( even at various expiry dates ) are netted off before arriving at open position. Here in this case its 8 – 6 = 2.

This is because a long and a short position in the same underlying will have no risk (if one will make profit, the other will be in a simillar loss) and only the open position will have the risks and margins will be collected from these open positions.

Explanation:

Clearing and settlement activities in the F&O segment are undertaken by Clearing Corporation with the help of Clearing Members and Clearing Banks.

Exercise settlement in respect of admitted deals in index option contracts are cash settled by debit/credit of the clearing accounts of the relevant clearing members with the respective clearing bank. Index option contracts, which have been exercised, shall be assigned and allocated to clearing members at the client level with the same series.

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. 200 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. 200 at the rate of, say, 12% per annum. So 1% ie. Rs 2 ( 1% of Rs 200) is the per month interest cost. and this Rs 2 is the cost of carry.

The future price (ideally) at the beginning of month will be Spot Price + Cost of Carry ie. Rs 200 + Rs 2 = Rs 202.

Explanation:

A penalty or suspension of registration of a stock – broker under the SEBI (Stock Broker & Sub – 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 the market
• 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

Explanation:

In case of Bonus, Stock Splits and Consolidations. the new strike price for option contracts is arrived at by dividing the old strike price by the adjustment factor.

Explanation:

The maximum a seller of an option (either CALL or PUT) can gain is the premium he receives. In this case Mr. Gautam is receiving Rs 60 per share as premium and that can be his maximum profit.

Explanation:

Each clients open position is taken separately for calculating the initial margin. Positions of two or more clients cannot be netted off against each other for calculation of initial margin.

For eg – If Mr A has bought 10 contracts of Nifty and Mr B has sold 4 contracts of Nifty, then the broker has to pay the initial margin on 14 contracts and not 6 contracts.

Explanation:

Arbitrage means the simultaneous purchase and sale of an asset in order to profit from a difference in the price.

It is a trade that profits by exploiting price differences of identical or similar financial instruments, on different markets.

For example- If SBI is quoted on NSE at Rs 200 and on BSE there is a buyer at Rs 203, then the arbitrageur will buy on NSE and sell on BSE and Rs 3 (less brokerage etc.) will be is profit.

Arbitrage exists as a result of market inefficiencies; it provides a mechanism to ensure prices do not deviate substantially from fair value for long periods of time.

Explanation:

The series closest to current date will have the lowest premium due to low time value of money ( so lower interest costs ).

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:

No, broker members are not allowed on the Clearing Council of the Clearing Corporation of the derivatives segment.

Explanation:

In a futures market margins are payable by both the parties.

Explanation:

The broker has to collect –

From Mr. R : 17 x 4550 x 50 x 9% = Rs 3,48,075

From Mr. S : 20 x 4500 x 50 x 9% = Rs 4,05,000

Therefore the total margin to be collected is 348075 + 405000 = Rs 7,53,075

Explanation:

Higher volatility means higher risk and higher risk means one has to pay a higher premium.