NISM Series - VIII Equity Derivatives Cert. Mock Test - 2/50 NISM Series – VIII Equity Derivatives Cert. Mock Test – 2 1 / 501. Are Professional Clearing members restricted to acting solely on behalf of institutional clients? a) Yes b) No Explanation:Professional clearing member clears the trades of his associate Trading Member and institutional clients.2 / 502. Is it true or false that trading members are required to maintain a higher level of book net worth compared to clearing members? a) True b) False Explanation:Clearing Members have to maintain higher book net worth than trading members.3 / 503. True or False: To close a long or short position in a futures contract, one can initiate a reverse trade. a) True b) False Explanation:Closing a position means either buying or selling a contract, which essentially results in reduction of client’s open position (long or short). A client is said to be closed a position if he sells a contract which he had bought before or he buys a contract which he had sold earlier.4 / 504. The introduction of forward contracts is driven by the idea and economic rationale to ________. a) Help hedging b) Help arbitrage c) Help trading d) Both 1 and 2 Explanation:The essential idea of entering into a forward is to fix the price and thereby avoid the price risk. By entering into forwards, one is assured of the price at which one can buy/sell an underlying asset.Thus Forward contracts are basically meant for hedgeing / managing the risks.5 / 505. The introduction of forward contracts is driven by the idea and economic rationale to ________. a) Current Liabilities b) Current Assets c) Fixed Assets d) Bad Debts Explanation:The seller/ writer of the option is required to pay initial margin for entering into the option contract and its should be debited to an appropriate account, say, “Equity Index/ Stock Option Margin Account”.In the balance sheet, such account should be shown separately under the head “Current Assets”.6 / 506. A person who is bullish and a payer of premium is a ____________. a) Seller of call option b) Buyer of call option c) Seller of put option d) Buyer of put option Explanation:A buyer of a Call is bullish and believes that the price will rise. He pays a premium which is his maximum loss but the profits can be unlimited.7 / 507. Investor Mr. X intends to sell 11 contracts of the February series at Rs. 6300, and investor Mr. Y wants to sell 13 contracts of the March series at Rs. 6450. The lot size is 50 for both these contracts, and the initial margin is fixed at 6%. What is the total initial margin required to be collected from both these investors (sum of the initial margin of X and Y) by the broker? a) Rs 459450 b) Rs 640000 c) Rs 251550 d) Rs 374900 Explanation:Margin from Mr. XRs 6300 X 11 contracts X 50 (lot size) X 6% = 207900Margin from Mr. YRs 6450 X 13 contracts X 50 (lot size) X 6% = 251550Total Margin = 207900 + 251550 = 459450.8 / 508. A trader has initiated a short position of one contract in September ABC futures (contract multiplier 50) at a price of Rs. 1800. Upon closing this position after a few days, he found that he had made a profit of Rs. 5000. What would have been the closing action that allowed him to generate this profit? (Please ignore brokerage costs). a) Selling 1 Sept ABC futures contract at 1700 b) Selling 1 Sept ABC futures contract at 1900 c) Buying 1 Sept ABC futures contract at 1700 d) Buying 1 Sept ABC futures contract at 1900 Explanation:To make a profit of Rs 5000, he has to earn Rs 100 per share ( 5000 / 50 (lot size) = 100 )Since he has gone short, he will make a profit when the price falls and he buys at the reduced price.He has sold at Rs 1800, so when he buys back at Rs 1700 he make Rs 100 profit per share.Rs 100 X 50 ( Lot size ) = Rs 5000 profit.9 / 509. The option that grants the holder the right to purchase the underlying asset on or before a specific date for a predetermined price is known as _________. a) European call option. b) American call option c) American put option d) European put option Explanation:In case of American options, buyers can exercise their option any time before the maturity of contract.In case of European options, owner of such option can exercise his right only on the expiry date/day of the contract.10 / 5010. A call option provides the holder with the right to buy how much of the underlying asset from the option writer? a) The specified quantity or less than the specified quantity b) Only the specified quantity c) The specified quantity or more than the specified quantity d) None of the above Explanation:Only the specified quantity as per the lot size of the option contract.11 / 5011. 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 IncorrectYour answer is correctExplanation: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.12 / 5012. 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 IncorrectYour answer is correctExplanation: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.13 / 5013. 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 IncorrectYour answer is correctExplanation:Margin to be collected from Meghna : Rs 2450 X 34 contracts X 50 (Market lot) at 7%= Rs 4165000 x 7% = Rs 29155014 / 5014. 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 IncorrectYour answer is correctExplanation: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.15 / 5015. The Clearing Corporation of an Exchange guarantees the performance of exchange-traded contracts – True or False? a) True b) False Your answer is IncorrectYour answer is correctExplanation:Clearing Corporation acts as a legal counterparty to all trades on this segment and also guarantees their financial settlement.16 / 5016. 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 IncorrectYour answer is correctExplanation: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.17 / 5017. 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 IncorrectYour answer is correctExplanation: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.18 / 5018. The seller of a call option can potentially incur an unlimited loss – True or False? a) True b) False Your answer is IncorrectYour answer is correctExplanation: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.19 / 5019. ‘Bulls’ are investors who anticipate that the market will experience an upward movement – True or False? a) True b) False Your answer is IncorrectYour answer is correctExplanation:Investors who believe that the markets will rise are called Bulls and investors who believe that markets will fall are known as Bears.20 / 5020. The initial margin is always equivalent to the mark-to-market margin – True or False? a) True b) False Your answer is IncorrectYour answer is correctExplanation: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.21 / 5021. 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.22 / 5022. 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.23 / 5023. 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.24 / 5024. 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.25 / 5025. 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.26 / 5026. 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.27 / 5027. 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.28 / 5028. 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.29 / 5029. 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 exchange30 / 5030. 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.31 / 5031. Initial Margin is the amount of money you need to deposit at the beginning when you start trading or investing. a) The margin which is paid at the time of entering futures contract b) The margin which is paid when a trading member starts his business c) The margin which a trading member needs to pay when applying for membership d) The Margin which is paid at the time of buying shares in the spot market. Explanation:The amount one needs to deposit in the margin account at the time entering a futures contract is known as the initial margin.32 / 5032. The Strangle strategy is like the straddle strategy in its overall idea, but it differs in a specific way. a) Cost b) Implementation c) Aggression d) All of the above Explanation:Long Strangle As in case of straddle, the outlook here (for the long strangle position) is that the market will move substantially in either direction, but while in straddle, both options have same strike price, in case of a strangle, the strikes are different. Also, both the options (call and put) in this case are out-of-the-money and hence the premium paid is low.33 / 5033. Which of the options below is harder to manipulate? a) IT sector stocks b) Individual Stocks c) Stock Index d) All of the above Explanation:A stock index contains a basket of high market cap stocks. So its very difficult to manipulate it when compared to individual stocks.34 / 5034. Is it true or false that Liquid Assets offered by a Clearing Member to the Clearing Corporation can include Mutual Fund Units and Bank Guarantees? a) True b) False Explanation:Clearing member is required to provide liquid assets to cover various margins and liquid networth requirements. The total liquid assets comprise of at least 50% of the cash component and the rest is non cash component.1. Cash Component:• Cash• Bank fixed deposits (FDRs) issued by approved banks and deposited with approved custodians or Clearing Corporation.• Bank Guarantees (BGs) in favour of clearing corporation from approved banks in the specified format.• Units of money market mutual fund and Gilt funds where applicable haircut is 10%.• Government Securities and T-Bills2. Non Cash Component:• Liquid (Group I) Equity Shares as per Capital Market Segment which are in demat form, as specified by clearing corporation from time to time deposited with approved custodians.• Mutual fund units other than those listed under cash component decided by clearing corporation from time to time deposited with approved custodians.35 / 5035. A trader named Mr. Raj intends to sell 10 contracts of the June series at Rs. 5200, while another trader, Mr. Rahul, wants to buy 5 contracts of the July series at Rs. 5250. The lot size for both contracts is 50. The Initial Margin is set at 10%. As they both have their accounts with the same broker, how much Initial Margin does the broker need to collect from both investors? a) Rs 2,60,000 b) Rs 1,28,750 c) Rs 1,31,250 d) Rs 3,91,250 Explanation:Payment of Initial Margin by a broker cannot be netted against two or more clients. So he will have to pay the margin for the open position of each of his clients.So margin payable for Mr. Raj is : 10 x 5200 x 50 at 10% = Rs 2,60,000Margin payable for Mr. Rahul is : 5 x 5250 x 50 at 10% = Rs 1,31,250Total = Rs 3,91,250.36 / 5036. True or False: The option buyer pays the option premium to the option seller. a) False b) True Explanation:Option Premium is the price which the option buyer pays to the option seller.37 / 5037. The contract month is the month when a futures contract is scheduled to be ________. a) Are at its highest price b) Are at the lowest price c) Expires d) None of the above Explanation:Contract month is the month in which futures contract expires.At the expiry of the nearest month contract, a new contract with 3 months maturity will start. Thus, at any point of time, there will be 3 contracts available for trading.38 / 5038. True or False: A Trading Member can become a Clearing Member by fulfilling additional requirements a) True b) False Explanation:A Trading Member can also be a Clearing Member by meeting additional requirements.39 / 5039. The smallest price change in a stock is referred to as the BASIS. a) True b) False Explanation:The minimum price movement in a scrip is called TICK. It is minimum move allowed in the price quotations. Exchanges decide the tick sizes on traded contracts as part of contract specification.The difference between the spot price and the futures price is called basis. 40 / 5040. Calendar spreads carry only _____ risk. a) Basis b) Market c) Speculatives d) Interest Explanation:Basis means the difference between Spot Price and Future Price or difference between two future price of the same underlying.Basis risk is the chance that the basis will have strengthened or weakened from the time the hedge is implemented to the time when the hedge is removed – ie. the risk that the two future prices will not fluctuate identically.41 / 5041. Diversifying one’s portfolio can help reduce Non-Systematic risk. a) False b) True Explanation:Specific risk or unsystematic risk is the component of price risk that is unique to particular events of the company and/or industry. This risk is inseparable from investing in the securities. This risk could be reduced to a certain extent by diversifying the portfolio.42 / 5042. An exchange-traded option becomes void after its maturity. a) Can be traded after 2 days ie. after pay in / pay out. b) Cannot be traded c) Can be traded in the spot market d) None of the above Explanation:An exchange traded option can only be traded till the last date of expiry ie. its maturity. After that it will not be available for trading.For eg – If 27th June is the last Thursday of the month ie. the maturity, all options of June month will cease to exist as soon as the market closes on 27th June.43 / 5043. The option premium paid by the option buyer stays with the exchange until it is closed out or expires. a) False b) True Explanation:The Option premium is collected by the exchange but is given to the seller of option.44 / 5044. When a call option is ‘ In The Money ‘ – the _______________. a) Strike Price is lower than Spot Price b) Strike Price is same as Spot Price c) Strike Price is higher than Spot Price d) None of the Above Explanation:An In the money (ITM) option would give holder a positive cash flow, if it were exercised immediately.A call option is said to be ITM, when spot price is higher than strike price. And, a put option is said to be ITM when spot price is lower than strike price. In our examples, call option is in the money45 / 5045. Did you buy a “Call” option for SBI with a strike price of Rs 200 in January? If you want to end that investment, do you need to buy a “Put” option with the same Rs 200 strike price in January? (True or False) a) True b) False Explanation:When you buy a CALL option, to close this position you will have to sell a CALL option of same strike price and expiry.46 / 5046. Mr. Shah plans to purchase 8 contracts in the January series at Rs 740 each, while Mr. Patel intends to sell 5 contracts in the February series at Rs 754 each. The initial margin is set at 6%. What is the total initial margin that needs to be collected from them? The market lot is 250. a) Rs 1,87,600 b) Rs 1,45,350 c) Rs 56,550 d) Rs 88,800 Explanation:Margin to be collected from Mr Shah : Rs 740 X 8 contracts X 250 (Market lot) at 6%= Rs 1480000 x 6% = Rs 88,800Margin to be collected from Mr Patel : Rs 754 X 5 contracts X 250 (Market lot) at 6%= Rs 942500 x 6% = Rs 56,550So the total margin : 88,800 + 56,550 = Rs 145350 47 / 5047. In the context of a CALL OPTION, it provides the buyer with the right to _________. a) Buy the underlying at set price b) Sell the underlying at market price c) Buy the underlying at market price d) Sell the underlying at set price Explanation:A call option is a financial instrument that gives the buyer the right, but not an obligation, to buy a set quantity of a security at a set strike price at some time on or before expiration.In easy terms – what ever may be the market price, the buyer will get the security at the set price or strike price as he has paid a premium for it.48 / 5048. The current price of LKK share is Rs 300, and the put option with a Strike Price of Rs 280 is _________. a) At the money b) Out of the money c) In the money d) None of the above Explanation:Out of the Money Option – A call option with a strike price that is higher than the market price of the underlying asset, or a put option with a strike price that is lower than the market price of the underlying asset. An out of the money option has no intrinsic value, but only possesses time value.As in the above example, LKK is trading at Rs 300. For such a stock, call options with strike prices above Rs 300 would be out of the money calls, while put options with strike prices below Rs 300 would be out of the money puts. Out of the money options are significantly cheaper than in the money or at the money options.49 / 5049. A stock exchange is equipped with online surveillance capabilities to monitor the _________. a) Volumes b) Positions c) Prices d) All of the above Explanation:All modern stock exchanges have highly developed online surveillance sytems to monitor the volumes / position and prices of all listed products and also check any unusual activity etc. in them.50 / 5050. Shares can also be traded through Professional Clearing Members. a) False b) True Explanation:Professional clearing member clears the trades of his associate Trading Member and institutional clients. He need not be a member of an exchange.Your score is 0% Restart quiz Exit
