Equity Derivatives Certification Free Demo Test 3

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.

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).

Explanation:

Most derivatives contract have an expiration date.

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’.

Explanation:

A trading terminal helps the Clearing Members to monitor the open positions of all the Trading Members
clearing 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.

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.

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.

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.

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.

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.