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Equity Derivatives Certification Free Demo Test 8

/10

Equity Derivatives Certification Free Demo Test 8

1 / 10

1. Mr. Sam, an equity fund manager, has a negative outlook on the stock market. How will he utilize this perspective to establish a hedge?

a) He will decrease the NAV of his fund

b) He will sell index futures

c) He will sell all his stocks

d) He will buy index futures

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.

2 / 10

2.

___________ is a transaction that generates profit by taking advantage of a price difference in a product.

a) Trading

b) Hedging

c) Arbitrage

d) Speculation

Explanation:

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

3 / 10

3.

The option that grants the holder the right to SELL the underlying asset on or before a specific date at a predetermined price is known as ___________.

a) European Call option

b) American Put option

c) American Call option

d) European Put option

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)

4 / 10

4. The strategy in which a trader assumes a short position in a call option without taking any offsetting position in the underlying stock is known as a “naked call” strategy.

a) Butterfly strategy

b) Writing a covered call

c) Protective Put strategy

d) Writing a naked call

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.

5 / 10

5.

If the price of far-month futures is less than the price of near-month futures, it is called ____________.

a) Backwardation

b) Reverse Hedging

c) Basis

d) Contango

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”.

6 / 10

6. Before you take a position in a futures contract, the Exchange calls for ____________ to cover any potential losses that your position may incur.

a) Mark-to-market Margin

b) Initial Margin

c) Call Margin

d) Ad-hoc Margin

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.

7 / 10

7.

The Exercise price of an option is the same as its position limit – State whether True or False.

a) False

b) True

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.

8 / 10

8. Can a mutual fund that invests in stocks protect itself from losses by selling contracts based on the stock market index?

a) No

b) Yes

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.

9 / 10

9. When the margins are kept on the lower side, it will attract more players to join the derivatives market – State True or False?

a) True

b) False

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.

10 / 10

10. Professional clearing member clears the trades of his associate Trading Member only – State True or False ?

a) True

b) False

Explanation:

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

Your score is

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