NISM Series - VIII Equity Derivatives Cert. Mock Test - 3/50 NISM Series – VIII Equity Derivatives Cert. Mock Test – 3 1 / 501. 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 / 502.___________ 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 / 503.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 / 504. 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 / 505.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 / 506. 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 / 507.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 / 508. 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 / 509. 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 / 5010. 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.11 / 5011. In the case of futures contract, the profits or losses are received / paid only on maturity – State whether True or False? a) True b) False Explanation:In futures contract, the profits / losses are received / paid as and when the contract is closed (squared up) by the trader or on maturity, which ever is earlier.12 / 5012.If there are three series of one, two and three months futures open at a given point of time, how many calendar spread possibilities arise? a) 4 b) 2 c) 3 d) 1 Explanation:The three calendar spreads can be between months 1 and 2, 2 and 3 and 1 and 3.13 / 5013. ______ is not a type of financial product traded in the derivatives market. a) Options b) Futures c) Preference Share d) Swaps Explanation:Futures, Forwards, Options, Swaps etc. are all products in the derivative market.Preference share is not a derivative product.14 / 5014. True or False: You can sell a stock option for a specific stock even if you don’t own the underlying stock. a) True b) False Explanation:Although Futures and Options were introduced as hedgeing tools but there is no pre-condition that one has to own the stock to trade in futures and options.One can easily buy and sell options without owning the underlying stock.15 / 5015.True or False: Over-the-counter options are always standardized. a) False b) True Explanation:Over the Counter options are made as per the needs of the trading parties – so they are customised.Future options are standardised as per the rules of stock exchange.16 / 5016.Calendar spreads carry basis risk and no market risk; therefore, reduced margins are charged. a) Higher b) Very high c) Lower d) NIL Explanation:Calendar spreads carry only basis risk and no market risk – hence lower margins are adequate.That is why margin on calendar spread transaction in index futures is lower than the sum of regular margin on two independent legs of spread transaction.(Basis risk arises when the price of a futures contract does not have a predictable relationship with the spot price, which is very rare.Market risk is the risk that the price of a stock etc. will increase or decrease due to changes in market factors)17 / 5017.True or False: A long or short position in a futures contract can be closed by initiating a reverse trade. a) False b) True Explanation:A closing transaction is one that reduces or eliminates an existing position by an appropriate offsetting purchase or sale. This is also known as “squaring off” your position.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.18 / 5018.True or False: When it is stated that there is cash settlement of an index futures contract, it means that the contract is settled in cash with no delivery of the underlying. a) True b) False Explanation:Index futures are always cash settled.Individual securities can be cash settled or by delivery.19 / 5019. Which of these grievances against a trading member can an exchange address for resolution? a) Claims for expenses incurred for taking up the matter with the ISC b) Claims for opportunity loss for the particular disputed trade c) Losses for transaction which are not within the framework of exchange d) Excess brokerage charged by a broker Explanation:Complaints against trading members on account of the following can be taken by an Exchange for redressal :– Non-receipt of funds / securities– Non- receipt of documents such as member client agreement, contract notes, settlement of accounts, order trade log etc.– Non-Receipt of Funds / Securities kept as margin– Trades executed without adequate margins– Delay /non – receipt of funds– Squaring up of positions without consent– Unauthorized transaction in the account– Excess Brokerage charged by Trading Member– Unauthorized transfer of funds from commodities account to other accounts etc.20 / 5020.In exercising a Put option on a stock, the option holder acquires from the option writer the right to sell the stock. a) a strangle position in the underlying stock b) a short position in the underlying stock c) a long position in the underlying stock d) a butterfly position in the underlying stock Explanation:The buyer / holder of a Put option is of the view that price of the underlying will fall.He thus acquires a short position on exercise.21 / 5021. In the Indian stock market, ______ can create an option. a) Individuals b) Market Makers c) Foreign portfolio investors d) All of the above Your answer is IncorrectYour answer is correctExplanation:All of the above can write (sell) options in Indian stock market.Individuals like traders, hedgers, arbitrageurs etc. can write options as per their plans.FIIs bring foreign capital to India, they invest in the F & O (Future and option market). FIIs can also write options or short futures, as required by their strategy.The market maker is a key stock market participant and like any trader or arbitrageur, he is also there for the profit and buy/write options.22 / 5022. The BID PRICE is always _________. a) Lower than ASK PRICE b) Higher than ASK PRICE c) Equal to ASK PRICE Your answer is IncorrectYour answer is correctExplanation:Bid price is the price buyer is willing to pay and ask price is the price seller is willing to sell.For example the prices as seen on the screen will be – Reliance Inds 2500 – 2501, where 2500 is the bid price and 2501 is the ask price.So the Bid price is always lower than Ask price.23 / 5023. One of the reason that future trading has become expensive is due to higher margins – True or False? a) False b) True Your answer is IncorrectYour answer is correctExplanation:Cost components of futures transaction include margins, transaction costs (commissions), taxes etc.So, higher the margins more expensive the trading.24 / 5024. Who gives the first payment to the exchange when starting a futures contract? a) Only buyers pay initial margin b) No margins are payable to the exchange by buyer or seller c) Only sellers pay the initial margin d) Both the buyer and seller pay initial margin to the exchange Your answer is IncorrectYour answer is correctExplanation:The amount one needs to deposit in the margin account at the time of entering into a futures contract is known as the initial margin.In case of futures, The buyer and seller are required to pay iinitial margin as decided by exchanges for entering into futures contract.(In case of Options, the initial margin is paid only by the sellers. The option buyers have to pay the premium)25 / 5025. Which participant of a stock exchange doesn’t directly trade but handles clearing and settlement for Trading Members and institutional clients? a) A Professional clearing member b) Custodial participant c) A Self-clearing member d) A Trading-cum-clearing member Your answer is IncorrectYour answer is correctExplanation:Professional Clearing Member: Professional clearing member clears the trades of his associate Trading Member and institutional clients. PCM is not a Trading Member of the exchange. Typically banks or custodians become a PCM and clear and settle for Trading Members as well as for Custodial Participants.26 / 5026. Losses from derivative transactions conducted on a recognized stock exchange can be carried forward for a period of ________. a) 10 assessment years b) 8 assessment years c) 5 assessment years d) 7 assessment years Your answer is IncorrectYour answer is correctExplanation:Loss on derivative transactions can be set off against any other income during the year (except salary income). In case the same cannot be set off, it can be carried forward to subsequent assessment year and set off only against any other non-speculative business income of the subsequent year.Such losses can be carried forward for a period of 8 assessment years.27 / 5027. In which document are the risks associated with trading in derivatives required to be outlined? a) It can be conveyed verbally to the client b) The Risk Disclosure document c) Contract Note which is sent to the client d) None of the above 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 informed about the various risks associated with derivatives trading. 28 / 5028. The Beta of a portfolio represents the _________. a) Simple average of the beta’s of the constituent securities in that portfolio b) Value weighted average of the beta’s of the constituent securities in that portfolio c) Sum of the betas the constituent securities in that portfolio d) Same as the beta of the stock with the highest market capitalization Your answer is IncorrectYour answer is correctExplanation:Portfolio beta is a weighted average of betas of individual stocks in the portfolio based on their investment proportion.For example, if there are four stocks in a portfolio with betas 0.5, 1.1, 1.30 and 0.90 having weights 35%, 15%, 20% and 30% respectively, the beta of this portfolio would be 0.87 ( = 0.5*0.35 +1.10*0.15 +1.30*0.20 +0.90*0.30)29 / 5029. What does the risk of bad delivery mean in an index futures contract? a) The risk is there but quiet low b) The risk is very high c) The risk is around 25% of the total deliveries d) The risk does not exist Your answer is IncorrectYour answer is correctExplanation:Index futures are financial contracts whose underlying asset is a specific index like Nifty 50 or Bank Nifty.According to the SEBI regulations, all index futures contracts are cash-settled i.e. there is no delivery of stocks. As there is no delivery, risk of bad delivery does not arise.(Bad delivery means delivery of securities which cannot be legally transferred to the buyer due to some issue with the securities. For eg. Fake or stolen securities).30 / 5030. When is the maturity date for the monthly series of NSE index futures? a) Last Wednesday of the month b) First Wednesday of the month c) Last Thursday of the month d) First Thursday of the month Your answer is IncorrectYour answer is correctExplanation:The Nifty, the Bank Nifty futures contracts and the stock futures contracts listed on the NSE expire on the last Thursday of the respective month (or the day before if the last Thursday is a trading holiday).31 / 5031. In India, the clearing and settlement of derivatives trades would be through ______ . a) State Bank of India b) Euroclear c) SEBI approved Clearing Corporation / Clearing House d) The Interbank Clearing House Explanation:Clearing Corporation/ Clearing House is responsible for clearing and settlement of all trades executed on the F&O Segment of the Exchange. The clearing and settlement of derivatives trades would be through a SEBI approved clearing corporation /house. Clearing corporations/houses complying with the eligibility conditions as laid down by the L. C. Gupta committee have to apply to SEBI for grant of approval.32 / 5032. On final settlement, the buyer/holder of the option will recognise the favourable difference received from the seller/writer as ______ in the profit and loss account. a) Income b) Expense c) Loan d) Amortization Explanation:On exercise of the option, the buyer/holder will receive the favorable difference between the final settlement price as on the exercise/expiry date and the strike price, which will be recognized as INCOME.33 / 5033. A trader buys a January ABC stock futures contract at Rs 768 and the lot size is 1200. What is his profit or loss , if he squares off the position at Rs 778? a) Rs. 12,000 b) Rs 12,00,000 c) Rs 1,20,000 d) Rs 10,000 Explanation:The trader buys at Rs 768 and sells off at Rs 778, so he makes a profit of Rs 10. Lot size is 1200. So the total profit is Rs 10 X 1200 = Rs 1200034 / 5034. A professional clearing member of the derivatives segment _______________. a) should also be a member of the cash segment b) should also become a member of the cash segment within 2 years c) provides trading facility to its clients d) does not have any trading rights Explanation:A professional clearing member is not a trading member of the exchange and does not have trading rights.35 / 5035. Which one of these complaints against a trading member can an Exchange take up for redressal? a) Complaints regarding land dealings between a client and trading member b) Complaints in respect of transactions which are already subject matter of Arbitrage proceedings c) Claims regarding notional loss for the disputed trade d) Claims regarding unauthorized transaction in the client’s account Explanation:Complaints against trading members on account of the following can be taken by an Exchange for redressal :– Non-receipt of funds / securities– Non- receipt of documents such as member client agreement, contract notes, settlement of accounts, order trade log etc.– Non-Receipt of Funds / Securities kept as margin– Trades executed without adequate margins– Delay /non – receipt of funds– Squaring up of positions without consent– Unauthorized transaction in the account– Excess Brokerage charged by Trading Member / Sub-broker– Unauthorized transfer of funds from commodities account to other accounts etc.36 / 5036. Trading is allowed in Indian Equity markets in which of the following – a) Index Options b) Individual stock options c) Individual stock futures options d) All of the above Explanation:In Indian equity markets, trading is allowed in all the following derivative instruments:Index Options – Options based on a stock market index like Nifty 50 or Bank Nifty.Individual Stock Options – Options based on specific stocks such as Reliance, TCS, etc.Individual Stock Futures – Futures contracts on individual stocks that allow speculation or hedging against future price movement.The Securities and Exchange Board of India (SEBI) has permitted trading in these instruments on recognized stock exchanges like NSE and BSE, providing various tools for risk management, hedging, and speculation.37 / 5037. On the derivatives futures market, if there are three series of one, two and three months open at a point of time, how many calendar spreads can one have? a) 1 b) 2 c) 3 d) 4 Explanation:The three calendar spreads can be between months 1 and 2, 2 and 3 and 1 and 3.38 / 5038. What does an Call Option gives the buyer ? a) The right but not the obligation b) The obligation but not the right c) Gives both the right and obligation d) Neither the right not the obligation Explanation:A call option gives the buyer the right but not the obligation to buy from the seller an underlying at the prevailing market price on or before the expiry date.39 / 5039. Speculators are those who take risks, whereas hedgers are those who wish to reduce risk – State True or False. a) True b) False Explanation:Hedgers – They face risk associated with the prices of underlying assets and use derivatives to reduce their risk.Speculators/Traders – They try to predict the future movements in prices of underlying assets and based on the view, take positions in derivative contracts.40 / 5040. The money and securities that are deposited in a client’s account _______. a) Can be attached for meeting the obligations of the broker on his proprietary account b) Can or cannot be attached depends on the decision of Clearing Corporation c) Cannot be attached for meeting the obligations of the broker on his proprietary account d) None of the above Explanation:The securities or money deposited by clients cannot be attached for meeting broker’s obligation on his proprietary account. The broker has to maintain separate client bank account for segregation of client money. Also brokers should keep margins collected from clients in a separate bank account.41 / 5041. In case there is a Stock Split of a company which is a part of an Index, than what will its impact on the index value? a) The index value can increase or decrease but this cannot be forecasted with accuracy b) The index value will remain unchanged c) The index value will decrease d) The index value will increase Explanation:A stock split lowers its stock price but doesn’t weaken its value to current shareholders as the number of shares increase proportionally. Stock Split has an effect on Options, Strike Price etc. but has no impact on the index as such. Therefore, when a stock which is part of the index has a stock split, it does not have an impact on the index.42 / 5042. ‘Time Decay’ is beneficial to the _______ . a) Option Buyer b) Option Seller c) Option Buyer and Seller equally d) Neither the option buyer or seller Explanation:If all other factors affecting an option’s price remain the same, the time value portion of an option’s premium will decrease with the passage of time. This is also known as time decay. Options are known as ‘wasting assets’, due to this property where the time value gradually falls to zero.Any fall in premium is advantageous to the option seller.43 / 5043. Which of these options is an example of a calendar spread? a) Going short on the underpriced futures contract of one month and at the same time buying the overpriced futures contract of another month b) Buying stock futures contract while at the same time shorting the stock c) Buying the underpriced futures contract of one month and simultaneously selling the overpriced futures contract of another month d) Going short on the stock futures contract while simultaneously buying the stock Explanation:Calendar spread refers to the arbitrage between futures contracts of different expiration months.In this strategy, the arbitrageur buys and sells the futures contracts of two different months. To execute this strategy, the arbitrageur must identify which contract to buy or sell. The principal rule of arbitrage is that one must buy the underpriced contract and sell the overpriced one.Hence, the arbitrageur needs to compute the fair price of both futures contracts and compare these with the traded prices to decide which contract is overpriced and which one is underpriced.44 / 5044. Identify the TRUE statement concerning a Put option. a) In a Put Option, both the buyer and seller must buy and sell the underlying at a specified price b) A put option will give the buyer a right but not an obligation to sell to the writer an underlying at a specified price c) A put option will give the seller a right but not an obligation to buy from the buyer an underlying at a specified price d) A put option will give the buyer an obligation but not the right to sell to the writer an underlying at a specified price Explanation:Options may be categorized into two main types: · Call Options · Put Options An option that gives the buyer/holder a right to buy the underlying asset is called a call option; and an option that gives the buyer/holder a right to sell the underlying asset, is called a ’put option’.The buyer of an option is one who has a right but not the obligation in the contract. For owning this right, he pays a price called ‘option premium’ to the seller of this right.He has a right to buy the underlying asset in case of a call option and the right to sell the underlying asset in case of a put option.45 / 5045. The Derivatives market helps in _________ . a) Transfer of risk from those who are exposed to risk but have low risk appetite to participants with high risk appetite b) The reallocation of risk among the market participants c) Both of the above d) None of the above Explanation:Derivatives play a positive role by reallocating risks. They help in transfer of various risks from those who are exposed to risk but have low risk appetite (Hedgers) to participants with high risk appetite (Speculators). For example, hedgers do not want any risk where as traders/speculators are willing to take risk. Derivatives were first invented as a Hedgeing tool so that people who wanted to play safe can use them to transfer the risk by hedgeing.46 / 5046. Identify the FALSE statement concerning options. a) Option contracts are NOT symmetrical regarding the rights and obligations of the parties involved b) The buyer of an option gets the right while the seller of an option bears the obligation c) Options contracts have non-linear payoffs d) Options contracts have linear payoffs Explanation:In the case of futures contracts, long as well as short position has unlimited profit or loss potential. This results in linear payoffs for futures contracts. However, option contracts do not have linear payoffs as the buyers and sellers have different obligations and risk factors.The buyer of an option has limited risk (premium which he pays) but can earn unlimited profits whereas the seller of the option has unlimited risk but can earn only limited profits (premium which he receives).Option contracts are not symmetrical as the buyers and sellers have different obligations and risk factors. The buyer has limited risk whereas a seller of an option has unlimited risk.47 / 5047. Kavita wants to ‘sell’ on a futures market. For this, she _______________. a) need not own the underlying b) must own the underlying c) must own at least 25% of the underlying d) must own at least 50% of the underlying Explanation:Selling on a futures market does not need any delivery. Only margin is required to be paid to Buy/Sell on a futures market. Therefore, Ms. Kavita can sell on the futures market even without owning the underlying. However, she needs to square up her position before the expiry.48 / 5048. Mr. Mehta has bought a futures contract and the price rises. In this case, Mr. Mehta will _________ . a) Make a profit b) Make a loss c) Make a profit or make a loss depending on the situation d) Insufficient information to arrive at a conclusion Explanation:Mr. Mehta has bought the future contract which means he believes that the prices will rise so that he can gain from it. So he will make a profit if the price rises.49 / 5049. A derivative market helps in transferring the risk from ________. a) Speculators to Hedgers b) Arbitrageurs to Hedgers c) Speculators to Arbitrageurs d) Hedgers to Speculators Explanation:Hedgers aim to hedge their risk and speculators/traders take the risk which hedgers plan to offload from their exposure. Speculators form one of the most important participants of the derivatives market, providing depth to the market. Hedgers may not be able to hedge, if speculators were not present in the system.50 / 5050. A calendar spread in index futures will be treated as _________ in a far-month contract if the near month contract has expired. a) Naked Position b) Long position c) Optional position d) Short position Explanation:A naked position is long or short in any of the futures contracts but a spread position consists of two opposite positions. A calendar spread becomes a naked/open position when the near-month contract expires or either of the legs of the spread is closed.Your score is 0% Restart quiz Exit
