Nism Xiii - Common Derivatives - Last Day Revision Test 1

NISM SERIES XIII - COMMON
DERIVATIVE CERTIFICATION
EXAM
NISM SERIES XIII COMMON DERIVATIVE
CERTIFICATION EXAM : LAST DAY REVISION TEST 1
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LAST DAY REVISION TEST 1 - COMBINED Q&As OF ALL 3 MODULES
Question 1 The system of accounting which is used to calculate prices of currency futures
contract when multiple contracts of a series are combined / squared up is
__________.
(a) FIFO
(b) LIFO
(c) Lowest price contract are squared off first
(d) Profit making contracts are squared off first.
Correct Answer FIFO
Answer FIFO - First In First Out.

Explanation
Question 2 What is done when a client defaults in making the Mark to Market margin
payments ?
(a) The matter is reported to the clients bankers and amount is recovered from his
banks
(b) The client is allowed to a maximum of 5 more trades so that he can make profits
and pay the margins
(c) The amount of unpaid mark to market margin is recovered from his Initial
Margin
(d) SEBI handles the matter as per its guidelines
Correct Answer The amount of unpaid mark to market margin is recovered from his Initial
Margin
Answer When a client defaults in making payments in respect of a daily settlement mark to
Explanation market margins, the contract is closed out.
The amount not paid by the client is adjusted against the initial margin.
Question 3 The seller of a Call Option has the obligation to buy the underlying asset - True
or False ?
(a) TRUE
(b) FALSE
Correct Answer FALSE
Answer The seller of a Call Option has the obligation to SELL the underlying asset.
Explanation
Question 4 The SEBI Act - 1992 is the act mainly responsible for governing the trading of
securities in India - True or False ?
(a) TRUE
(b) FALSE
Answer The SC(R)A ie. the Securities Contarct (Regualtion) Act of 1956 is the act mainly
Explanation responsible for governing the trading of securities in India.
Question 5 In case of currency options, the net option value is added for short options and
its deducted for long options to the liquid net worth of clearing members - True
or False ?
(a) TRUE
(b) FALSE
Answer Remember the current market value of short options is deducted from liquid net worth and
Explanation for long options its added.
Question 6 Mr Raunak believes that there is a very strong bullish trend in USDINR. He also
believes that there will be a decrease in volatility. So which option strategy is he
most likely to use ?
(a) Long Call

(b) Long Put
(c) Short Call
(d) Short Put
Correct Answer Long Call
Answer Buying a Call is the best option as he is anticipating a strong bullish run in USDINR.
Explanation Decrease in volatility will be an added advantage as he will get the call cheaper.
Question 7 The Profit or Loss for an Option Writer is unlimited - True or False ?
(a) TRUE
(b) FALSE
Answer The Profits for a Option Writer is limited to the extent of premium received but his
Explanation losses can be unlimited.
For eg if he sells a call option ( as he belives that the underlying will fall ) he collects the
premium (limited profit). But in case the underlying rises to a great extent, his losses can
be huge / unlimited.
Question 8 A trading cum clearing member buys 10 lots of GBPINR one month futures on
day 1 and also sells 4 lots of this contract on that day in his proprietary account.
What would be his open position at the end of day in GBP?
(a) 14000
(b) 6000
(c) 10000
(d) 4000
Correct Answer 6000
Answer 10 lots less 4 lots X 1000 (lot size of GBP) = 6000

Explanation
Question 9 A person who has studied economics and international finance believes that
EUR should appreciate against INR in the next 1 month. Using this view he
executes a trade on currency futures. Given this situation, what type of market
participant would this person be ?
(a) Arbitrageur
(b) Delta Player
(c) Speculator
(d) Hedger
Correct Answer Speculator
Question 10 Mr Rohit is very bullish on GBPINR and thinks that this pair will trade at 80 in
the next few weeks. The current price of GBPINR is 75. Mr. Rohit wants to
maximize his profits if this view turns out to be correct. Which of the below
strategies should he consider ?
(a) Buy GBPINR Call option

(b) Sell GBPINR Call option
(c) Buy GBPINR Put option
(d) Sell GBPINR Put option
Correct Answer Buy GBPINR Call option
Answer Buy a Call option or Selling a Put option - both signify bullish view. Buy when you sell a Put
Explanation option, the profits are limited to the extent of premium received.
So to maximise his profits, he will buy a Call Option where the profit potential is
unlimited.
Question 11 A _____________ can trade in his own account as well as on account of its
client.
(a) Participant
(b) Custodian
(c) Trading cum clearing member
(d) Trading Member
Correct Answer Trading Member
Answer Trading members are members of an authorized Exchange. They can trade either on their
Explanation own account or on behalf of their clients including participants.
Question 12 A pharma company has imported some chemicals from USA and has to make
payments after three months. To hedge the risk the company buys a USDINR
call option at a strike price of Rs 52 and pays a premium of Rs 2.30. When the
option matures, the settlement price was Rs 55.10. How much profit did the
company make per USD on this option strategy in Rs. ?
(a) 5.4
(b) 3.1
(c) 2.3
(d) 0.8
Correct Answer 0.8
Answer The Company buys Rs 52 call option at Rs 2.30 premium.

Explanation
So the total cost = 52 + 2.30 = 54.30
The Settlement Price is 55.10
So the profit is 55.10 - 54.30 = Rs 0.80

Question 13 _______measures sensitivity of option value to the risk free interest rate.
(a) Theta
(b) Delta
(c) Vega
(d) Rho
Correct Answer Rho
Question 14 An exporter receives USD as export remittance and wants to sell the same. The
bank quotes a price of 54.20/ 54.30 for USDINR. At what price can you sell one
unit of USD ?
(a) 54.25
(b) 54.2
(c) 54.3
(d) 54.5
Correct Answer 54.2
Answer 54.20 and 54.30 are the BID and ASK price. This means there are buyers at 54.20 and
Explanation sellers at 54.30.
So if the exporter wants to sell, he has to sell them to the buyer at 54.20
Question 15 A wheat flour manufacturer gets into a contract with a five star hotel chain to
sell certain quantity of wheat flour at a fixed price for a year. However after a
few months, the price of wheat rises much above the contracted price and the
manufacturer refuses to sell to the five star hotel chain. What is the type of risk
highlighted in this contract ?
(a) Operational Risk

(b) Liquidity Risk
(c) Basis Risk
(d) Counter Party Risk
Correct Answer Counter Party Risk
Answer Counter Party Risk - The risk to each party of a contract that the counterparty will not
Explanation live up to its contractual obligations.
Question 16 A trader is bullish about USD and buys 5 lots of one month USDINR future
contracts at Rs.301500. On the expiry, the USDINR future were settled at Rs.60.
What will be his profit or loss ?
(a) Profit of 15000

(b) Loss of 15000
(c) Loss of 1500
(d) Loss of 150
Correct Answer Loss of 1500
Answer He bought 5 lots at 301500.

Explanation
Per lot price = 301500 / 5 = 60300 / 1000 ( Lot size) = 60.30
He bought at 60.30 and the expiry price is 60.
So he will suffer a loss : 60.30 - 60.00 = 0.30
Total Loss : 0.30 x 5 Lots X 1000 ( Lot size )
= Rs 1500
Question 17 A sub-broker has to execute a bipartite agreement between him and his client
clearly specifying rights and obligations of each party - State True or False ?
(a) TRUE
(b) FALSE
Answer A sub-broker should enter into a tripartite agreement with his client and with the main
Explanation broker specifying the scope of rights and obligations of the broker, sub-broker and such
client of the sub-broker.
Question 18 A trading member (TM) has two clients "A" and "B" and he also does
proprietary trading in currency futures. On day 1, TM buys 12 lots of USDINR
one month futures and also sells 2 lots of the same contract on the same day in
his proprietary book. On the same day, client "A" buys 12 lots of USDINR one
month futures and also sells 2 lots of the same contract while client "B" buys 12
lots and sells 2 lots. What would be the open position (in USD) of the trading
member, client "A" and client "B" respectively at the end of day 1 ?
(a) 30,000; 10,000; 10,000

(b) 10,000; zero; zero
(c) zero, 10,000; 10,000
(d) 10,000; 10,000; 10,000
Correct Answer 30,000; 10,000; 10,000
Answer TM open position : 12 -2 Lots = 10 lots x 1000 (Lot size) = 10,000

Explanation
Client A : 12 -2 Lots = 10 lots x 1000 (Lot size) = 10,000
Client B : 12 -2 Lots = 10 lots x 1000 (Lot size) = 10,000
TM open position is the sum of all open position = 10,000 + 10,000 + 10,000 = 30,000
Question 19 The contract size for USDINR futures contract is __________.
(a) USD 100

(b) INR 100
(c) USD 1000
(d) INR 1000
Correct Answer USD 1000
Answer The Contract size or lot size in the case of USDINR is USD1000
Explanation
In case of GBPINR it is GBP 1000; EURINR it is EUR 1000; JPYINR it is JPY 100,000.
Question 20 Mr Sharma invested INR 200,000 in an Indian corporate bond for a year giving a
return of 14% in one year. He plans to use the proceeds from the maturity of
this bond to fund his son's education on US. At the time of investing in the
corporate bond, USDINR spot rate was 50 and one year premium was 3%. The
person decides to hedge currency risk using USDINR one year futures. At the
end of one year, how many USD can this person remit to his son?
(a) 4385
(b) 4427
(c) 4480
(d) 4516
Correct Answer 4427
Answer Mr Sharma has invested Rs 2,00,000 at 14% . So after one year he will receive :
Explanation
200000 X 14% = Rs 2,28,000
One year premium for USD is 3%
So the future price of USD is 50 x 3% = 51.50
Therefore, USD which Mr Sharma will have after one year = 2,28,000 / 51.50
= 4427
Question 21 When two way market quotes are mentioned, BID price would mean ________ .
(a) The price at which price taker is willing to buy

(b) The price at which price taker is willing to sell
(c) The price at which market maker is willing to buy
(d) The price at which market maker is willing to sell
Correct Answer The price at which market maker is willing to buy
Answer In interbank market, currency prices are quoted with two way price - the prices quoted
Explanation for buying is called bid price and the price quoted for selling is called as offer or ask
price.
These prices are always from the perspective of the market maker and not from the
perspective of the price taker.
(The difference between bid and offer price is called as 'spread')
Question 22 The Special Committee formed by SEBI on Currency Futures recommends

product design, risk management and membership norms for currency futures -
State True or False ?
(a) TRUE
(b) FALSE
Answer RBI-SEBI Standing Technical Committee on Exchange Traded Currency recommends

Explanation product design, risk management and membership norms for currency futures.
Question 23 Assume that USDINR spot price to remain the same in the next 30 days and
premium on USD to INR to continue. So which of the below actions will result in
losses ?
(a) Selling USDINR futures

(b) Selling USDINR OTC forward
(c) Buying USDINR futures
(d) All of the above
Correct Answer Buying USDINR futures
Answer The buyer of future contract suffers a loss if there is no movement in the underlying due
Explanation to the concept of time decay.
Question 24 A trader in currency markets sells 20 lots of EURINR 1 month future when the
price was 62.60/62.70 and squares off 12 lots when the price was 63.20/63.40.
How much profit or loss does he make on the trades that were squared off
?Profit of 7600
(a) Profit of 7600

(b) Loss of 8750
(c) Profit of 9740
(d) Loss of 9600
Correct Answer Loss of 9600
Answer When the price was 62.60 / 62.70, the trader sold EURINR - so he sold at 62.60 as
Explanation that is the Bid (Buyers) price.
When the price was 63.20 / 63.40, the trader bought EURINR, so he bought at 63.40 as
that is the Ask (Sellers) price.
Out of the 20 lots bought, he has squared off only 12 lots.
62.60 - 63.40 = -0.80 ( Loss)
Total Loss = -0.80 x 12 lots x 1000 (each lot of EURINR)
= -9600
Question 25 The Calendar Spread margin requirement for a 3 months EURINR spread is
__________.
(a) Rs 500
(b) Rs 1000
(c) Rs 1500
(d) Rs 2000
Correct Answer Rs 1500
Answer Please memorise the Calendar Spread Margin requirements over various periods for the 4
Explanation currency pairs as mentioned in the NISM book, Chapter - Clearing, Settlement & Risk
Management - Margin Requirements.
Question 26 At the start of month, JPYUSD is 2.66 and GBPUSD is 1.80. At the end of month,
JPYUSD is 2.87 and GBPUSD is 1.73. Which of the following best describes the
price movement ?
(a) USD has weakened against GBP

(b) USD has strengthened against JPY
(c) JPY has weakened against USD
(d) GBP has weakened against USD
Correct Answer GBP has weakened against USD

Question 27 As a trader you believe USDJPY will move from 90 to 95 in the next one month.
You are a trader based in India where there is no trading in USDJPY. Therefore
which of the following would you do to execute this view using currency future
contracts of JPYINR and USDINR.
(a) Short JPYINR and Long USDINR

(b) Short USDINR and Long JPYINR
(c) Short JPYINR
(d) Long JPYINR
Correct Answer Short JPYINR and Long USDINR
Answer USDJPY moving from 90 to 95 means JPY will become weak against USD.
Explanation
So in India, he will short JPYINR and go long in USDINR.
Question 28 Which of the following correctly describes the closing price of USDINR futures
contract ?
(a) The average price for last half hour trading.

(b) The weighted average price for last half an hour trading.
(c) The last traded price.
(d) The average price of bid and ask price for last half an hour of trading.
Correct Answer The weighted average price for last half an hour trading.
Answer The closing price for a futures contract is calculated as the last half an hour weighted
Explanation average price of the contract.
However if a futures contract is not traded on a day or not traded during the last half
hour, a 'theoretical settlement price' is computed as may be decided by the relevant
authority.
Question 29 An importer takes a long position in USDINR futures contract at a price of 53 by

buying 20 lots. At the expiry, the settlement price is 54.3. How much Profit or
Loss did the importer make ?
(a) Profit of 2600

(b) Profit of 26000
(c) Loss of 2600
(d) Loss of 26000
Correct Answer Profit of 26000
Answer The importer went long which means he bought USDINR at 53.
Explanation
Settlement price is 54.30
P/L = Selling Price - Buying Price
= 54.30 - 53
= 1.30 Profit
1.30 x 20 Lots X 1000 ( lot size of USDINR )
= 26000
Question 30 The currency futures segment of the Exchange has a separate Governing Council
on which the representation of Trading /Clearing Members of the currency
futures segment does not exceed 50% - True or False ?
(a) TRUE
(b) FALSE
Answer The currency futures segment of the Exchange has a separate Governing Council on which
Explanation the representation of Trading /Clearing Members of the currency futures segment does
not exceed 25 %
Question 31 If one year interest rate in US is 1% and 4 % in Great Britain and the current
GBPUSD spot rate is 1.74. What would be the one year futures of GBPUSD ?
(a) Lower than 1.74

(b) Higher than 1.74
(c) 1.74
(d) None of the above
Correct Answer Lower than 1.74
Answer The formula for Interest Rate Parity is :

Explanation
Future Rate = Spot Rate X (1 + Interest Rate of Quoted Currency) /
( 1 + Interest Rate of Base Currency)
= 1.74 X ( 1 + 0.01 ) / ( 1 + 0.04 )
= 1.74 X ( 1.01 / 1.04)
= 1.74 x 0.9711
= 1.689
Thus the future rate will be at a discount as Quoted Currency interest rates are less than
base currency interest rates.
Question 32 Mr Kulkarni invested Rs 1,00,000 in US Stock Markets when the USDINR rate
was 60. After one year his investment appreciated by 18% in USD terms. He sold
of his investments and repatriated the money to India at the then existing rate
of 62. What is his real returns in INR ?
(a) 20.78%
(b) 21.93%
(c) 16.45%
(d) 15.20%
Correct Answer 21.93%
Answer Mr. Kulkarni invested Rs 1,00,00 in US Stock when the USDINR rate was 60.
Explanation So he had invested 100000/60 = 1666.67 Dollars in US Stocks.
His investment grew by 18% : 1666.67 x 18% = 1666.66 + 300 = 1966.67
He is repatriating at USDINR rate of 62 : 1966.67 x 62 = 121933.54
Therefore his investment in INR terms have grown from Rs 1,00,000 to Rs 1,21,933.54
This is an increase of 21.93 %

Question 33 Ms. Rita sold a put option of strike price Rs. 90 and she received a premium of
Rs. 6 from the option buyer. Theoretically, what can be the maximum loss on
this trade ?
(a) 90
(b) 84
(c) 96
(d) 0
Correct Answer 84
Answer Theoretically a share can fall to Rs 0. So the maximum loss can be Rs 90. But Ms. Rita
Explanation has received Rs 6 as option premium so her maximum loss will be Rs 90 - Rs 6 = Rs 84.
Question 34 Guidelines for accounting of currency futures contracts are issued by

_________.
(a) RBI
(b) ICWAI
(c) ICAI
(d) FX- CA
Correct Answer ICAI
Answer The Institute of Chartered Accountants of India (ICAI) has issued guidance notes on
Explanation accounting of currency futures contracts.
Question 35 A paddy farmer buys a weather insurance to protect himself if there is less
rainfall in his region. This is like a derivative contract - what is the underlying for
this weather derivative?
(a) Temperature recorded

(b) Actual Rainfall
(c) Storms and Hurricanes
Correct Answer Actual Rainfall
Question 36 One of the key difference in OTC and Exchange traded EUR-INR currency option
market is related to ___________.
(a) Lot size

(b) Requirement of proof of underlying FX transaction
(c) Market timings
(d) Both (2) and (3)
Correct Answer Both (2) and (3)

Question 37 Can we say that when the USDINR falls one way, this means there is a decrease
in volatility ?
(a) Yes
(b) No
Correct Answer No
Answer Volatility measures the magnitude of the change of prices (up or down) of the underlying
Explanation asset. So even if the price has fallen, volatility can continue to be high.
Question 38 Suppose a trader has a grievance against a trading member and he uses the
mechanism of Arbitration to settle the dispute. The arbitrator conducts the
arbitration proceeding and passes the award normally within a period of
________ from the date of initial hearing.
(a) 25 days
(b) 2 months
(c) 4 months
(d) 6 months
Correct Answer 4 months

Question 39 A DAY ORDER means its valid ______________.
(a) for one hour

(b) till the end of day
(c) till its executed
(d) till 5 hours
Correct Answer till the end of day
Answer A day order is an order which is valid for the day on which it is entered.
Explanation
If the order is not executed during the day, the system cancels the order automatically
at the end of the day.
Question 40 An Immediate Or Cancel (IOC) order __________.
(a) gets exercised on the last day

(b) is valid for one hour after it is entered in the trading system
(c) is either executed or cancelled as soon as it is entered in the trading system
(d) gets executed at the best price during the day
Correct Answer is either executed or cancelled as soon as it is entered in the trading system
Answer IOC is an order to buy or sell a security that if not immediately executed, will be
Explanation cancelled.
Partial match is possible for the order, and the unmatched portion of the order is
cancelled immediately
Question 41 A unique principle of futures trading makes trading possible for those who do
not want to make or take delivery of underlying assets. Which is that principle ?
(a) Traded on a recognised exchange

(b) Price uncertainity
(c) Standardisation of contracts
(d) Cash settlement
Correct Answer Cash settlement
Question 42 When a clearing member / broker make unnecessary transactions in his clients
account with the sole aim of making commissions, this is known as ________.
(a) Technical Trading

(b) Stop Loss Trading
(c) Churning
(d) Portfolio Planning
Correct Answer Churning

Question 43 Money and securities deposited by clients with the trading members should be
kept by them in a separate clients account - True or False ?
(a) TRUE
(b) FALSE
Correct Answer TRUE
Question 44 ETFs is basket of securities that trade like individual stock on an exchange- True
or False ?
(a) TRUE
(b) FALSE
Correct Answer TRUE
Answer Exchange Traded Funds (ETFs) is basket of securities that trade like individual stock on
Explanation an exchange. They have number of advantages over other mutual funds as they can be
bought and sold on the exchange.
Since, ETFs are traded on exchanges intraday transaction is also possible.

Question 45 You are interested in creating a perfect hedge for your portfolio. For this you
need to sell index futures and the index futures sold should be equal to
__________.
(a) Value of your portfolio + Beta of your portfolio

(b) Value of your portfolio / Beta of your portfolio
(c) Value of your portfolio * Beta of your portfolio
(d) Value of your portfolio - Beta of your portfolio
Correct Answer Value of your portfolio * Beta of your portfolio
Answer To get a hedge, one has to multiply the beta of his portfolio with the value of the
Explanation portfolio and them sell that value of index futures.
Question 46 As per the rules, the minimum networth of clearing members who handle and
clears/settles only deals executed by him is higher than those clearing members
who handle institutional trades.
(a) TRUE
(b) FALSE

Question 47 An trader buys a June XYZ stock futures contract at Rs 242. After a few days the
price of XYZ futures was Rs 269. What will be your profit / loss if you square up
your position ? ( The market lot of XYZ share is 1000 )
(a) -20000
(b) -27000
(c) 20000
(d) 27000
Correct Answer 27000
Answer Purchase Price - Rs 242

Explanation
Sale Price - Rs 269
So profit of Rs 27 x 1000 lot = Rs 27000.
Question 48 Ms. Geeta goes long in a PUT option of a higher strike price and shorts another
PUT option of a lower strike price, of the same scrip and same expiry. This
strategy is called _______ .
(a) Bullish Spread

(b) Bearish Spread
(c) Calendar spread
(d) Straddle
Correct Answer Bearish Spread
Answer Bearish Spread - The trader is bearish on the market and so goes long in one put option
Explanation by paying a premium. Further, to reduce her cost, she shorts another low strike put and
receives a premium.
Question 49 Hedging would ensure that your profits are always on the higher side compared
to an unhedged position - State True or False ?
(a) TRUE
(b) FALSE
Answer Hedging controls your losses but also controls your profits. It does not ensure higher
Explanation profits.
An open position can give you more profits or more losses.
Question 50 A client can use cross margining across Cash and Derivatives segment - True or
False ?
(a) TRUE
(b) FALSE
Correct Answer TRUE
Answer A client can use the margin he has paid in any segment provided he has signed on the
Explanation necessary declarations in the account opening forms etc.
Question 51 You have bought a CALL of SBI of Strike price of Rs 200 of January. To close the
position, you will buy a PUT of same strike price of January. True or False ?
(a) TRUE
(b) FALSE
Answer When you buy a CALL option, to close this position you will have to sell a CALL option of
Explanation same strike price and expiry.
Question 52 Derivatives market helps shift of speculative trades from unorganized market to
organized market. True or False ?
(a) TRUE
(b) FALSE
Correct Answer TRUE
Answer In the unorganized markets, there is a huge risk of counter party default etc. In the
Explanation organized markets for derivatives the Clearing Corporation guarantees the clearing and
settlement of all trades even if there is a default of any participant.
Question 53 A short seller has the time of one week to deliver the stocks - True or False ?
(a) TRUE
(b) FALSE
Answer Selling Short means Seller does not own the stock he is supposed to deliver.
Explanation
Even if a trader has stock he has to deliver the shares in T+2 days.
Question 54 The option which gives the holder a right to buy the underlying asset on or
before a particular date for a certain price, is called as _________
(a) European put option

(b) American put option
(c) American call option
(d) European call option.
Correct Answer American call option
Answer In case of American options, buyers can exercise their option any time before the
Explanation 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.
Question 55 The spot price of LKK share is Rs 300, the put option of Strike Price Rs 280 is
_____ .
(a) In the money

(b) Out of the money
(c) At the money
Correct Answer Out of the money
Answer Out of the Money Option - A call option with a strike price that is higher than the
Explanation 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.
Question 56 Mr A sold a put option of strike Rs.400 on PQR stock for a premium of Rs.32.
The lot size is 500. On the expiry day, PQR stock closed at Rs. 350. What is your
net profit or loss?
(a) -25000 (Loss)

(b) -9000 (Loss)
(c) 9000 (Profit)
(d) 25000 (Profit)
Correct Answer -9000 (Loss)

Answer Mr. A sold a PUT option, that means he has a bullish or neutral view on PQR stock.
Explanation
However, PQR stock has fallen by Rs 50 ( 400 - 350 ).
Which mems he has lost Rs 50.
Since he has sold a PUT, he will receive the premium which is Rs 32.
So his net loss will be Rs 50 (Loss) - Rs 32 (Premium Recd) = Rs 18
Total Loss = Rs 18 x 500 (lot size) = Rs. 9000

Question 57 In case of Call options, if the market price is less than the exercise (strike) price,
the option will __________.
(a) expire worthless

(b) seller of the option will exercise it
(c) will definitely get exercised
(d) none of the above
Correct Answer expire worthless
Answer If market price is below strike price, the option expires worthless as the buyer will incur
Explanation the maximum loss of his premium paid and the seller will earn the premium received.
Question 58 Theta is the rate of change in option premium for a change in the price of the
underlying asset - State True or False ?
(a) TRUE
(b) FALSE
Answer Delta is the rate of change in option premium for a change in the price of the underlying
Explanation asset.
Theta is the change in option price given a one-day decrease in time to expiration. It is a
measure of time decay.
Question 59 In the Options segment, if you sell a PUT, you expect the market / scrip to move
_____
(a) Either up or down as you profit in both directions.

(b) One cannot sell a PUT in the options market
(c) Up
(d) Down
Correct Answer Up
Answer A seller of a PUT option has a positive / bullish view and he expects the market / script
Explanation to go up to make a profit.
Question 60 Vega is ________ .
(a) the change in option price given a one percentage point change in the risk-free
interest rate
(b) a measure of the sensitivity of an option price to changes in market volatility
(c) the change in option price given a one-day decrease in time to expiration
(d) speed with which an option moves with respect to price of the underlying asset
Correct Answer a measure of the sensitivity of an option price to changes in market volatility
Question 61 In an In the money PUT option____
(a) strike price would be lower than the market price

(b) exercise price would be equal to the market price
(c) strike price would be higher than the market price
(d) strike price would be zero
Correct Answer strike price would be higher than the market price
Answer A put option is said to be In The Money when market price is lower than strike price.
Explanation
Question 62 An American put option gives the buyer the right but not the obligations to sell
to the writer an underlying asset at a specified price on or before the expiry
date - State whether True or False ?
(a) TRUE
(b) FALSE
Correct Answer TRUE
Answer The owner of American option can exercise his right at any time on or before the expiry
Explanation date/day of the contract.
The owner of European option can exercise his right only on the expiry date/day of the
contract.
Question 63 In the Option segment, if you sell a CALL at a premium of Rs 45 at the Strike
Price of Rs 400, lot is of 200 shares, then the maximum possible Profit is ______
(a) Rs 9000
(b) Rs 18000
(c) Rs 80000
(d) Unlimited
Correct Answer Rs 9000
Answer In the Options market, the maximum profit a seller of an option can make is the premium
Explanation he receives.
In the above case the premium received is Rs 45 x 200 shares = Rs 9000.
Question 64 Time value and intrinsic value of a call option are always either positive or zero-
True or False ?
(a) TRUE
(b) FALSE
Correct Answer TRUE
Answer Only in-the-money options have intrinsic value whereas at-the-money and out-of-the-
Explanation money options have zero intrinsic value. The intrinsic value of an option can never be
negative.
Time value also can never be negative.

Question 65 A tax which is clearly mentioned in the Contract Note is _______
(a) Long Term Capital Gain Tax

(b) Short Term Capital Gain Tax
(c) Both 1 and 2
(d) Securities Transaction Tax (STT)
Correct Answer Securities Transaction Tax (STT)
Question 66 Does trading in derivatives become expensive due to high margins ? State Yes
or No.
(a) Yes
(b) No
Correct Answer Yes
Answer Cost components of futures transaction include margins, transaction costs (commissions),
Explanation taxes etc.
So higher the margins more expensive the trading.

Question 67 Tick size depends on _______ .
(a) The Delta of the security

(b) Volume in that security
(c) Its fixed by the exchange
(d) The Interest rates
Correct Answer Its fixed by the exchange
Answer Tick size is the minimum move allowed in the price quotations. Exchanges decide the tick
Explanation sizes on traded contracts as part of contract specification. Tick size for Nifty futures is
5 paisa.
Question 68 Options contracts are not symmetrical with respect to rights & obligations of
the parties involved - State True or False ?
(a) TRUE
(b) FALSE
Correct Answer TRUE
Answer The buyer of an option has a right but not the obligation in the contract. Also his riskd
Explanation are limited to the extent of premium paid.
The writer/seller of an option is one who receives the option premium and is thereby
obliged to sell/buy the asset if the buyer of option exercises his right. His risks are
unlimited.
Thus Option contracts are not symmetrical as the buyers and sellers have different
obligations and risk factors.
On the other hand obligations and returns in Futures are symmetrical for both buyer and
sellers.
Question 69 Of the below options, when will the April index future contract be introduced
on NSE ?
(a) On the 1st trading day after last Thursday in March

(b) On the 1st trading day after last Friday in March
(c) On the 1st trading day after last Thursday in January
(d) On the 1st trading day after last Friday in January
Correct Answer On the 1st trading day after last Thursday in January
Answer There are always 3 contracts running. So for eg. we will have Jan-Feb-Mar contracts
Explanation trading in January.
When January contracts expire on last Thursday of January, on Friday the April
contracts will be introduced and so we will have Feb-Mar-April contracts
Question 70 High level of initial margins deter brokers and clients from trading in the
derivatives market - State True or False ?
(a) TRUE
(b) FALSE
Correct Answer TRUE
Answer Risk involved in trading in derivatives are higher as compared to spot market due to bigger
Explanation trading lot sizes.
Margin levels in derivatives are kept at a higher level so that brokers and clients who do
not have adequate finances , do not trade in this market as they do not have the risk
bearing financial capacity.
Question 71 A high initial margin level improves solvency & financial capability of the
clearing corporation - True or False ?
(a) TRUE
(b) FALSE
Correct Answer TRUE
Answer Higher initial margin collection from trading members reduces the chances of their
Explanation defaults thus improving the solvency & financial capability of the clearing corporation.
Question 72 Strike price is the price per share for which the underlying security may be
purchased or sold by the option holder - State True or False ?
(a) TRUE
(b) FALSE
Correct Answer TRUE

Question 73 If the base price of a security for a trading day is Rs 200 and the price range is
1%, the opening price for the trading day will be _______ .
(a) between Rs 198 and 202

(b) between Rs 190 and 210
(c) below Rs 198
(d) above Rs 202
Correct Answer between Rs 198 and 202
Answer Price range is 1% of Rs 200 = Rs +/- 2

Explanation
So Rs 200 +/- 2 = Rs 198 and Rs 202.
Question 74 Which order has a better chance of execution - Stop Loss order or Stop Loss
Limit order ?
(a) Stop Loss Order

(b) Stop Loss Limit Order
(c) Both have equal chance of execution
Correct Answer Stop Loss Order
Answer A 'Stop Loss limit' order states two prices ie. Trigger price and Limit Price. For eg - Sell
Explanation at 100 (Limit Price) or above when the price reaches101 (Trigger Price). Stop-loss limit
order has the risk of not being executed at all, if the market moves quickly, after hitting
the trigger price.
In a Stop Loss order, no limit price is mentioned and only the trigger price is mentioned.
So the trade gets executed at any price (market price), on hitting the Trigger price.
Question 75 From the given options, which is the most liquid tenor in Money Markets ?
(a) 10 month
(b) 6 month
(c) 2 month
(d) 1 month
Correct Answer 1 month
Answer The Money market tenors consists of overnight (ON), 1-week (1W), 2-week (2W), 1-
Explanation month (1M) to 1-year (1Y) at the interval of a month.
Of these, ON, 1M and 3M are more liquid than others.
(The Bond Market tenors 2Y, 5Y, 7Y, 10Y, 15Y, 20Y, 25Y and 30Y.
Of these, 2Y and 10Y are more liquid).
Question 76 When one trades in SWAP derivatives, he buys and sell the _______ .
(a) futures of the underlying

(b) rights of the underlying
(c) returns from the underlying
Correct Answer returns from the underlying
Answer Swap differs from all other derivatives in the sense it does not involve exchange of cash
Explanation for an underlying asset: it involves exchange of returns from the underlying against return
from money.
Question 77 Interest rate derivatives is best described as ______ .
(a) Borrowing money at an agreed rate

(b) Lending money at an agreed rate
(c) One party to borrow and one to lend at an agreed rate
Correct Answer One party to borrow and one to lend at an agreed rate
Answer An interest rate derivative is a derivative where the underlying asset is the right to pay
Explanation or receive a notional amount of money at a given interest rate.
Question 78 On which day does the Government of India conducts the auction for Treasury
Bills ?
(a) Monday
(b) Wednesday
(c) Friday
(d) Sunday
Correct Answer Wednesday
Answer The 91-day T-bills are auctioned every week on Wednesdays, 182-day and 364-day T-
Explanation bills are auctioned every alternate week on Wednesdays.
Question 79 Assume two bonds are issued by an issuer which have same maturity but
different coupon. Which bond should an investor buy ?
(a) Bond with a higher market price

(b) Bond with a lower market price
(c) Bonds cannot be judged based on their prices
Correct Answer Bonds cannot be judged based on their prices
Answer Price alone cannot be used as a judgment tool for determining the mis-pricing.
Explanation
Question 80 Which date is the 'Expiry Date' in Interest Rate futures contract ?
(a) Settlement Date of the Interest Rate futures contract

(b) Last Trading Date Interest Rate futures contract
(c) Both 1 and 2 are the same
Correct Answer Last Trading Date Interest Rate futures contract
Answer In India, SEBI uses Expiry Day and Last Trading Day as synonyms and they are
Explanation distinguished from Settlement Day.
(NOTE: in overseas Exchanges, Expiry Date corresponds to the Settlement Date and is
different from Last Trading Day).
Question 81 Which of these risks is most severe for Banks and Financial institutions ?
(a) Interest Rate Risk

(b) Equity Risk
(c) Currency Risk
(d) All of the above are equally severe
Correct Answer Interest Rate Risk
Answer For banks, financial institutions and businesses, the exposure to interest rate risk is much
Explanation more severe than that to currency risk and equity risk.
Question 82 What is Market liquidity risk ?
(a) The seller is unable to give the deliveries of the securities

(b) The buyer is unable to make payments
(c) Both 1 and 2
(d) There is not sufficient volumes in the market to enable the required trades
Correct Answer There is not sufficient volumes in the market to enable the required trades
Answer Market liquidity risk is the inability to quickly buy or sell futures contract without
Explanation disturbing the futures price. If there is no market liquidity, the futures price is de-linked
from the price of cash markets.
Question 83 What will be the shape of term structure if the difference between Long term
rate and short term rate is zero ?
(a) Normal
(b) Flat
(c) Inverted
(d) Abnormal
Correct Answer Flat
Answer If the rate is the same for all terms then the shape of the term structure will be Flat.
Explanation
Question 84 A trader expects the interest rate change to happen in the short term, so he
should use ___________ .
(a) Govt. bond futures with short expiry date

(b) Govt. bond futures with long expiry date
(c) Treasury Bill futures with short expiry date
(d) Treasury Bill futures with long expiry date
Correct Answer Treasury Bill futures with short expiry date

Question 85 Among the below given options, interest rates will be highest for ______ credit
ratings.
(a) AAA
(b) AA
(c) AA+
(d) BB
Correct Answer BB
Answer Stronger the credit ratings of a security, lower will be the interest on it as its less risky.
Explanation Similarly if the ratings are low, which means there is a credit risk, the issuer will have to
offer higher interest rates to attract investors.
So in the above question, BB ratings is the lowest and so will offer highest interest rate.
Question 86 A coupon paying bond is issued by a government ( sovereign ). Which risk(s)

is/are associated with such bonds ?
(a) Repayment Risk

(b) Reinvestment Risk
(c) Both 1 and 2
(d) No risk are associated with government bonds
Correct Answer Reinvestment Risk
Answer If the issuer is a sovereign government, there will be no credit risk because government
Explanation will not default in its own currency.
However there will be Reinvestment risk ie. the uncertainty of reinvestment rate for cash
flows received before maturity (e.g. coupons). For eg. - if the interest rates falls in a
economy, the interest received on bonds will have to be reinvested at lower rates ie. it
faces reinvestment risk.
Question 87 Which is the correct sequence of products launched in the Indian Exchange
traded derivatives market?
(a) Equity Index options , Equity Index futures , Single stock options
(b) Equity Index futures , Equity Index options , Single stock options
(c) Single stock futures , Equity Index futures , Equity Index options
(d) Single stock futures , Single stock options , Equity Index futures
Correct Answer Equity Index futures , Equity Index options , Single stock options
Answer The sequence is : Equity Index futures , Equity Index options , Single stock options
Explanation , Single stock futures.
Question 88 The underlying for short term interest rate derivatives is ___________ .
(a) Short tenor rate in the long run

(b) Short tenor rate in the short run
(c) Long tenor rate in the long run
(d) Long tenor rate in the short run
Correct Answer Short tenor rate in the short run

Question 89 The Public Debt Office of RBI maintains demat account of Govt. Securities for
_________ .
(a) All investors of Govt. securities

(b) All investors of Private , Public and Got. debt securities
(c) All securities of State Govt
(d) Banks, Primary Dealers and select Financial Institutions
Correct Answer Banks, Primary Dealers and select Financial Institutions
Answer Public Debt Office holds accounts only for Schedule Commercial Banks, Primary Dealers
Explanation and few select financial institutions.
Question 90 Delivery margin is collected on the ________ .
(a) Day of Intent

(b) Day of Delivery
(c) Day of Settlement
Correct Answer Day of Intent
Answer Delivery margin is collected on the Day of Intent (which is the Last Trading Day) after
Explanation the intention to deliver and allocations are completed.
Question 91 _________ have to compulsorily hold government securities in demat form.
(a) All retail Investors

(b) All RBI controlled entities
(c) All Primary Dealers and Banks
(d) All schedule commercial banks
Correct Answer All Primary Dealers and Banks
Answer Public Debt Office - PDO which is the depository for government securities, holds
Explanation accounts only for Schedule Commercial Banks (SCB), Primary Dealers (PD) and few select
financial institutions that maintain current account (for cash) with RBI.
Question 92 Calculate the change in the value of one futures contract if the Government
Bond futures contract price changes by 100 ticks ?
(a) 5
(b) 10
(c) 100
(d) 500
Correct Answer 500
Answer The tick size for contracts is Rs 0.0025.

Explanation
Given that the face value of one contract is equal to Rs 200,000 and given that tick size
is 0.0025, the minimum change per contract will be:
200,000 x 0.0025 / 100 = 5.
In the example, the contract price changes by 100 ticks, so the change in value will be
100 x 5 = 500
Question 93 In India, the minimum and multiple amounts of issue for T bills is _______ .
(a) Rs. 2500

(b) Rs. 10000
(c) Rs. 25000
(d) Rs. 100000
Correct Answer Rs. 25000
Answer Treasury Bills are issued by the Govt. of India at minimum and in multiples of Rs 25000.
Explanation
Question 94 Who issues the 'Certificates of Deposit' ?
(a) Local Municipality

(b) Banks
(c) RBI
(d) Corporates
Correct Answer Banks
Answer Certificate of Deposit ( CD ) is a negotiable, unsecured instrument issued by scheduled

Explanation commercial banks (excluding regional rural banks and local area banks) and select all-India
financial institutions.
The minimum and multiple of issue is Rs 1 lakh.

Question 95 In an 'Immediate or Cancel' order ________ .
(a) Partial execution of the order is possible

(b) The non executed portion of the order is cancelled
(c) Both 1 and 2
Correct Answer Both 1 and 2
Answer Immediate or Cancel (IOC) is an order to execute the trade immediately. If it cannot be
Explanation executed, its automatically cancelled. It can be combined with limit order and partial
execution is permitted.
Question 96 The underlying for ' Bond Derivatives ' should be __________ .
(a) Borrowing and Lending of money

(b) A specific instrument issued by a specific borrower
(c) Interest rate on specific instrument
Correct Answer A specific instrument issued by a specific borrower
Answer The underlying for Bond Derivatives is the specific instrument.

Explanation
The underlying for Interest rate derivative is the Interest rate on money.
Question 97 Who maintains Constituent Subsidiary General Ledger account with the Public
Debt Office (PDO) of RBI ?
(a) Schedule Commercial Banks (SCB)

(b) Primary Dealers (PD)
(c) Both 1 and 2
Correct Answer Both 1 and 2
Answer The Schedule Commercial Banks or Primary Dealers holding government securities in Gilt
Explanation Account for their constituents must in turn open a separate second account with Public
Debt Office, which is called Constituent SGL (CSGL) Account or SGL II A/c.
Question 98 Which interest rate affect the price of Treasury Bills ?
(a) Short Term rate

(b) Long Term rate
(c) Both 1 and 2
Correct Answer Short Term rate
Answer Since Treasury bills are of less than 1 year duration, only the short term rates afftect
Explanation them.
Question 99 The last trading day for Treasury Bill future contract is ______ .
(a) Last Wednesday of Contract Month

(b) Last Thursday of Contract Month
(c) Last Friday of Contract Month
Correct Answer Last Wednesday of Contract Month
Answer The last trading day for Treasury Bill future contract is the Last Wednesday of Contract
Explanation Month where as for Govt. Bonds it is the Last Thursday of Contract Month.
Question 100 ________ is/are secured money market instrument(s) .
(a) Certificate of deposits

(b) Commercial paper
(c) Both 1 and 2
Correct Answer None of the above

Answer Certificate of deposit is a negotiable, unsecured instrument issued by scheduled
Explanation commercial banks and select all-India financial institutions.
Commercial paper is a negotiable, unsecured instrument issued by corporate bodies and

primary dealers.
===============================================================================================
Practice Question Banks also available for :
NISM
NISM Series I: Currency Derivatives Certification Exam

NISM Series V A: Mutual Fund Distributors Certification Exam
NISM Series VI: Depository Operations Certification Exam
NISM Series VII: Securities Operations and Risk Management
NISM Series VII: Equity Derivatives Certification Exam
NISM Series III A: Securities Intermediaries Compliance Certification Exam
NISM Series X A : Investment Adviser (Level 1) Certification Exam
NISM Series X B: Investment Adviser (Level 2) Certification Exam
NISM Series X V: Research Analyst Certification Exam
NISM II A Registrar to an Issue & Share Transfer Agent
NISM IV Interest Rate Derivatives Certification Exam
And many more
NCFM
NCFM Financial Markets: A Beginners Module

NCFM Capital Market (Dealers) Module
NSE FIMMDA : Debt Market (Basic) Module
NCFM Derivative Market (Dealers) Module
BSE
Certificate on Security Market (BCSM)


Nism Xiii - Common Derivatives - Last Day Revision Test 1

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NISM SERIES XIII - COMMON

LAST DAY REVISION TEST 1 - COMBINED Q&As OF ALL 3 MODULES

Correct Answer FIFO

Answer FIFO - First In First Out.

Correct Answer FALSE

Correct Answer FALSE

Correct Answer FALSE

(a) Long Call

Correct Answer Long Call

Correct Answer FALSE

Correct Answer 6000

Answer 10 lots less 4 lots X 1000 (lot size of GBP) = 6000

Correct Answer Speculator

(a) Buy GBPINR Call option

Correct Answer Buy GBPINR Call option

Correct Answer Trading Member

Correct Answer 0.8

Answer The Company buys Rs 52 call option at Rs 2.30 premium.

The Settlement Price is 55.10

So the profit is 55.10 - 54.30 = Rs 0.80

Correct Answer Rho

Correct Answer 54.2

(a) Operational Risk

Correct Answer Counter Party Risk

(a) Profit of 15000

Correct Answer Loss of 1500

Answer He bought 5 lots at 301500.

He bought at 60.30 and the expiry price is 60.

So he will suffer a loss : 60.30 - 60.00 = 0.30

Total Loss : 0.30 x 5 Lots X 1000 ( Lot size )

Correct Answer FALSE

(a) 30,000; 10,000; 10,000

Correct Answer 30,000; 10,000; 10,000

Answer TM open position : 12 -2 Lots = 10 lots x 1000 (Lot size) = 10,000

Client B : 12 -2 Lots = 10 lots x 1000 (Lot size) = 10,000

Question 19 The contract size for USDINR futures contract is __________.

(a) USD 100

Correct Answer USD 1000

Correct Answer 4427

One year premium for USD is 3%

So the future price of USD is 50 x 3% = 51.50

(a) The price at which price taker is willing to buy

Correct Answer The price at which market maker is willing to buy

(The difference between bid and offer price is called as 'spread')

Question 22 The Special Committee formed by SEBI on Currency Futures recommends

Correct Answer FALSE

Answer RBI-SEBI Standing Technical Committee on Exchange Traded Currency recommends

(a) Selling USDINR futures

Correct Answer Buying USDINR futures

(a) Profit of 7600

Correct Answer Loss of 9600

Out of the 20 lots bought, he has squared off only 12 lots.

62.60 - 63.40 = -0.80 ( Loss)

Total Loss = -0.80 x 12 lots x 1000 (each lot of EURINR)

Correct Answer Rs 1500

(a) USD has weakened against GBP

Correct Answer GBP has weakened against USD

(a) Short JPYINR and Long USDINR

Correct Answer Short JPYINR and Long USDINR

(a) The average price for last half hour trading.

Question 29 An importer takes a long position in USDINR futures contract at a price of 53 by

(a) Profit of 2600

Correct Answer Profit of 26000