Nism Xiii - Common Derivatives - Last Day Revision Test 1

NISM SERIES XIII - COMMON DERIVATIVE CERTIFICATION

NISM SERIES XIII – COMMON DERIVATIVE CERTIFICATION EXAM : LAST DAY REVISION TEST 1

About PASS 4SURE.in PASS4SURE is a professional online practice test bank for various NSE NCFM, NISM and BSE exams. The team behind PASS4SURE has decades of experience in the financial and stock markets and have succeeded in preparing practice question bank which will help not only to pass the exams easily but also get good knowledge of the subject. Our online mock exams contain questions which are carefully analysed by the experts and have a high probability of being asked in the exams. Thus all PASS4SURE questions are highly valued and contribute to an almost 100% success rate. We do not believe in offering you thousands of questions but most important 400 – 500 practice questions and answers. PASS4SURE understands that time and money is valuable for our students, so we regularly update all our exams. The old questions are deleted and new important questions are added. Our LAST DAY REVISION test are on the spot. This is done to ensure that the students learns what is most important and pass the exams. You do not have to try again and again wasting time and money. money. Our simple aim is to simplify the NCFM, NISM and BSE exams.

ALL THE BEST.

IMPORTANT – The viewing rights for this downloaded Question Bank will automatically expire after 60 days from the date of purchase.

TEST DETAILS – The NISM XIII – Common Derivative Module exam is a 150 mark exam with 60% ie. 90 marks as passing marks. The question paper will consist of 150 multiple choice questions. There is 25% negative marking. The time duration is 180 Minutes.

All Rights Reserved. No Part of this documents may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, mechanical, photocopying, recording or otherwise, without the prior written permission from PASS4SURE.in. PASS4SUR E.in. For any clarification regarding this document or if you feel there are errors in the question bank, please write us at [email protected]


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

Question 1

(a) (b) (c) (d)

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 __________. FIFO LIFO Lowest price contract are squared off first Profit making contracts are squared off first.

Correct Answer

FIFO

Answer Explanation

FIFO - First In First Out.

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 SEBI handles the matter as per its guidelines

(d)

Correct Answer

The amount of unpaid mark to market margin is recovered from his Initial Margin

Answer Explanation

When a client defaults in making payments in respect of a daily settlement mark to market margins, the contract is closed out. The amount not paid by the client is adjusted against the initial margin.


Question 3

(a) (b)

The seller of a Call Option has the obligation to buy the underlying asset - True or False ? TRUE FALSE

Correct Answer

FALSE

Answer Explanation

The seller of a Call Option has the obligation to SELL the underlying asset.

Question 4

The SEBI Act - 1992 is the act mainly responsible for governing the trading of securities in India - True or False ?

(a) (b)

TRUE FALSE

Correct Answer

FALSE

Answer Explanation

The SC(R)A ie. the Securities Contarct (Regualtion) Act of 1956 is the act mainly responsible for governing the trading of securities in India.


Question 5

(a) (b)

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 ? TRUE FALSE

Correct Answer

FALSE

Answer Explanation

Remember the current market value of short options is deducted from liquid net worth and 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 i n volatility. So which option strategy is he most likely to use ?

(a) (b) (c) (d)

Long Call Long Put Short Call Short Put

Correct Answer

Long Call

Answer Explanation

Buying a Call is the best option as he is anticipating a strong bullish run in USDINR. Decrease in volatility will be an added advantage as he will get the call cheaper.


Question 7 (a) (b)

The Profit or Loss for an Option Writer is unlimited - True or False ? TRUE FALSE

Correct Answer

FALSE

Answer Explanation

The Profits for a Option Writer is limited to the extent of premium received but his 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) (b) (c) (d)

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 hi s proprietary account. What would be his open position at the end of day in GBP? 14000 6000 10000 4000

Correct Answer

6000

Answer Explanation

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


Question 9

(a) (b) (c) (d)

A person who has studied economics and i nternational 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 ? Arbitrageur Delta Player Speculator Hedger

Correct Answer

Speculator

Question 10

Mr Rohit is very bullish on GBPINR and thinks that this pair will trade at 80 i n 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) (b) (c) (d)

Buy GBPINR Call option Sell GBPINR Call option Buy GBPINR Put option Sell GBPINR Put option

Correct Answer

Buy GBPINR Call option

Answer Explanation

Buy a Call option or Selling a Put option - both signify bullish view. Buy when you sell a Put 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) (b) (c) (d)

A _____________ can trade in his own account as well as on account of its client. Participant Custodian Trading cum clearing member Trading Member

Correct Answer

Trading Member

Answer Explanation

Trading members are members of an authorized Exchange. They can trade either on their 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) (b) (c) (d)

5.4 3.1 2.3 0.8

Correct Answer

0.8

Answer Explanation

The Company buys Rs 52 call option at Rs 2.30 premium. 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 (a) (b) (c) (d)

_______measures sensitivity of option value to the risk free interest rate. Theta Delta Vega 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 U SDINR. At what price can you sell one unit of USD ?

(a) (b) (c) (d)

54.25 54.2 54.3 54.5

Correct Answer

54.2

Answer Explanation

54.20 and 54.30 are the BID and ASK price. This means there are buyers at 54.20 and 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) (b) (c) (d)

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 ab ove 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 ? Operational Risk Liquidity Risk Basis Risk Counter Party Risk

Correct Answer

Counter Party Risk

Answer Explanation

Counter Party Risk - The risk to each party of a contract that the counterparty will not 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) (b) (c) (d)

Profit of 15000 Loss of 15000 Loss of 1500 Loss of 150

Correct Answer

Loss of 1500

Answer Explanation

He bought 5 lots at 301500. 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) (b)

A sub-broker has to execute a bipartite ag reement between him and his client clearly specifying rights and obligations of each party - S tate True or False ? TRUE FALSE

Correct Answer

FALSE

Answer Explanation

A sub-broker should enter into a tripartite agreement with his client and with the main 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) (b) (c) (d)

30,000; 10,000; 10,000 10,000; zero; zero zero, 10,000; 10,000 10,000; 10,000; 10,000

Correct Answer

30,000; 10,000; 10,000

Answer Explanation

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



The contract size for USDINR futures contract is __________. USD 100 INR 100 USD 1000 INR 1000

Correct Answer

USD 1000

Answer Explanation

The Contract size or lot size in the case of USDINR is USD1000 In case of GBPINR it is GBP 1000; EURINR it is EUR 1000; JPYINR it is JPY 100,000.

Question 20

(a) (b) (c) (d)

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? 4385 4427 4480 4516

Correct Answer

4427

Answer Explanation

Mr Sharma has invested Rs 2,00,000 at 14% . So after one year he will receive : 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



When two way market quotes are mentioned, BID price would mean ________ . The price at which price taker is willing to buy The price at which price taker is willing to sell The price at which market maker is willing to buy The price at which market maker is willing to sell

Correct Answer

The price at which market maker is willing to buy

Answer Explanation

In interbank market, currency prices are quoted with two way price - the prices quoted 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

(a) (b)

The Special Committee formed by SEBI on Currency Futures recommends product design, risk management and membership norms for currency fu tures State True or False ? TRUE FALSE

Correct Answer

FALSE

Answer Explanation

RBI-SEBI Standing Technical Committee on Exchange Traded Currency recommends product design, risk management and membership norms for currency futures.


Question 23

(a) (b) (c) (d)

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 ? Selling USDINR futures Selling USDINR OTC forward Buying USDINR futures All of the above

Correct Answer

Buying USDINR futures

Answer Explanation

The buyer of future contract suffers a loss if there is no movement in the underlying due 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) (b) (c) (d)

Profit of 7600 Loss of 8750 Profit of 9740 Loss of 9600

Correct Answer

Loss of 9600

Answer Explanation

When the price was 62.60 / 62.70, the trader sold EURINR - so he sold at 62.60 as 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

(a) (b) (c) (d)

The Calendar Spread margin requirement for a 3 months EURINR spread is __________. Rs 500 Rs 1000 Rs 1500 Rs 2000

Correct Answer

Rs 1500

Answer Explanation

Please memorise the Calendar Spread Margin requirements over various periods for the 4 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) (b) (c) (d)

Correct Answer

USD has weakened against GBP USD has strengthened against JPY JPY has weakened against USD GBP has weakened against USD

GBP has weakened against USD


Question 27

(a) (b) (c) (d)

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. Short JPYINR and Long USDINR Short USDINR and Long JPYINR Short JPYINR Long JPYINR

Correct Answer

Short JPYINR and Long USDINR

Answer Explanation

USDJPY moving from 90 to 95 means JPY will become weak against USD. So in India, he will short JPYINR and go long in USDINR.

Question 28

(a) (b) (c) (d)

Which of the following correctly describes the closing price of USDINR futures contract ? The average price for last half hour trading. The weighted average price for last half an hour trading. The last traded price. 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 Explanation

The closing price for a futures contract is calculated as the last half an hour weighted 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

(a) (b) (c) (d)

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 ? Profit of 2600 Profit of 26000 Loss of 2600 Loss of 26000

Correct Answer

Profit of 26000

Answer Explanation

The importer went long which means he bought USDINR at 53. 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

(a) (b)

The currency futures segment of the Exchange has a separate Governing Council on which the representation of Trading /Cl earing Members of the currency futures segment does not exceed 50% - True or False ? TRUE FALSE

Correct Answer

FALSE

Answer Explanation

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 25 %


Question 31

(a) (b) (c) (d)

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 ? Lower than 1.74 Higher than 1.74 1.74 None of the above

Correct Answer

Lower than 1.74

Answer Explanation

The formula for Interest Rate Parity is : 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

(a) (b) (c) (d)

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 Indi a at the then existing rate of 62. What is his real returns in INR ? 20.78% 21.93% 16.45% 15.20%

Correct Answer

21.93%

Answer Explanation

Mr. Kulkarni invested Rs 1,00,00 in US Stock when the USDINR rate was 60. 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

(a) (b) (c) (d)

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 ? 90 84 96 0

Correct Answer

84

Answer Explanation

Theoretically a share can fall to Rs 0. So the maximum loss can be Rs 90. But Ms. Rita 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) (b) (c) (d)

RBI ICWAI ICAI FX- CA

Correct Answer

ICAI

Answer Explanation

The Institute of Chartered Accountants of India (ICAI) has issued guidance notes on accounting of currency futures contracts.


Question 35

(a) (b) (c) (d)

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? Temperature recorded Actual Rainfall Storms and Hurricanes None of the above

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) (b) (c) (d)

Correct Answer

Lot size Requirement of proof of underlying FX transaction Market timings Both (2) and (3)

Both (2) and (3)


Question 37

(a) (b)

Can we say that when the USDINR falls one way, this means there is a decrease in volatility ? Yes No

Correct Answer

No

Answer Explanation

Volatility measures the magnitude of the change of prices (up or down) of the underlying 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 di spute. The arbitrator conducts the arbitration proceeding and passes the award normally wi thin a period of ________ from the date of initial hearing.

(a) (b) (c) (d)

Correct Answer

25 days 2 months 4 months 6 months

4 months



A DAY ORDER means its valid ______________. for one hour till the end of day till its executed till 5 hours

Correct Answer

till the end of day

Answer Explanation

A day order is an order which is valid for the day on which it is entered. If the order is not executed during the day, the system cancels the order automatically at the end of the day.


An Immediate Or Cancel (IOC) order __________. gets exercised on the last day is valid for one hour after it is entered in the trading system is either executed or cancelled as soon as it is entered in the trading system 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 Explanation

IOC is an order to buy or sell a security that if not immediately executed, will be cancelled. Partial match is possible for the order, and the unmatched portion of the order is cancelled immediately


Question 41

(a) (b) (c) (d)

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 ? Traded on a recognised exchange Price uncertainity Standardisation of contracts 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) (b) (c) (d)

Correct Answer

Technical Trading Stop Loss Trading Churning Portfolio Planning

Churning


Question 43

(a) (b)

Money and securities deposited by clients with the tradi ng members should be kept by them in a separate clients account - True or False ? TRUE FALSE

Correct Answer

TRUE

Question 44

ETFs is basket of securities that trade like individual stock on an exchange- True or False ?

(a) (b)

TRUE FALSE

Correct Answer

TRUE

Answer Explanation

Exchange Traded Funds (ETFs) is basket of securities that trade like individual stock on 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

(a) (b) (c) (d)

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 __________. Value of your portfolio + Beta of your portfolio Value of your portfolio / Beta of your portfolio Value of your portfolio * Beta of your portfolio Value of your portfolio - Beta of your portfolio

Correct Answer

Value of your portfolio * Beta of your portfolio

Answer Explanation

To get a hedge, one has to multiply the beta of his portfolio with the value of the 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 hi gher than those clearing members who handle institutional trades.

(a) (b)

Correct Answer

TRUE FALSE

FALSE


Question 47

(a) (b) (c) (d)

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 ) -20000 -27000 20000 27000

Correct Answer

27000

Answer Explanation

Purchase Price - Rs 242 Sale Price - Rs 269 So profit of Rs 27 x 1000 lot = Rs 27000.

Question 48

(a) (b) (c) (d)

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 _______ . Bullish Spread Bearish Spread Calendar spread Straddle

Correct Answer

Bearish Spread

Answer Explanation

Bearish Spread - The trader is bearish on the market and so goes long in one put option by paying a premium. Further, to reduce her cost, she shorts another low strike put and receives a premium.


Question 49

(a) (b)

Hedging would ensure that your profits are al ways on the higher side compared to an unhedged position - State True or False ? TRUE FALSE

Correct Answer

FALSE

Answer Explanation

Hedging controls your losses but also controls your profits. It does not ensure higher profits. An open position can give you more profits or more losses.

Question 50

(a) (b)

A client can use cross margining across Cash and Derivatives segment - True or False ? TRUE FALSE

Correct Answer

TRUE

Answer Explanation

A client can use the margin he has paid in any segment provided he has signed on the necessary declarations in the account opening forms etc.


Question 51

(a) (b)

You have bought a CALL of SBI of Strike price of Rs 2 00 of January. To close the position, you will buy a PUT of same strike price of January. True or False ? TRUE FALSE

Correct Answer

FALSE

Answer 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.

Question 52

Derivatives market helps shift of speculative trades from unorganized market to organized market. True or False ?

(a) (b)

TRUE FALSE

Correct Answer

TRUE

Answer Explanation

In the unorganized markets, there is a huge risk of counter party default etc. In the 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) (b)

A short seller has the time of one week to deliver the stocks - True or False ? TRUE FALSE

Correct Answer

FALSE

Answer Explanation

Selling Short means Seller does not own the stock he is supposed to deliver. Even if a trader has stock he has to deliver the shares in T+2 days.

Question 54

(a) (b) (c) (d)

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 _________ European put option American put option American call option European call option.

Correct Answer

American call option

Answer 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.


Question 55

(a) (b) (c) (d)

The spot price of LKK share is Rs 300, the put option of Strike P rice Rs 280 is _____ . In the money Out of the money At the money None of the above

Correct Answer

Out of the money

Answer 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.

Question 56

(a) (b) (c) (d)

Correct Answer Answer Explanation

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? -25000 (Loss) -9000 (Loss) 9000 (Profit) 25000 (Profit)

-9000 (Loss) Mr. A sold a PUT option, that means he has a bullish or neutral view on PQR stock. 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

(a) (b) (c) (d)

In case of Call options, if the market price is less than the exercise (strike) price, the option will __________. expire worthless seller of the option will exercise it will definitely get exercised none of the above

Correct Answer

expire worthless

Answer Explanation

If market price is below strike price, the option expires worthless as the buyer will incur 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) (b)

TRUE FALSE

Correct Answer

FALSE

Answer Explanation

Delta is the rate of change in option premium for a change in the price of the underlying 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

(a) (b) (c) (d)

In the Options segment, if you sell a PUT, you expect the market / scrip to move _____ Either up or down as you profit in both directions. One cannot sell a PUT in the options market Up Down

Correct Answer

Up

Answer Explanation

A seller of a PUT option has a positive / bullish view and he expects the market / script 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) (c) (d)

a measure of the sensitivity of an option price to changes in market volatility the change in option price given a one-day decrease in time to expiration 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



In an In the money PUT option____ strike price would be lower than the market price exercise price would be equal to the market price strike price would be higher than the market price strike price would be zero

Correct Answer

strike price would be higher than the market price

Answer Explanation

A put option is said to be In The Money when market price is lower than strike price.

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) (b)

TRUE FALSE

Correct Answer

TRUE

Answer Explanation

The owner of American option can exercise his right at any time on or before the expiry 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

(a) (b) (c) (d)

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 ______ Rs 9000 Rs 18000 Rs 80000 Unlimited

Correct Answer

Rs 9000

Answer Explanation

In the Options market, the maximum profit a seller of an option can make is the premium he receives. In the above case the premium received is Rs 45 x 200 shares = Rs 9000.

Question 64

(a) (b)

Time value and intrinsic value of a call option are always either positive or zeroTrue or False ? TRUE FALSE

Correct Answer

TRUE

Answer Explanation

Only in-the-money options have intrinsic value whereas at-the-money and out-of-themoney options have zero intrinsic value. The intrinsic value of an option can never be negative.

Time value also can never be negative.



A tax which is clearly mentioned in the Contract Note is _______ Long Term Capital Gain Tax Short Term Capital Gain Tax Both 1 and 2 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) (b)

Yes No

Correct Answer

Yes

Answer Explanation

Cost components of futures transaction include margins, transaction costs (commissions), taxes etc. So higher the margins more expensive the trading.



Tick size depends on _______ . The Delta of the security Volume in that security Its fixed by the exchange The Interest rates

Correct Answer

Its fixed by the exchange

Answer Explanation

Tick size is the minimum move allowed in the price quotations. Exchanges decide the tick 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) (b)

TRUE FALSE

Correct Answer

TRUE

Answer Explanation

The buyer of an option has a right but not the obligation in the contract. Also his riskd 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

(a) (b) (c) (d)

Of the below options, when will the April index future contract be introduced on NSE ? On the 1st trading day after last Thursday in March On the 1st trading day after last Friday in March On the 1st trading day after last Thursday in January On the 1st trading day after last Friday in January

Correct Answer

On the 1st trading day after last Thursday in January

Answer Explanation

There are always 3 contracts running. So for eg. we will have Jan-Feb-Mar contracts 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

(a) (b)

High level of initial margins deter brokers and clients from trading in the derivatives market - State True or False ? TRUE FALSE

Correct Answer

TRUE

Answer Explanation

Risk involved in trading in derivatives are higher as compared to spot market due to bigger 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) (b)

A high initial margin level improves solvency & financial capability of the clearing corporation - True or False ? TRUE FALSE

Correct Answer

TRUE

Answer Explanation

Higher initial margin collection from trading members reduces the chances of their 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) (b)

Correct Answer

TRUE FALSE

TRUE


Question 73

(a) (b) (c) (d)

If the base price of a security for a trading day i s Rs 200 and the price range is 1%, the opening price for the trading day will be _______ . between Rs 198 and 202 between Rs 190 and 210 below Rs 198 above Rs 202

Correct Answer

between Rs 198 and 202

Answer Explanation

Price range is 1% of Rs 200 = Rs +/- 2 So Rs 200 +/- 2 = Rs 198 and Rs 202.

Question 74

(a) (b) (c) (d)

Which order has a better chance of execution - Stop Loss order or Stop Loss Limit order ? Stop Loss Order Stop Loss Limit Order Both have equal chance of execution None of the above

Correct Answer

Stop Loss Order

Answer Explanation

A 'Stop Loss limit' order states two prices ie. Trigger price and Limit Price. For eg - Sell 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.



From the given options, which is the most liquid tenor in Money Markets ? 10 month 6 month 2 month 1 month

Correct Answer

1 month

Answer Explanation

The Money market tenors consists of overnight (ON), 1-week (1W), 2-week (2W), 1month (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).


When one trades in SWAP derivatives, he buys and sell the _______ . futures of the underlying rights of the underlying returns from the underlying None of the above

Correct Answer

returns from the underlying

Answer Explanation

Swap differs from all other derivatives in the sense it does not involve exchange of cash for an underlying asset: it involves exchange of returns from the underlying against return from money.



Interest rate derivatives is best described as ______ . Borrowing money at an agreed rate Lending money at an agreed rate One party to borrow and one to lend at an agreed rate None of the above

Correct Answer

One party to borrow and one to lend at an agreed rate

Answer Explanation

An interest rate derivative is a derivative where the underlying asset is the right to pay 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) (b) (c) (d)

Monday Wednesday Friday Sunday

Correct Answer

Wednesday

Answer Explanation

The 91-day T-bills are auctioned every week on Wednesdays, 182-day and 364-day Tbills are auctioned every alternate week on Wednesdays.


Question 79

(a) (b) (c) (d)

Assume two bonds are issued by an issuer which have same maturity but different coupon. Which bond should an investor buy ? Bond with a higher market price Bond with a lower market price Bonds cannot be judged based on their prices None of the above

Correct Answer

Bonds cannot be judged based on their prices

Answer Explanation

Price alone cannot be used as a judgment tool for determining the mis-pricing.

Question 80

Which date is the 'Expiry Date' in Interest Rate futures contract ?

(a) (b) (c) (d)

Settlement Date of the Interest Rate futures contract Last Trading Date Interest Rate futures contract Both 1 and 2 are the same None of the above

Correct Answer

Last Trading Date Interest Rate futures contract

Answer Explanation

In India, SEBI uses Expiry Day and Last Trading Day as synonyms and they are distinguished from Settlement Day. (NOTE: in overseas Exchanges, Expiry Date corresponds to the Settlement Date and is different from Last Trading Day).



Which of these risks is most severe for Banks and Financial institutions ? Interest Rate Risk Equity Risk Currency Risk All of the above are equally severe

Correct Answer

Interest Rate Risk

Answer Explanation

For banks, financial institutions and businesses, the exposure to interest rate risk is much more severe than that to currency risk and equity risk.

Question 82

What is Market liquidity risk ?

(a) (b) (c) (d)

The seller is unable to give the deliveries of the securities The buyer is unable to make payments Both 1 and 2 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 Explanation

Market liquidity risk is the inability to quickly buy or sell futures contract without disturbing the futures price. If there is no market liquidity, the futures price is de-linked from the price of cash markets.


Question 83

(a) (b) (c) (d)

What will be the shape of term structure if the difference between Long term rate and short term rate is zero ? Normal Flat Inverted Abnormal

Correct Answer

Flat

Answer Explanation

If the rate is the same for all terms then the shape of the term structure will be Flat.

Question 84

A trader expects the interest rate change to happen in the short term, so he should use ___________ .

(a) (b) (c) (d)

Correct Answer

Govt. bond futures with short expiry date Govt. bond futures with long expiry date Treasury Bill futures with short expiry date Treasury Bill futures with long expiry date

Treasury Bill futures with short expiry date


Question 85

(a) (b) (c) (d)

Among the below given options, interest rates will be highest for ______ credit ratings. AAA AA AA+ BB

Correct Answer

BB

Answer Explanation

Stronger the credit ratings of a security, lower will be the interest on it as its less risky. 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) (b) (c) (d)

A coupon paying bond is issued by a government ( sovereign ). Which risk(s) is/are associated with such bonds ? Repayment Risk Reinvestment Risk Both 1 and 2 No risk are associated with government bonds

Correct Answer

Reinvestment Risk

Answer Explanation

If the issuer is a sovereign government, there will be no credit risk because government 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

(a) (b) (c) (d)

Which is the correct sequence of products launched in the Indian Exchange traded derivatives market? Equity Index options , Equity Index futures , Single stock options Equity Index futures , Equity Index options , Single stock options Single stock futures , Equity Index futures , Equity Index options Single stock futures , Single stock options , Equity Index futures

Correct Answer

Equity Index futures , Equity Index options , Single stock options

Answer Explanation

The sequence is : Equity Index futures , Equity Index options , Single stock options , Single stock futures.

Question 88

The underlying for short term interest rate derivatives i s ___________ .

(a) (b) (c) (d)

Correct Answer

Short tenor rate in the long run Short tenor rate in the short run Long tenor rate in the long run Long tenor rate in the short run

Short tenor rate in the short run


Question 89

(a) (b) (c) (d)

The Public Debt Office of RBI maintains demat account of Govt. Securities for _________ . All investors of Govt. securities All investors of Private , Public and Got. debt securities All securities of State Govt Banks, Primary Dealers and select Financial Institutions

Correct Answer

Banks, Primary Dealers and select Financial Institutions

Answer Explanation

Public Debt Office holds accounts only for Schedule Commercial Banks, Primary Dealers and few select financial institutions.

Question 90

Delivery margin is collected on the ________ .

(a) (b) (c) (d)

Day of Intent Day of Delivery Day of Settlement None of the above

Correct Answer

Day of Intent

Answer Explanation

Delivery margin is collected on the Day of Intent (which is the Last Trading Day) after the intention to deliver and allocations are completed.



_________ have to compulsorily hold government securities in demat form. All retail Investors All RBI controlled entities All Primary Dealers and Banks All schedule commercial banks

Correct Answer

All Primary Dealers and Banks

Answer Explanation

Public Debt Office - PDO which is the depository for government securities, holds 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) (b) (c) (d)

5 10 100 500

Correct Answer

500

Answer Explanation

The tick size for contracts is Rs 0.0025. 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



In India, the minimum and multiple amounts of issue for T bills is _______ . Rs. 2500 Rs. 10000 Rs. 25000 Rs. 100000

Correct Answer

Rs. 25000

Answer Explanation

Treasury Bills are issued by the Govt. of India at minimum and in multiples of Rs 25000.

Question 94

Who issues the 'Certificates of Deposit' ?

(a) (b) (c) (d)

Local Municipality Banks RBI Corporates

Correct Answer

Banks

Answer Explanation

Certificate of Deposit ( CD ) is a negotiable, unsecured instrument issued by scheduled 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.



In an 'Immediate or Cancel' order ________ . Partial execution of the order is possible The non executed portion of the order is cancelled Both 1 and 2 None of the above

Correct Answer

Both 1 and 2

Answer Explanation

Immediate or Cancel (IOC) is an order to execute the trade immediately. If it cannot be 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) (b) (c) (d)

Borrowing and Lending of money A specific instrument issued by a specific borrower Interest rate on specific instrument None of the above

Correct Answer

A specific instrument issued by a specific borrower

Answer Explanation

The underlying for Bond Derivatives is the specific instrument. The underlying for Interest rate derivative is the Interest rate on money.


Question 97

(a) (b) (c) (d)

Who maintains Constituent Subsidiary General Ledger account with the Publ ic Debt Office (PDO) of RBI ? Schedule Commercial Banks (SCB) Primary Dealers (PD) Both 1 and 2 None of the above

Correct Answer

Both 1 and 2

Answer Explanation

The Schedule Commercial Banks or Primary Dealers holding government securities in Gilt 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) (b) (c) (d)

Short Term rate Long Term rate Both 1 and 2 None of the above

Correct Answer

Short Term rate

Answer Explanation

Since Treasury bills are of less than 1 year duration, only the short term rates afftect them.



The last trading day for Treasury Bill future contract is ______ . Last Wednesday of Contract Month Last Thursday of Contract Month Last Friday of Contract Month None of the above

Correct Answer

Last Wednesday of Contract Month

Answer Explanation

The last trading day for Treasury Bill future contract is the Last Wednesday of Contract Month where as for Govt. Bonds it is the Last Thursday of Contract Month.

Question 100

________ is/are secured money market instrument(s) .

(a) (b) (c) (d)

Correct Answer Answer Explanation

Certificate of deposits Commercial paper Both 1 and 2 None of the above

None of the above Certificate of deposit is a negotiable, unsecured instrument issued by scheduled 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

Recommend Documents