NISM SERIES 1 – CURRENCY DERIVATIVES

CERTIFICATION EXAM – PRACTICE TEST 1

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 NISM SERIES 1 – CURRENCY DERIVATIVES
CERTIFICATION EXAM – PRACTICE TEST 1

PRACTICE TEST 1

Question 1 In JPYINR, INR is the base currency - True or False ?

(a) TRUE
(b) FALSE

Question 2 In the currency derivative segment of a recognized exchange, pay-in and

payout of the mark-to-market settlement are effected on___________.
(a) the day following the trade day
(b) expiry of contract
(c) the trade day itself
(d) two days after the trade day

Correct Answer 1 FALSE

Answer In JPYINR, JPY is the Base Currency and INR is the Quoted Currency.
Explanation The first mentioned currency is always the Base currency.

Correct Answer 2 the day following the trade day

 NISM SERIES 1 – CURRENCY DERIVATIVES
CERTIFICATION EXAM – PRACTICE TEST 1

Question 3 Every derivative contract should have ____________.

(a) to be traded on a recognised exchange
(b) an underlying
(c) good volumes to be traded regularly
(d) 3 months or more contract period

Question 4 The interest rate of UK is lower than India. As per the concept of Interest
Rate Parity the future currency price of GBP will be __________ to INR.
(a) At a discount
(b) At Par
(c) At a premium

Correct Answer 3 an underlying

Answer Every derivative contract should have an underlying be it Stocks,

Explanation Commodities, Currencies etc. Without an underlying there there can be no
derivative.

Correct Answer 4 At a premium

Answer India has an interest rate higher than UK, so as per the concept of Interest Rate
Explanation Parity, the GBPINR Future price will always be at a premium to Spot prices. If
the interest rate gap widens, so will the spot price-future price gap.
For eg - price of future GBPINR pair is 72 when spot price is 70. It means that
INR is at discount to GBP and GBP is at premium to INR.
 NISM SERIES 1 – CURRENCY DERIVATIVES
CERTIFICATION EXAM – PRACTICE TEST 1

Question 5 The total number of outstanding contracts in the future market at any
point of time is called the __________.
(a) Outstanding Status
(b) Open Interest
(c) Outstanding Position
(d) Open position

Question 6 A trader buys two April USDINR contract which cost him Rs 104000. The
RBI reference rate for final settlement is fixed at 52.30. How much profit /
loss did he make ?
(a) Profit 600
(b) Loss 600
(c) Profit 60
(d) Loss 60

Correct Answer 5 Open Interest

Correct Answer 6 Profit 600

Answer USDINR contract lot is 1000.

Explanation He has bought two lots for a cost of Rs 104000
So 104000 / 2 = 52000 and 52000 / 1000 = 52 Buying Price
Settlement Price is 52.30.
52.30 - 52 = 0.30 profit x 2 lots x 1000 lot size
= Rs 600 profit
 NISM SERIES 1 – CURRENCY DERIVATIVES
CERTIFICATION EXAM – PRACTICE TEST 1

Question 7 The first ever financial future was Stock Derivative future - True or False
?
(a) TRUE
(b) FALSE

Question 8 Which currency is widely used as the 'Vehicle Currency' in foreign

exchange transactions ?
(a) Euro
(b) US Dollars
(c) GB Pounds
(d) Indian Rupee

Correct Answer 7 FALSE

Answer The first ever financial future was Currency (FX) future.
Explanation

Correct Answer 8 US Dollars

 NISM SERIES 1 – CURRENCY DERIVATIVES
CERTIFICATION EXAM – PRACTICE TEST 1

Question 9 A trader buys a USDINR call option at strike of 57.50 and pays a premium
of INR 0.60. What is the break even point for this trade ?
(a) 56.9
(b) 57.5
(c) 58.1
(d) 58.35

Question 10 Mr. Shah is expecting a remittance of USD 10,000 after two months. To
safeguard himself against currency fluctuations he should ____________.
(a) Sell 10,000 contracts of USDINR futures
(b) Buy 10,000 contracts of USDINR futures
(c) Buy 10 contracts of USDINR futures
(d) Sell 10 contracts of USDINR futures

Correct Answer 9 58.1

Answer For a long Call Option : Strike Price plus the premium paid is the breakeven
Explanation point
57.50 + 0.60 = 58.10

Correct Answer 10 Buy 10 contracts of USDINR futures

Answer Mr. Shah has to send USD after two months, so to safeguard against
Explanation fluctuations, he will buy USD futures.
The lot size for each USDINR future contract is USD 1000. So by buying 10
contracts he is hedging his future receipts of USD 10,000.
The lot size for EURINR it is EUR 1000; GBPINR it is GBP 1000 and in case
of JPYINR it is JPY 100,000.
 NISM SERIES 1 – CURRENCY DERIVATIVES
CERTIFICATION EXAM – PRACTICE TEST 1

Question 11 The number of USDINR option contracts which can be made available for
trading at a given time are _____ .
(a) 3
(b) 4
(c) 6
(d) 9

Question 12 If a trader expects INR to depreciate against the USD, he will sell USDINR -
True or False ?
(a) TRUE
(b) FALSE

Correct Answer 11 4

Answer Options contracts having the following expiries shall be available for trading on
Explanation USDINR. On the expiry of a near month contract, new contracts shall be made
available so that at any point in time there shall be at least four expiries
available for trading.
For eg :
Sr. No. Expiry Date Maturity Date Remarks
1 26 NOV 2010 26 NOV 2010 Monthly Contract
2 29 DEC 2010 29 DEC 2010 Monthly Contract
3 27 JAN 2011 27 JAN 2011 Monthly Contract
4 29 MAR 2011 29 MAR 2011 Quarterly Contract

Correct Answer 12 FALSE

Answer Eg - If USDINR is 55 and Rupee begins to depreciate, then USDINR will

Explanation move up from 55 to ... 56 and so on.
So if a trader is expecting INR to depreciate, he will buy USDINR at 55 and
profit fom the upward move.
 NISM SERIES 1 – CURRENCY DERIVATIVES
CERTIFICATION EXAM – PRACTICE TEST 1

Question 13 Unlike Equity markets, where there are daily price bands for various
stocks, there are no daily price bands applicable for currency futures
contracts - True or False ?
(a) TRUE
(b) FALSE

Question 14 The participants in foreign exchange market are _____________.

(a) Investors
(b) Arbitrageurs
(c) Hedgers
(d) All of the above

Correct Answer 13 TRUE

Answer There are no daily price bands applicable for currency futures contracts.
Explanation However in order to prevent erroneous order entry by members, operating
ranges will be kept at +/-3% of the base price for contracts with tenure up to 6
months and +/-5% for contracts with tenure greater than 6 months.

Correct Answer 14 All of the above

 NISM SERIES 1 – CURRENCY DERIVATIVES
CERTIFICATION EXAM – PRACTICE TEST 1

Question 15 What will be the Settlement Date for JPYINR currency future contracts
for the month of September 2012 if the last working day ie. 30th
September falls on a Monday ?
(a) 27th September
(b) 28th September
(c) 29th September
(d) 30th September

Question 16 The main basic accounting heads to be maintained by any market participant
for maintaining currency futures accounts are Initial margin - currency futures
and Mark to market - currency futures - True or False ?
(a) FALSE
(b) TRUE

Correct Answer 15 30th September

Answer Settlement Date is the Last working day of the month (subject to holiday
Explanation calendars) at 12 noon.
(Last trading day or Expiry day - 12 noon on the day that is two working days
prior to the settlement date)

Correct Answer 16 TRUE

 NISM SERIES 1 – CURRENCY DERIVATIVES
CERTIFICATION EXAM – PRACTICE TEST 1

Question 17 The one year interest rate in USD is 2 % and is 9 % in India. Assume the
spot rate is 60 and the one year future price is 62.50. If the interest rate
gap between US and India widens and other things remain the same, what
will be the one year future price ?
(a) Same as 62.50
(b) Higher than 62.50
(c) Lower than 62.50

Question 18 As per the Foreign Exchange Management Act an 'AD Category 1' bank
should have a minimum net worth of Rs _______ to become a Trading and
Clearing Member of currency futures segment at a recognised stock
exchange.
(a) Rs 100 crores
(b) Rs 200 crores
(c) Rs 400 crores
(d) Rs 500 crores

Correct Answer 17 Higher than 62.50

Correct Answer 18 Rs 500 crores

 NISM SERIES 1 – CURRENCY DERIVATIVES
CERTIFICATION EXAM – PRACTICE TEST 1

Question 19 A textile exporter from India hedges its receivables using exchange traded
currency options. It buys 100 lots of USDINR one month put of strike
price 60 at a premium of 30 paise per contract. After a few days, the
exporter decided to cancel the put option and at that time spot was 59.50
and the price quoted for one month option of strike 60 was 18/19 paise.
How much Profit / Loss did he make in this transaction ?
(a) 10,000
(b) -10,000
(c) 12,000
(d) -12,000

Question 20 As per the Foreign Exchange Management Act an 'AD Category 1' bank
can have a minimum capital adequacy (CAR) ratio _____ % to become a
Trading and Clearing Member of currency futures segment at a
recognised stock exchange.
(a) 8%
(b) 10%
(c) 16%
(d) 20%

Correct Answer 19 -12,000

Answer The main data is the buying and selling prices.

Explanation He bought at 30 paise and sold at 18 paise.
So net loss of 12 paise ( 30 -18 )
(-).12 X 100 lots x 1000 lot size = -12,000

Correct Answer 20 10%

 NISM SERIES 1 – CURRENCY DERIVATIVES
CERTIFICATION EXAM – PRACTICE TEST 1

Question 21 Brokers should promptly issue contract notes to his clients and clients of
his sub brokers - True or False ?
(a) TRUE
(b) FALSE

Question 22 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) FALSE
(b) TRUE

Correct Answer 21 TRUE

Correct Answer 22 FALSE

Answer The currency futures segment of the Exchange has a separate Governing
Explanation Council on which the representation of Trading /Clearing Members of the
currency futures segment does not exceed 25 %
 NISM SERIES 1 – CURRENCY DERIVATIVES
CERTIFICATION EXAM – PRACTICE TEST 1

Question 23 Which of the following steps will help the situation where in the local
currency of a country is depreciating ?
(a) Decrease the FII holding in the stock markets
(b) Increase the FII holding in the stock markets
(c) Stricter rules for inflow of foreign capital in the country
(d) None of the above

Question 24 The one year interest rate in GBP is 1 % and is 9 % in India. Assume the
spot rate is 70 and the one year future price is 73. If the interest rate gap
between UK and India comes down and other things remain the same,
what will be the one year future price ?
(a) 73
(b) Higher than 73
(c) Lower than 73

Correct Answer 23 Increase the FII holding in the stock markets

Answer One reason for the depreciation of a currency is the outflow of foreign capital /
Explanation currency.
So if the outflow can be reduced and inflow increased, the depreciation of the
currency will get reduced.
Therefore by allowing more Foreign Institutional Investors ( FII ) to invest
more money will help increase inflows and reduce the local currency
depreciation.

Correct Answer 24 Lower than 73

 NISM SERIES 1 – CURRENCY DERIVATIVES
CERTIFICATION EXAM – PRACTICE TEST 1

Question 25 A call option of strike price 50 is available at premium of 0.75 when the
spot price is 50.50. If the spot price increases the premium will decline.
(a) Always true
(b) Never true
(c) Sometimes true

Question 26 A person sells a USD Put option at strike of 60.50 and receives a premium
of INR 0.40. What would be the breakeven point for the transaction?
(a) 60.1
(b) 60.5
(c) 60.9
(d) 60.3

Correct Answer 25 Never true

Answer When the spot price increase, the Value / Premium of Call Option will always
Explanation rise.

Correct Answer 26 60.10

Answer The breakeven point for a short put is the strike price of the option minus the premium.
Explanation So 60.50 - 0.40 = 60.10
 NISM SERIES 1 – CURRENCY DERIVATIVES
CERTIFICATION EXAM – PRACTICE TEST 1

Question 27 One month EURINR is quoting at 68.75/68.90 in the OTC market and
futures for same maturity is quoting at 69.30/69.60. Which of the following
describes possible arbitrage trade and possible arbitrage profit per EUR if
the arbitrage trade is carried until maturity?
(a) Buy EURINR in OTC and sell in futures, 55 paise
(b) Buy EURINR in OTC and sell in futures, 40 paise
(c) Buy EURINR in OTC and sell in futures, 85 paise
(d) Sell EURINR in OTC and buy in futures, 65 paise

Question 28 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 27 Buy EURINR in OTC and sell in futures, 40 paise

Answer Arbitrageurs make profits by simultaneously entering opposite side

Explanation transactions in two or more markets ie. buy in one market at a lower price and
sell in another at a higher price.
Here, in the OTC Market the Bid Ask price is 68.75 / 68.90. So an arbitrageur
will buy at 68.90.
In Futures Market the Bid Ask price is 69.30 / 69.60. So the arbitrageur will
sell at 69.30.
Thus he will make an arbitrage profit of Rs 0.40 ( 69.30 - 68.90 )

Correct Answer 28 Short Put

Answer When a person sells a Put option, he has receives the premium and also he has
Explanation a bullish view. When volatility decreases there is less movement in option
prices. So buying a Call option (bullish view) may not fetch him good returns.
But if he sells a PUT option (again bullish view) - this means he will benefit of
the bullish move by retaining the entire premium received by him.
 NISM SERIES 1 – CURRENCY DERIVATIVES
CERTIFICATION EXAM – PRACTICE TEST 1

Question 29 Which of the following best describes the SEBI prescribed open position
limit for GBPINR contracts for Stock Brokers (bank & non-bank) and
Category I & II FPIs?
(a) 6% of total open interest or GBP 25 mn, whichever is higher
(b) 6% of total open interest or GBP 50 mn, whichever is higher
(c) 15% of total open interest or GBP 50 mn, whichever is higher
(d) 15% of total open interest or GBP 25 mn, whichever is higher

Question 30 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 29 15% of total open interest or GBP 50 mn, whichever is higher

Answer V.IMP Note - Please memories the open position limits which have been
Explanation prescribed by SEBI for different currency pairs and different market participants
from the NISM Nov 2014 book

Correct Answer 30 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

Explanation mark to market margins, the contract is closed out.
The amount not paid by the client is adjusted against the initial margin.
 NISM SERIES 1 – CURRENCY DERIVATIVES
CERTIFICATION EXAM – PRACTICE TEST 1

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NISM SERIES 1 – CURRENCY DERIVATIVES
CERTIFICATION EXAM – PRACTICE TEST 1