NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION

EXAM – PRACTICE TEST NO. 7

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 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 7

PRACTICE TEST NO. 7

Question 1 Long Straddle is a strategy of ____________.

(a) Unlimited profits and limited losses
(b) Unlimited profits and unlimited losses
(c) Limited profits and limited losses
(d) Limited profits and unlimited losses

Question 2 Nifty is currently at 4900. An investor feels Nifty will not rise beyond 5000 in the next three
months. He sells two Nifty calls of strike price 4900 at Rs 100 per lot. Because of positive
indicators Nifty rises to 4950 on expiry day. What is his profit/loss ? (1 lot = 50 shares)
(a) Profit of Rs 5000
(b) Loss of Rs 5000
(c) Profit of Rs 10000
(d) Loss of Rs 10000

Correct Answer 1 Unlimited profits and limited losses

Answer A long straddle position is created by buying a call and a put option of same strike and same
Explanation expiry.
His maximum loss will be equal to the sum of these two premiums paid.
Any significant move in either direction will result in handsome profits.

Correct Answer 2 Profit of Rs 5000

Answer The investor sells 2 Nifty calls at Rs 100.

Explanation So he receives premium of Rs 100 x 2 lots x 50 (lot size) = Rs 10,000
He had a negative outlook on Nifty but Nifty rose, so he will incur a loss.
4900 - 4950 = Rs 50 Loss
Rs. 50 x 2 Lots x 50 (lot size) = Rs 5000
So Net he is in a profit : 10,000 - 5000 = Rs 5000
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 7

Question 3 Intrinsic value of an OUT OF MONEY option is _____

(a) zero
(b) 1
(c) -1
(d) none of the above

Question 4 A penalty or suspension of registration of a stock broker from derivatives exchange/segment

under SEBI (Stock Broker and Sub-broker) Regulations, 1992 can take place if ________
(a) The stock broker violates the conditions of registration
(b) The stock broker fails to pay fees
(c) The stock broker is suspended by the stock exchange
(d) In any of the above situations

Correct Answer 3 zero

Correct Answer 4 In any of the above situations

 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 7

Question 5 An 'authorised person' in the Futures & Options segment is ___________.

(a) a person authorised by the exchange as an approved user of a trading member
(b) any person who is acting in any capacity on behalf of the trading member or a participant for any
activity relating to the trades done and executed
(c) an approved user of a participant
(d) all of the above

Question 6 A butterfly spread is an extension of __________ strategy.

(a) Covered call
(b) Long straddle
(c) Short straddle
(d) Long Strangle

Correct Answer 5 all of the above

Correct Answer 6 Short straddle

Answer The downside in short straddle is unlimited if market moves significantly in either direction.
Explanation So to put a limit to this downside, along with short straddle, trader buys one out of the money call
and one out of the money put. This strategy is called “Butterfly Spread”.
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 7

Question 7 In the derivatives segment , Clients' positions cannot be netted off against each other while
calculating initial margin - True or False ?
(a) FALSE
(b) TRUE

Question 8 After SPAN has scanned the 16 different scenarios of underlying market price and volatility
changes, it selects the ________ loss.
(a) Average Loss
(b) Smallest Loss
(c) Largest Loss
(d) Medium Loss

Correct Answer 7 TRUE

Correct Answer 8 Largest Loss

 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 7

Question 9 If you sell a put option with strike of Rs. 375 at a premium of Rs.50, how much is the
maximum gain that you may have on expiry of this position?
(a) Unlimited
(b) Rs 50
(c) Rs 325
(d) None of the above

Question 10 ____________________ being anticipated profit should be ignored and no credit for the
same should be taken in the profit and loss account.
(a) Credit balance in the "Mark-to-Market Margin Account"
(b) Debit balance in the "Mark-to-Market Margin Account"
(c) Debit balance in the Initial Margin A/c
(d) Credit balance in the Initial Margin A/c

Correct Answer 9 Rs 50

Answer Seller of an option - be it Call or Put receives the premium and that shall be his maximum profit.
Explanation

Correct Answer 10 Credit balance in the "Mark-to-Market Margin Account"

Answer As per the rules of Accounting for open interests as on the balance sheet date :
Explanation Net amount received (represented by credit balance in the "Mark-to-Market Margin Account")
being anticipated profit should be ignored and no credit for the same should be taken in the profit
and loss account.
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 7

Question 11 Which statement is false with respect to Futures market ?

(a) There is daily settlement
(b) There are standardised contract terms
(c) No margin payment is required
(d) Traded on organised exchanges

Question 12 ___________ of the option is the one who by paying the option premium buys the right but
not the obligation to exercise his option on the seller.
(a) Buyer
(b) Seller
(c) Buyer or Seller
(d) None of the above

Correct Answer 11 No margin payment is required

Correct Answer 12 Buyer

 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 7

Question 13 Intrinsic value of an Out of the Money option is ____________.

(a) 1
(b) -1
(c) zero
(d) None of the above

Question 14 Around 60% of the trading volume on the American Stock Exchange is from
(a) Index Futures
(b) Index Funds
(c) ETFs
(d) Index Options

Correct Answer 13 Zero

Answer An Out of the Money option has no intrinsic value and it cannot be negative.
Explanation

Correct Answer 14 ETFs

Answer ETF - Exchange Traded Funds

Explanation
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 7

Question 15 Spot value of Reliance Industry share is Rs 800 and an investor buys one month Reliance
call option of strike price 820 at a premium of Rs 3. The option is _________.
(a) In the Money
(b) At the Money
(c) Out of the Money
(d) Deep In the Money

Question 16 As per the recommendations of the L.C.Gupta Committee, CROSS MARGINING ( which
takes into account the combined position in the cash and derivative market) is currently not
permitted.
(a) FALSE
(b) TRUE

Correct Answer 15 Out of the Money

Answer When the Strike price of a call option is higher than the Spot price, its Out of the Money. There is
Explanation no intrinsic value but only time value.

Correct Answer 16 TRUE

Answer As per the major recommendations of the L.C.Gupta Committee - Cross margining (linking
Explanation overall cash and derivative positions for margining) is not permitted.
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 7

Question 17 An option with zero intrinsic value is called _______ .

(a) OTM - Out of The Money option
(b) ATM - At The Money option
(c) ITM - In The Money option
(d) Expiry day options

Question 18 __________ measures the sensitivity of the option value to a given small change in the price
of the underlying asset.
(a) Delta
(b) Theta
(c) Rho
(d) Vega

Correct Answer 17 ATM - At The Money option

Answer At the Money option means a situation where an option's strike price is identical to the price of
Explanation the underlying security. Both call and put options will be simultaneously "at the money."
For example, if ABC stock is trading at 100, then the ABC 100 call option is at the money and so
is the ABC 100 put option. An at-the-money option has no intrinsic value, but may still have time
value.

Correct Answer 18 Delta

Answer The most important of the „Greeks‟ is the option‟s is “Delta”. This measures the sensitivity of the
Explanation option value to a given small change in the price of the underlying asset. It may also be seen as
the speed with which an option moves with respect to price of the underlying asset. Delta =
Change in option premium/ Unit change in price of the underlying asset. Delta for call option
buyer is positive. This means that the value of the contract increases as the share price rises. For
example, with respect to call options, a delta of 0.6 means that for every Rs.1 the underlying stock
increases, the call option will increase by Rs 0.60
Put option deltas, on the other hand, will be negative, because as the underlying security
increases, the value of the option will decrease. So a put option with a delta of -0.6 will decrease
by Rs.0.60 for every Rs 1 the underlying increases in price.
The knowledge of delta is of vital importance for option traders because this parameter is heavily
used in margining and risk management strategies.
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 7

Question 19 A stock exchange has ON LINE SURVEILLANCE capability to monitor the __________.
(a) Volumes
(b) Prices
(c) Positions
(d) All of the above

Question 20 Theta is ___________.

(a) is 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 19 All of the above

Correct Answer 20 the change in option price given a one-day decrease in time to expiration.
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 7

Question 21 The basic test of whether a trade done in the future market is for hedging or speculation is
centered on the premise that there already exist a related commercial position which is
exposed to the risk due to price fluctuations.
(a) TRUE
(b) FALSE

Question 22 The options which are traded on a exchange are standardised.

(a) TRUE
(b) FALSE

Correct Answer 21 TRUE

Answer Hedgeing basically means making an investment to reduce the risk of adverse price movements
Explanation in an asset. Normally, a hedge consists of taking an offsetting position in a related security,
such as a futures contract.
An example of a hedge would be if you owned a stock, then sold a futures contract stating that
you will sell your stock at a set price, therefore avoiding market fluctuations.

Correct Answer 22 TRUE

Answer Exchange traded options are standardised as per the rules of the exchange in terms of time,
Explanation duration, quantity etc.
Forward options are customised as per the agreement between the trading parties.
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 7

Question 23 You are long in ICICI Bank Ltd futures at price Rs 1000. The prices rises to Rs 1020 next
day. The Mark to Market margin will be credited to your account. True or False ?
(a) FALSE
(b) TRUE

Question 24 The networth of clearing members does not include –

(a) Bad Deliveries
(b) Doubtful Debts
(c) Unlisted Securities
(d) All of the Above

Correct Answer 23 TRUE

Correct Answer 24 All of the Above

Answer The minimum networth for clearing members of the derivatives clearing corporation/house
Explanation shall be Rs.300 Lakhs. The networth of the member shall be computed as follows:
- Capital + Free reserves
- Less non-allowable assets which are :
o Fixed assets
o Pledged securities
o Member‟s card
o Non-allowable securities (unlisted securities)
o Bad deliveries
o Doubtful debts and advances
o Prepaid expenses
o Intangible assets
o 30% marketable securities
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 7

Question 25 The Option which gives its holder a positive cash flow is called a _______ .
(a) At the money option
(b) Out of the money option
(c) In the money option
(d) Delta

Question 26 In case of CALL OPTION, it gives the buyer the right to _________ .
(a) buy the underlying at market price
(b) buy the underlying at set price
(c) sell the underlying at market price
(d) sell the underlying at set price

Correct Answer 25 In the money option

Answer An 'In the money' (ITM) option gives the holder a positive cash flow, if it were exercised
Explanation immediately.
A call option is said to be ITM, when spot price is higher than strike price. And, a put option
is said to be ITM when spot price is lower than strike price.

Correct Answer 26 buy the underlying at set price

Answer A call option is a financial instrument that gives the buyer the right, but not an obligation, to
Explanation buy a set quantity of a security at a set strike price at some time on or before expiration.
In easy terms - what ever may be the market price, the buyer will get the security at the set
price or strike price as he has paid a premium for it.
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 7

Question 27 You have bought a CALL of Reliance of Strike price of Rs 900 of January. To close the
position, you will SELL a PUT of same strike price of January. True or False ?
(a) FALSE
(b) TRUE

Question 28 Tick size depends on

(a) The Delta of the security
(b) Its fixed by the exchange
(c) Volume in that security
(d) The Interest rates

Correct Answer 27 FALSE

Answer If you have bought a CALL option, then to close the position you will have to sell a CALL
Explanation option Rs 900 strike price.

Correct Answer 28 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.
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 7

Question 29 The Strangle strategy is similar to straddle strategy in outlook but different in __________ .
(a) implementation
(b) aggression
(c) cost
(d) All of the above

Question 30 If you are a seller of put option, you expect ___________ .

(a) No change in the price
(b) Increase in the price
(c) Decrease in the price
(d) Both 1 and 2

Correct Answer 29 All of the above

Answer Long Strangle As in case of straddle, the outlook here (for the long strangle position) is that the
Explanation market will move substantially in either direction, but while in straddle, both options have same
strike price, in case of a strangle, the strikes are different. Also, both the options (call and put) in
this case are out-of-the-money and hence the premium paid is low.

Correct Answer 30 Both 1 and 2

Answer When you sell a put option you expect the price to rise. Even if the price remains stable, you earn
Explanation the option premium.
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 7

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NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 7