NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION

EXAM – PRACTICE TEST NO. 1

About PASS4SURE.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.

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 EQUITY DERIVATIVES CERTIFICATION EXAM is a 100 mark exam with 60% as
passing marks. In all 100 questions will be asked with 0.25% negative marking for Wrong Answers. The
time duration is 2 hours.

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, photocopying, recording or otherwise, without the prior written permission
from PASS4SURE.in. For any clarification regarding this document or if you feel there are errors in the question bank,
please write us at info@pass4sure.in
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 1

PRACTICE TEST NO. 1

Question 1 An Equity based Mutual Fund can sell Index Futures to hedge its position-True or False?

(a) TRUE

(b) FALSE

Question 2 Which of these PUT's are In the Money ?

(a) Spot 300 ; Strike Price 300

(b) Spot 300 ; Strike Price 280

(c) Spot 300 ; Strike Price 320

(d) None of the above

Correct Answer 1 TRUE

Answer Derivatives like futures & options are used by mutual funds for hedging their portfolio to
Explanation manage the risk. For example, if the fund manager foresees a downturn in the stocks held in his
portfolio, he can hedge the same by selling (stock/index futures) in the derivatives segment.

Correct Answer 2 Spot 300 ; Strike Price 320

Answer A Put option is In the Money when the Spot price is below the Strike price.
Explanation A Call option is In the Money when the Spot price is above the Strike price.
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 1

Question 3 The beta of SBI is 0.9. If a trader has a buy position of Rs 3,00,000 of SBI, which of the
following will give him a complete hedge ?

(a) Sell Nifty of 270000

(b) Sell Nifty of 330000

(c) Sell Nifty of 300000

(d) Beta of below 1 cannot be hedged

Question 4 Theta is the rate of change in option premium for a unit change in .

(a) volatility

(b) price of the underlying asset

(c) time to expiry

(d) interest rates

Correct Answer 3 Sell Nifty of 270000

Answer SBI has a beta of 0.9 means that if Nifty falls by 100, the SBI will fall by 90 ie. 10% less.
Explanation
So wee need to hedge 10% less of NIfty, ie 10% of Rs 300000 = 30,000

So we need to sell 270000 of Nifty

Correct Answer 4 time to expiry

Answer Theta is the change in option price given a one-day decrease in time to expiration. It is a
Explanation measure of time decay.
(Please memorize the details for Delta, Gamma, Theta, Rho etc.)
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 1

Question 5 Can the exercise price be more than or equal to or less than the cash spot price ?

(a) Yes

(b) No

Question 6 When a PUT option on an index is exercised, the option holder receives from the option
writer .

(a) A cash amount that is equal to the excess of spot price over exercise price

(b) A cash amount that is equal to the excess of exercise price over spot price

(c) A cash amount that is equal to spot price

(d) No amount

Correct Answer 5 Yes

Answer Exercise price means the Strike price for which options can be traded.
Explanation
For eg. - A scrip ABC has options tarding at a strike price of Rs 100. The spot price
(market price) can easily fluctuate as per market sentiments and can be above, below
or equal to Rs. 100.

Correct Answer 6 A cash amount that is equal to the excess of exercise price over spot price
Answer An option will only be exercised when its In the Money (Profitable)
Explanation A put option is In the Money when the Exercise price is higher than the spot price. So the
excess of exercise price over the spot price will be receivable by the option holder.
(IN THE MONEY - A call option with a strike (exercise) price that is lower than the market
(spot) price of the underlying asset, or a put option with a strike price that is higher than the
market price of the underlying asset. In the money means that your stock option is worth
money and you can turn around and sell or exercise it.)
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 1

Question 7 Can one sell assets in futures market even if he does not own any such assets ?

(a) Yes

(b) No

Question 8 Which of the following options will result in the creation of a BEAR SPREAD ?

(a) Selling one call at lower strike and buying another call at higher strike price

(b) Buying one put and buying one call at the same strike

(c) Selling one call and buying two puts at the same strike

(d) None of the above

Correct Answer 7 Yes

Answer One can sell futures / options etc. even if he does not own the underlying asset.
Explanation

Correct Answer 8 Selling one call at lower strike and buying another call at higher strike price

Answer Bear Spread can be created by :

Explanation 1) Selling a low strike call and buying a high strike call OR
2) Selling a low strike Put and buying a high strike Put

Remember : Bear spread involves either 2 Calls or 2 Puts and not Call and Put.
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 1

Question 9 On the derivatives futures market, if there are three series of one, two and three months
open at a point of time, how many calendar spread can one have ?

(a) 1

(b) 2

(c) 3

(d) 4

Question 10 Mr. A wants to sell stock options but he does not own the underlying stock. Can he do it
in India ?

(a) Yes

(b) No

Correct Answer 9 3

Answer The three claendar spreads can be between months 1 and 2, 2 and 3 and 1 and 3.
Explanation

Correct Answer 10 Yes

Answer One can buy / sell stock options even if he does not own the underlying stock.
Explanation
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 1

Question 11 The Clearing Corporation gives exposure limits to Clearing Members based on the
number of Trading Members using the services of that Clearing Member - State True or
False ?

(a) TRUE

(b) FALSE

Question 12 Why are margins collected in the derivative segment ?

(a) To earn revenue for the clearing corporation

(b) To minimize the number of investors entering the derivatives market

(c) To have friction in the market so facilitate arbitrage

(d) To minimize the risk of default by all parties involved

Correct Answer 11 True

Answer As per rules - Both trading-cum-clearing member and professional clearing member
Explanation are required to bring in additional security deposits in respect of every trading
member whose trades they undertake to clear and settle.

Correct Answer 12 To minimize the risk of default by all parties involved

Answer As exchange guarantees the settlement of all the trades, to protect itself against
Explanation default by either counterparty, it charges various margins from brokers. Brokers in
turn charge margins from their customers.
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 1

Question 13 What is Unsystematic Risk ?

(a) Unsystematic Risk is related to risk in a specific security and not pertaining to overall market

(b) Unsystematic Risk can be reduced through diversification

(c) Both 1 and 2

(d) None of the above

Question 14 Speculators are those who take risk whereas hedgers are those who wish to reduce risk -
State True or False ?

(a) TRUE

(b) FALSE

Correct Answer 13 Both 1 and 2

Answer Unsystematic risk is the component of price risk that is unique to particular events of the
Explanation company and/or industry. For example : Strike in a factory or threats from cheaper imports to
steel industry.
This risk is inseparable from investing in the securities. This risk could be reduced to a certain
extent by diversifying the portfolio.

Correct Answer 14 TRUE

Answer Hedgers - They face risk associated with the prices of underlying assets and use derivatives
Explanation to reduce their risk
Speculators/Traders - They try to predict the future movements in prices of underlying assets
and based on the view, take positions in derivative contracts.
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 1

Question 15 Loss on derivative transactions can be set off against any other income during the year.
In case the same cannot be set off, it can be carried forward to subsequent assessment
year and set off against any other income of the subsequent year. Such losses can be
carried forward for a period of assessment years.

(a) 4

(b) 8

(c) 12

(d) 16

Question 16 As per the rules of European Call Option, it gives the right but not the obligation to buy
from the seller an underlying at the prevailing market price on or before the expiry -
True or False ?

(a) FALSE

(b) TRUE

Correct Answer 15 8

Answer Loss incurred on derivatives transactions which are carried out in a recognized stock exchange
Explanation can be carried forward for a period of 8 assessment years.

Correct Answer 16 FALSE

Answer European Option is an an option that can only be exercised at the end of its life, at its
Explanation maturity / expiry and not before that. An American option can be exercised any time.

A buyer of an European option that does not want to wait for maturity to exercise it can
sell the option to close the position.
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 1

Question 17 If an investor buys a future contract but does not sell it till expiry than what happens to
that contract ?

(a) The investor will receive the delivery of the underlying

(b) The exchange will square up the position by the closing price

(c) A new buy position will be automatically be created in the next month

(d) The client has to pay a stiff penalty

Question 18 Margins in futures trading are applicable to -

(a) Only Institutional players.

(b) Both the buyer and the seller

(c) Only the buyer

(d) Only the Seller

Correct Answer 17 The exchange will square up the position by the closing price

Answer As per the rules in the Indian Stock markets, if the open position of a trader is
Explanation not squared up till maturity ie. last Thrusday of the month, then the position is automatically
squared up by the exchange by the closing price.
For example - Mr A bought one Ambuja Cement contract of 1000 shares at Rs 180 on 8th
January. He does not sell it even by the last day ie. last Thrusday of January. If the closing
price of Ambuja Cement is Rs 184, his contract will be squared up at Rs 184 and Rs 4 x 1000 =
Rs 4000 ( less brokerage etc. ) will be his profit. In case Ambuja Cement closes below Rs 180,
then he will incur a loss

Correct Answer 18 Both the buyer and the seller

Answer In a futures market margins are payable by both the parties.
Explanation
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 1

Question 19 Mr Manoj buys a put option on PQR stock for Rs 20 of strike price Rs 130. If on the
exercise day, the spot price of PQR is Rs 175, Mr Manoj will choose .

(a) Not to exercise the option

(b) To exercise the option

Question 20 The Clearing Corporation can transfer a defaulting members client's position to
.
(a) Liability a/c.
(b) Another solvent member
(c) Investor Protection Fund a/c.
(d) The Stock Exchange

Correct Answer 19 Not to exercise the option

Answer Mr. Manoj bought a PUT option so he had a view that the stock will fall. On the exercise day
Explanation the stock has risen and so Mr Manoj is in a loss. So he will not exercise the option.

Correct Answer 20 Another solvent member

Answer As per SEBI rules, the Clearing Corporation can transfer client positions from one broker
Explanation member to another broker member in the event of a default by the first broker member.
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 1

Question 21 The Spot Price of ABC Stock is Rs. 347. Rs. 325 strike call is quoted at Rs. 39. What is the
Intrinsic Value?

(a) 0

(b) 22

(c) 39

(d) 61

Question 22 Mr. Deshmukh took a short position of one contract in May Nifty futures (Contract
multiplier 50) at a price of Rs. 5600. When he closed this position after a few days, he
realized that he has made a profit of Rs.5000. Which of the following closing actions
would have enabled him to generate this profit ?

(a) Selling 1 May Nifty futures contract at 5700

(b) Buying 1 May Nifty futures contract at 5700

(c) Buying 1 May Nifty futures contract at 5500

(d) Selling 1 May Nifty futures contract at 5500

Correct Answer 21 22

Answer When the Strike Price is below the Spot Price, the Call Option is 'In the Money' ie. profitable.
Explanation Intrinsic Value for a such a Call Option = Spot Price - Strike Price
= 347 – 325
= 22

Correct Answer 22 Buying 1 May Nifty futures contract at 5500

Answer Mr Deshmukh is short ie. he has sold Nifty futures. He will make a profit when Nifty falls. His
Explanation profit is Rs 5000 and lot size is 50, so per share he has to get Rs 100 to make a profit of Rs
5000 ( 50 x 100)
So when Nifty falls to 5500 and Mr Deshmukh buys it to square up his position, he will make a
profit of Rs 5000.
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 1

Question 23 By using Financial derivatives one can engage in .

(a) Hedging
(b) Arbitraging
(c) Speculation
(d) All of the above

Question 24 If an trader does an calendar spread in index futures and the near leg of the calendar
spread expires, the Further leg becomes a regular open position. True or False ?

(a) TRUE

(b) FALSE

Correct Answer 23 All of the above

Answer Modern traders and investors also use financial derivatives for Arbitrage and Speculation, apart
Explanation from hedging

Correct Answer 24 TRUE

Answer Calendar spread means an options or futures spread established by simultaneously entering a
Explanation long and short position on the same underlying asset but with different delivery months.
In the above question, lets assume a trader has gone long in index options in current month and
short in index options in third month. Incase he does not close his position by the end of
current month, his current month option will expire and the third month option contract will
become an open position as there is no opposite option contract in his account.
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 1

Question 25 Mr. Nayar has purchased 8 contracts of March series and sold 6 contracts of April series
of the NSE Nifty futures. How many lots will get categorized as Regular (non-spread)
open positions?
(a) 14

(b) 8

(c) 2

(d) 6

Question 26 If the price of a stock is volatile, then the option premium would be relatively .

(a) Lower

(b) Higher

(c) No effect of volatility

(d) zero

Correct Answer 25 2

Answer Various future contract position in the same underlying ( even at various expiry dates ) are
Explanation netted off before arriving at open position. Here in this case its 8 - 6 = 2.
This is because a long and a short position in the same underlying will have no risk (if one
will make profit, the other will be in a similar loss) and only the open position will have the
risks and margins will be collected from these open positions.

Correct Answer 26 Higher

Answer Higher volatility means higher risk and higher risk means one has to pay a higher premium.
Explanation
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 1

Question 27 The strategy in which an trader buys a call option of lower strike price and sells another
call option with a higher strike price of the same share and same expiry date is called
.

(a) Butterfly spread

(b) Bearish spread

(c) Calendar spread

(d) Bullish spread

Question 28 You sold a Put option on a share. The strike price of the put was Rs.245 and you received
a premium of Rs.49 from the option buyer. Theoretically, what can be the maximum loss
on this position?

(a) 206

(b) 196

(c) 49

(d) NIL

Correct Answer 27 Bullish spread

Correct Answer 28 196

Answer When you sell a Put option you believe the share will go up. If the share goes down you will
Explanation make a loss.
Theoretically the share of 245 can fall to zero. So you can make a loss of 245.
You have received a premium of 49.
So the maximum loss can be 245 - 49 = 196
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 1

Question 29 The spot price of Grasim Industries Ltd share is Rs 2900, the call option of Strike Price
Rs 2800 is .

(a) At the money

(b) Out of the money

(c) In the money

(d) None of the above

Question 30 Of the below mentioned options, which would attract margins ?

(a) Buyer of PUT Option

(b) Seller of CALL Option

(c) Seller of PUT Option

(d) Both 2 and 3

Correct Answer 29 In the money

Answer In call options, when the Spot price is higher than Strike price - that call option is In the
Explanation Money.

Correct Answer 30 Both 2 and 3

Answer Buyers of Options pay the premium and that is the maximum loss they can suffer - so they
Explanation need not pay any margin.
A seller of options receives the premium but he can suffer infinte losses - so margins are
collected both from sellers of Call and Put options
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 1

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: 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
And many more..

NCFM

NCFM Financial Markets: A Beginners Module

NCFM Capital Market (Dealers) Module
NCFM Derivative Market (Dealers) Module

BSE

Certificate on Security Market (BCSM)

NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 1