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NISM-Series -VIII: Equity Derivatives Certification

Examination
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 3

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 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 3

PRACTICE TEST NO. 3

Question 1 A long position in a call option can be closed out by taking a long position in a put
option with identical exercise date and exercise price - State True or False ?

(a) TRUE

(b) FALSE

Question 2 Intrinsic value is always positive for in-the-money options and zero for out-of-the money
options - State True or False ?

(a) TRUE

(b) FALSE

Correct Answer 1 FALSE

Answer A long position in a CALL option can be closed out by taking a short position in a same
Explanation CALL option with same exercise date and exercise price.

Correct Answer 2 TRUE

Answer In-the-money options have positive intrinsic value whereas at-the-money and out-of-the-
Explanation money options have zero intrinsic value. The intrinsic value of an option can never be
negative.
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 3

Question 3 For a derivative exchange, the networth requirement for a clearing member is always
less than that for a non clearing member - State True or False ?

(a) TRUE

(b) FALSE

Question 4 All the 50 stocks of NSE Nifty index are equally weighed while calculating the index -
State True or False ?

(a) TRUE

(b) FALSE

Correct Answer 3 FALSE

Answer In a derivative exchange, the networth requirement for a clearing member is higher than that
Explanation of a non-clearing member

Correct Answer 4 FALSE

Answer The NIFTY 50 index is a well-diversified 50 companies index reflecting overall market
Explanation conditions.
NIFTY 50 Index is computed using free float market capitalization method. As per this
method, the 50 stocks of Nifty are weighed as per their free float market capitalisation. For eg
- Reliance Industry has a weightage of appx 7% where as Wipro has a weightage of appx 2%
in Nifty.
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 3

Question 5 If futures price is higher than spot price of an underlying asset, this is known as .

(a) Maximization

(b) Normalization

(c) Backwardation

(d) Contango

Question 6 What is the beta of a portfolio ?

(a) Its the value weighted average of the beta’s of the constituent securities in that portfolio

(b) Its the same as the beta of the stock with the highest market capitalization

(c) Its the sum of the betas the constituent securities in that portfolio

(d) Its the simple average of the beta’s of the constituent securities in that portfolio

Correct Answer 5 Contango

Answer If futures price is higher than spot price of an underlying asset, market participants may
Explanation expect the spot price to go up in near future. This expectedly rising market is called
“Contango market”.
Similarly, if futures price are lower than spot price of an asset, market participants may
expect the spot price to come down in future. This expectedly falling market is called
“Backwardation market”.

Correct Answer 6 Its the value weighted average of the beta’s of the constituent securities in that portfolio

Answer Beta of a portfolio is calculated as weighted average of betas of individual stocks in the
Explanation portfolio based on their investment proportion.
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 3

Question 7 In a derivative segment, the initial margin is collected from the clearing member on a
net basis ie. after netting all buy and sell positions of all clients together - State True or
False ?

(a) TRUE

(b) FALSE

Question 8 What happens to the unmatched portion of the order in an Immediate or cancel (IOC)
order ?

(a) It will be added to the order book as a limit order

(b) It will be executed on the next trading day

(c) It will be executed in the next one hour

(d) It will be cancelled

Correct Answer 7 FALSE

Answer In the derivatives segment , Clients' positions cannot be netted off against each other while
Explanation calculating initial margin. Margin for each client has to be paid separately as per his
outstanding trades / position.

Correct Answer 8 It will be cancelled

Answer Immediate or cancel (IOC): User is allowed to buy/sell a contract as soon as the order
Explanation is released into the trading system. An unmatched order will be immediately cancelled.
Partial order match is possible in this order, and the unmatched portion of the order
is cancelled immediately.
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 3

Question 9 A feature of a forward contract is .

(a) Its traded one-to-one between counterparties

(b) It has good liquidity

(c) It cannot be of a tenor of more than one year

(d) It does not carry any credit risk

Question 10 can write an option in the Indian stock market .

(a) Common individuals

(b) Market makers

(c) Foreign Financial Institutions (FII)

(d) All of the above

Correct Answer 9 Its traded one-to-one between counterparties

Answer Forward Contract - It is a contractual agreement between two parties to buy/sell an
Explanation underlying asset at a certain future date for a particular price that is pre-decided on the date
of
contract.

Correct Answer 10 All of the above

Answer All of the above can write (sell) options in Indian stock market.
Explanation
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 3

Question 11 Suppose you are a trading member and have bought 14 contracts of April series index
futures and sold 7 contracts of April series index futures on your own account. What
will be your exposure on these transactions ?

(a) It will grossed up to 21 contracts

(b) It will be netted to 7 contracts

(c) Higher of 14 and 7 ie. 14 contracts

(d) The Stock Exchange can decide to either to gross up or net out the exposure depending on the
past record of the trading member

Question 12 When there is a ‘Closing buy transaction’, this will have the effect of partly or fully
offsetting .

(a) A cross position

(b) A short position

(c) A high position

(d) A long position

Correct Answer 11 It will be netted to 7 contracts

Answer The exposure will be netted ie. 14 -7 = 7 contracts.
Explanation

Correct Answer 12 A short position

Answer Creating a Short Position means selling the asset on an exchange with a view to buy it back
Explanation when the price falls.
So a Closing Buy transaction will be used to buy back / offset the short position created.
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 3

Question 13 Which Option gives the holder a right to buy the underlying asset on or before a
particular date for a certain price ?

(a) European call option

(b) European put option

(c) American call option

(d) American put option

Question 14 The main proof of whether a futures transaction is for speculation or hedging is
based on whether there already exists a related commercial position which is exposed
to risk of loss due to price movement - State True or False ?

(a) TRUE

(b) FALSE

Correct Answer 13 American call option

Answer American option: The owner of such option can exercise his right at any time on or before the expiry
Explanation date/day of the contract.

A Call Option gives the holder a right to buy the underlying asset - So the answer is American Call
Option.

(European option: The owner of such option can exercise his right only on the expiry date/day of the
contract. In India, Index options are European.)

Correct Answer 14 TRUE

Answer
Explanation Hedgeing basically means making a trade to reduce the risk of adverse price movements in an
asset which you already hold. Normally, a hedge consists of taking an offsetting position in a
related security, such as a futures contract
For eg. - A company will be receiving dollors after three months. So to safe guard against any
fluctuations, it sells dollars in the futures market (3 month futures) and locks in the price.
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 3

Question 15 What is an Index Future ?

(a) Its a synthetic option

(b) Its a cash market product

(c) Its a derivative product

(d) Its an option

Question 16 The beta of a stock is 0.7 and you have a buy position of Rs 3,00,000 in it. Which of the
below options will give you a complete hedge ?

(a) Sell Rs 2,10,000 Nifty

(b) Buy Rs 2,10,000 Nifty

(c) Buy Rs 3,00,00 Nifty

(d) Sell Rs 3,00,000 Nifty

Correct Answer 15 Its a derivative product

Answer The future price of an index is derived from the spot / cash price.
Explanation So Index Future is a derivative product.

Correct Answer 16 Sell Rs 2,10,000 Nifty

Answer To get a complete hedge against your buy position , you will have to sell Nifty.
Explanation 0.7 x Rs 3,00,000 = Rs 2,10,000.
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 3

Question 17 What is the intrinsic value of a call option if the spot price is Rs 300 and the strike price
is Rs 250 ?

(a) zero

(b) 50

(c) 650

(d) None of the above

Question 18 For which type of options is it profitable to exercise the options ?

(a) In the Money

(b) At the Money

(c) Out of the Money

(d) None of the above

Correct Answer 17 50

Answer Intrinsic Value of an In the money call option is the Spot Price - Strike Price.
Explanation

Correct Answer 18 In the Money

Answer IN THE MONEY - A call option with a strike price that is lower than the market price of the
Explanation 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.
For example, consider a stock that is trading at Rs 100. For such a stock, call options with
strike prices below Rs 100 would be In the money calls ( ie Rs 80, Rs 90 calls) while put
options with strike prices above Rs 100 (Rs 110 , Rs 120 calls etc.)would be In the money
puts.
For easy understanding, those calls or puts which are profitable are In the Money.
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 3

Question 19 Losses due to Operational risks include losses due to .

(a) State Government policies

(b) Income tax regulations

(c) Inadequate contingency planning

(d) Excessive management control

Question 20 Mr R wants to sell 17 contracts of January series at Rs.4550 and Mr S wants to sell 20
contracts of February series at Rs. 4500. Lot size is 50. The Initial Margin is fixed at
9%. How much Initial Margin is required to be collected from both these investors by
the broker?

(a) Rs 3,48,075
(b) Rs 4,05,000
(c) Rs 5,87,500
(d) Rs 7,53,075

Correct Answer 19 Inadequate disaster planning

Answer An operational risk is defined as a risk incurred by an organisation's internal activities. So

Explanation losses due to fraud, inadequate documentation, inadequate disaster management,
improper execution are all Operational risks.

Correct Answer 20 Rs 7,53,075

Answer The Broker has to collect -

Explanation From Mr. R : 17 x 4550 x 50 x 9% = Rs 3,48,075
From Mr. S : 20 x 4500 x 50 x 9% = Rs 4,05,000
Therefore the total margin to be collected is 348075 + 405000 = Rs 7,53,075
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 3

Question 21 The Spot price ie. the market price of a share is Rs 200 and the interest rate is 12%.
Which of the below price is closest to 3 months future maturity ?
(a) 206
(b) 200
(c) 203
(d) 224

Question 22 If a person buys a share in one market and the simultaneously sells in a
different market to benefit from differentials is known as .
(a) Log trading
(b) Arbitrage
(c) Speculation
(d) Jobbing

Correct Answer 21 206

Answer Yearly Interest Rate is 12%. Full year's interest = 12% of 200 ie. Rs 24
Explanation So for 3 months the cost of interest is Rs 6.
Therefore the 3 month future contract will have an price of appx. Rs 206.

Correct Answer 22 Arbitrage

Answer Arbitrage means the simultaneous purchase and sale of an asset in order to profit from a
Explanation difference in the price.
It is a trade that profits by exploiting price differences of identical or similar financial
instruments, on different markets.
For eample- If Reliance is quoted on NSE at Rs 900 and on BSE there is a buyer at Rs 903,
then the arbitrageur will buy on NSE and sell on BSE and Rs 3 (less brokerage etc.) will be is
profit.
Arbitrage exists as a result of market inefficiencies; it provides a mechanism to ensure prices
do not deviate substantially from fair value for long periods of time.
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 3

Question 23 Can clients position be netted off against each other while calculating initial Margin on
the derivatives segment.
(a) No
(b) Yes

Question 24 Trade Guarantee Fund (TGF) is maintained for –

(a) Protecting the interests of investors
(b) inculcating confidence in the minds of investors and brokers
(c) Guaranteeing the settlement of trades
(d) All of the above

Correct Answer 23 No

Answer Each clients open position is taken separately for calculating the initial margin. Positions
Explanation of two or more clients cannot be netted off against each other for calculation of initial
margin. For eg - If Mr A has bought 10 contracts’ of Nifty and Mr B has sold 4 contracts of
Nifty,
then the broker has to pay the initial margin on 14 contracts and not 6 contracts.

Correct Answer 24 All of the above

 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 3

Question 25 In an equity scheme, the Mutual Fund can hedge its equity exposure by selling stock
index futures - True or False?
(a) TRUE
(b) FALSE

Question 26 All the orders entered on the Trading System of a Derivative Exchange are at Prices
exclusive of brokerage. True or False ?
(a) FALSE
(b) TRUE

Correct Answer 25 TRUE

Answer As per the recommendations of L.C. Gupta committee, mutual funds are allowed to hedge its
Explanation equity exposure in derivatives segment - subject to terms and conditions.

Correct Answer 26 TRUE

Answer The prices are exclusive ie. with out any brokerage. Brokerage is added later and is reflected
Explanation in the contract note.
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 3

Question 27 Ms. Rita sold a put option of strike price Rs. 90 and she received a premium of Rs. 6
from the option buyer. Theoretically, what can be the maximum loss on this trade ?
(a) 90
(b) 84
(c) 96
(d) 0

Question 28 If the liquid assets maintained by clearing member Mr. Ram are higher than that
clearing member Mr. Shyam, which of the below options is/are true ?
(a) There is no need to maintain liquid assets
(b) Both Mr. Ram and Mr. Shyam have the same level of exposure
(c) Mr Ram has a higher exposure level than Mr. Shyam
(d) Mr Shyam has a higher exposure level than Mr. Ram

Correct Answer 27 84

Answer Theoretically a share can fall to Rs 0. So the maximum loss can be Rs 90. But Ms. Rita has
Explanation received Rs 6 as option premium so her maximum loss will be Rs 90 - Rs 6 = Rs 84.

Correct Answer 28 Mr Ram has a higher exposure level than Mr. Shyam

Answer As per the rules of SEBI and Stock Exchanges, the notional value of gross open positions at
Explanation any point in time in the case of all Futures and Options shall not exceed a particular
percentage of the liquid networth of a member.
So a member (Mr Ram) who keeps higher liquid assets as security and margin with the stock
exchanges will get higher exposure limits.
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 3

Question 29 An exchange traded option after maturity .

(a) Can be traded after 2 days ie. after pay in / pay out.
(b) Can be traded in the spot market
(c) Cannot be traded
(d) None of the above

Question 30 You have bought a CALL of SBI of Strike price of Rs 2000 of January. To close the
position, you will buy a PUT of same strike price of January. True or False ?
(a) TRUE
(b) FALSE

Correct Answer 29 Cannot be traded

Answer An exchange traded option can only be traded till the last date of expiry ie. its maturity. After
Explanation that it will not be available for trading.
For eg - If 27th June is the last Thursday of the month ie. the maturity, all options of June
month will cease to exist as soon as the market closes on 27th June.

Correct Answer 30 FALSE

Answer When you buy a CALL option, to close this position you will have to sell a CALL option of
Explanation same strike price and expiry.
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 3

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