Finance Basics: Derivatives and ETFs
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Finance Basics: Derivatives and ETFs

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Questions and Answers

Is the minimum contract value of a futures contract not less than Rs. 1 Lakh?

  • False (correct)
  • True
  • Rs. 50,000 is acceptable
  • It can be any amount

    • What is the period within which an arbitrator normally passes the award after the initial hearing?

  • Four months
  • One month
  • Two months (correct)
  • Three months

    • How is the option premium primarily determined?

  • By Stock Exchanges
  • By SEBI guidelines
  • By financial analysts
  • By buyers and sellers (correct)

    • Can equities be traded through Professional Clearing Members?

    <p>Yes, they clear trades for trading members</p> Signup and view all the answers

    What is an option that would give a negative cash flow to its holder if exercised immediately called?

    <p>Out of the money option</p> Signup and view all the answers

    Is it true that ETFs are collections of securities that trade like individual stocks on an exchange?

    <p>Yes, they can be bought and sold intraday</p> Signup and view all the answers

    What option is known as 'In the money'?

    <p>When the spot price is above the strike price for a call option</p> Signup and view all the answers

    What authority decides the rules and regulations for trading options?

    <p>SEBI and Stock Exchanges</p> Signup and view all the answers

    Which statement is true regarding out of the money options?

    <p>Call options with strike prices above Rs 300 are out of the money.</p> Signup and view all the answers

    What can be concluded about the Brokers on the Governing Board of the derivatives segment?

    <p>No broker members should be allowed to sit on the Governing Board.</p> Signup and view all the answers

    If the price of a futures contract increases, what happens to the seller's margin account?

    <p>It is debited for the losses incurred by the seller.</p> Signup and view all the answers

    What is the purpose of derivatives in the market?

    <p>To transfer risk from low risk appetite participants to high risk appetite ones.</p> Signup and view all the answers

    What is the required Interest Free Security Deposit (IFSD) for each trading member?

    <p>2 Lakhs</p> Signup and view all the answers

    What is the minimum net worth requirement for a trading member in F&O segment?

    <p>Rs 250 lakhs</p> Signup and view all the answers

    How are the terms of a futures contract determined?

    <p>They are mutually decided by the trading parties.</p> Signup and view all the answers

    What does Rho measure in options trading?

    <p>The change in option price with a one percentage point change in the risk-free interest rate.</p> Signup and view all the answers

    What minimum net worth is required for Trading / Clearing members of the derivatives clearing corporation/house?

    <p>Rs 300 Lakhs</p> Signup and view all the answers

    Which condition defines a call option that is 'in the money'?

    <p>Strike price is lower than the market price</p> Signup and view all the answers

    In which situation can a position for a January future contract be reversed?

    <p>By squaring up in the same month</p> Signup and view all the answers

    What is the maximum gain for a seller of a put option if sold at a premium of Rs 38?

    <p>Rs 38</p> Signup and view all the answers

    What type of view does a person have when selling a put option?

    <p>Bullish view</p> Signup and view all the answers

    What type of risk is associated solely with calendar spreads?

    <p>Basis risk</p> Signup and view all the answers

    Which of the following assets is not considered an allowable asset when computing net worth?

    <p>Intangible assets</p> Signup and view all the answers

    What description fits a put option that is 'out of the money'?

    <p>Strike price is higher than market price</p> Signup and view all the answers

    What percentage of open interest must be disclosed to the clearing corporation for persons acting in concert?

    <p>20%</p> Signup and view all the answers

    What is the penalty for the first instance margin violation?

    <p>0.07% per day</p> Signup and view all the answers

    Which of the following factors does NOT affect the value of an option?

    <p>The open interest</p> Signup and view all the answers

    What is the maximum theoretical loss when selling a Put option with a strike price of Rs.245 and a premium of Rs.49?

    <p>196</p> Signup and view all the answers

    Can an equity-based mutual fund sell index futures to hedge its position?

    <p>Yes, it can</p> Signup and view all the answers

    Which statement accurately describes the difference between futures and forwards?

    <p>Futures are standardized and traded on exchanges</p> Signup and view all the answers

    Which of the following PUT options is In the Money?

    <p>Spot 300 ; Strike Price 280</p> Signup and view all the answers

    In the Indian context, which of the following statements about derivatives is correct?

    <p>Includes securities derived from various instruments</p> Signup and view all the answers

    What happens to the value of a call option when the spot price increases?

    <p>The value decreases</p> Signup and view all the answers

    Counterparty risk primarily arises due to what situation?

    <p>Default by one of the parties to a contract</p> Signup and view all the answers

    What is the term used for the daily settlement of all open positions in futures contracts?

    <p>Mark to Market settlement</p> Signup and view all the answers

    Nifty consists of securities having which type of market capitalisation stocks?

    <p>Large</p> Signup and view all the answers

    What is the period within which a stock exchange must complete the physical settlement in stock derivatives when introduced in a phased manner?

    <p>Six months</p> Signup and view all the answers

    Which statement is true regarding income or loss on derivative transactions carried out in a recognized stock exchange?

    <p>Is not taxed as speculative income or loss</p> Signup and view all the answers

    What does a seller of an option do?

    <p>Receives premium</p> Signup and view all the answers

    A protective put payoff is similar to that of which of the following?

    <p>Long Call</p> Signup and view all the answers

    Study Notes

    Derivative Exams

    • A Derivative Exam is required to complete certain formalities.

    Minimum Contract Value of Futures

    • The minimum contract value of a futures contract is Rs. 2 Lakhs.

    Accounting for Open Options

    • Accounting for open options is not shown under the "Equity Index/Stock Option Premium Account".

    Arbitration Procedure

    • An arbitrator conducts arbitration proceedings.
    • Arbitrators usually pass awards within three months from the initial hearing date.

    Option Premium

    • The option premium is determined by buyers and sellers, not SEBI or Stock Exchanges.

    Equity Trading

    • Equities can be traded through Professional Clearing Members, who clear trades for their associate Trading Members and institutional clients.

    Exchange Traded Funds (ETFs)

    • ETFs are baskets of securities that trade like individual stocks on an exchange.
    • ETFs offer advantages over other mutual funds, including the ability to buy and sell on the exchange and intraday trading.

    Out of the Money Option

    • An option that generates a negative cash flow upon immediate exercise is known as an "Out of the Money" option.
    • Call options are "Out of the Money" when the spot price is lower than the strike price.
    • Put options are "Out of the Money" when the spot price is higher than the strike price.

    Derivative Segment Reporting to SEBI

    • The derivative segment of the stock market must report to SEBI on specific occasions.

    Brokers and Governing Boards

    • Brokers are not permitted to sit on the Governing Board of a Clearing Corporation.

    Margin Account Debits

    • If the price of a futures contract increases, the seller's margin account is debited for the loss.

    Derivatives Market and Risk Transfer

    • The derivatives market facilitates the transfer of risks from those with low risk appetites to those with high risk appetites.

    Clearing Member Deposits

    • A clearing member is required to deposit Rs. 5 Lakhs as Interest Free Security Deposit (IFSD) and Rs. 10 Lakhs as Collateral Security Deposit (CSD) per trading member they clear and settle.

    Minimum Net Worth Requirement

    • The minimum net worth requirement for a trading member of the Capital Market Segment and F&O segment is Rs. 100 Lakhs.

    Futures Contract Terms

    • The terms of a futures contract are standardized by the exchange.

    Rho

    • Rho measures the change in option price given a one percentage point change in the risk-free interest rate.

    Trading Member Net Worth

    • Trading members are required to maintain a minimum net worth of Rs. 3 Crores (Rs. 300 Lakhs).

    Call Option Definitions

    • A call option is "In the Money" when the spot price is higher than the strike price.

    Reversing Futures Positions

    • A long position in a futures contract can be reversed by selling the same futures contract in the same month.

    Selling a Put Option

    • Selling a put option signifies a bullish view.

    Maximum Gain from Selling a Put Option

    • The maximum gain from selling a put option is equal to the premium received.

    Calendar Spreads

    • Calendar spreads carry only basis risk.

    Option Value and Spot Price Changes

    • The value of a call option decreases with an increase in spot price.

    Counterparty Risk

    • Counterparty risk is the risk arising due to a default on the part of one party to a transaction or contract.

    Daily Settlement of Futures

    • The daily settlement of all open positions in futures contracts is called Mark to Market settlement (MTM).

    Nifty Securities

    • Nifty consists of securities from companies with large market capitalizations.

    Trading Member Open Positions

    • A Trading Member's open position is calculated by adding up their proprietary positions and all their clients' net outstanding positions.

    Physical Settlement in Stock Derivatives

    • A stock exchange introducing physical settlement in stock derivatives must complete this transition within a period of six months.

    Derivative Transactions and Taxation

    • Income or loss from derivative transactions conducted on a recognized stock exchange is not taxed as speculative income/loss.
    • Losses can be set off against other income during the year.
    • Losses can be carried forward to subsequent assessment years.

    Option Seller Activities

    • A seller of an option receives a premium.

    Protective Put Payoff

    • A protective put payoff is similar to that of a long call and is considered a synthetic long call position.

    Derivatives Instruments Traded on NSE

    • Derivative instruments traded on the NSE (National Stock Exchange of India) include:
      • Index based futures
      • Individual stock options
      • Index based options
      • NOT Individual warrant options

    Bear Spreads

    • A spread designed to profit if prices go down is called a Bear Spread.

    Indian Derivatives Trading Act

    • The Securities and Exchange Board of India (SEBI) Act, 1992, governs the trading of derivatives in India.

    Clearing Member Disclosure

    • A clearing member is required to disclose to the clearing corporation details of any person(s) acting in concert who together own 15% or more of the open interest of all futures and options contracts on a particular underlying index on the stock exchange.

    Penalty for Margin/Limit Violation

    • For the first instance of a margin/limit violation, a penalty of 0.07% per day is levied.

    Factors Affecting Option Value

    • The following factors affect the value of an option:
      • NOT the Open Interest.
      • The Spot Price.
      • The volatility in underlying instruments.
      • The strike price.

    Maximum Loss from Selling a Put Option

    • The maximum loss from selling a put option is the difference between the strike price and the premium received.

    Mutual Fund Hedging

    • An Equity based Mutual Fund can sell Index Futures to hedge its position.

    Futures vs. Forwards

    • The key difference between Futures and Forwards is that futures positions are marked-to-market every day.

    In The Money Puts

    • A put option is "In the Money" when the Spot price is below the Strike price.

    Definition of "Derivative" in India

    • In India, a "derivative" is defined as:
      • A security derived from a debt instrument, share, loan (whether secured or unsecured), risk instrument, or contract for differences or any other form of security; AND
      • A contract that derives its value from the prices, or index of prices, of underlying securities.

    Beta of SBI

    • The beta of SBI is 0.9.

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