Futures Contracts and Price-Weighted Indices

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Questions and Answers

What is the primary aim of NISM's certification programs?

To reduce the competition among financial services providers

To increase the number of marketing professionals in the financial sector

To ensure professionals meet a defined minimum common knowledge benchmark (correct)

To limit access to financial education for certain individuals

Where is the National Institute of Securities Markets located?

Mumbai, India

Patalganga Industrial Area, Raigad

Delhi, India

Bandra Kurla Complex, Bandra East, Mumbai (correct)

What is the focus area of the NISM-Series-VIII: Equity Derivatives Certification Exam?

Mutual funds and investment strategies

Equity derivatives trading and risk management (correct)

Financial compliance and regulations

Corporate governance in financial markets

Which function does the School for Certification of Intermediaries (SCI) perform?

Conducts certification examinations and Continuing Professional Education programs Signup and view all the answers

What does NISM emphasize as part of its mission within the financial services sector?

Fostering policy research and financial literacy Signup and view all the answers

What is the version of the workbook for candidates appearing for the NISM Series VIII exam after?

July 11, 2023 Signup and view all the answers

Which area of financial products does NISM certification specifically address?

Various segments including equities and derivatives Signup and view all the answers

What does NISM hope to achieve through its educational initiatives?

A higher standard of financial education among market participants Signup and view all the answers

What is the primary purpose of NISM certifications?

To develop skills and ethical standards in securities markets Signup and view all the answers

Which organization collaborates with NISM in developing the certification examinations?

Securities and Exchange Board of India (SEBI) Signup and view all the answers

What disclaimer is made regarding the examination content?

NISM does not guarantee all exam questions are from the workbook material Signup and view all the answers

What does the School for Certification of Intermediaries (SCI) aim to achieve?

To establish a benchmark for functional knowledge in the markets Signup and view all the answers

What is one key benefit of the certification process highlighted in the information?

It facilitates greater investor participation in the markets Signup and view all the answers

What is emphasized about the role of professionals in the securities market?

Their skills and ethics increase investor confidence Signup and view all the answers

Who contributed to the development of the workbook used for certification?

Industry experts and representatives from stock exchanges Signup and view all the answers

What regulatory framework guides the NISM’s certification efforts?

Securities and Exchange Board of India Regulations, 2007 Signup and view all the answers

What is a Price-Weighted Index?

An index where each stock influences the index based on its price. Signup and view all the answers

How is the price index calculated on January 1, 1995?

The sum of historical stock prices divided by the number of stocks. Signup and view all the answers

What is the current value of the price-weighted index calculated from the given stock prices?

510 Signup and view all the answers

Which stock had the highest percent change in price from January 1, 1995 to today?

AZ Signup and view all the answers

What does the weight of a stock in the index indicate?

Its influence on the index based on its price. Signup and view all the answers

What is the percentage increase in the value of the index from January 1, 1995 to today?

104% Signup and view all the answers

Which of the following is NOT a price-weighted index?

S&P 500 Signup and view all the answers

If the current price of stock EU increased to 600, what would be the new current value of the index?

530 Signup and view all the answers

What feature distinguishes futures contracts from other types of contracts?

They have standardized contract specifications set by exchanges. Signup and view all the answers

Which of the following is a limitation of futures contracts?

They are subject to increased administrative costs due to MTM settlement. Signup and view all the answers

What term describes the conditions and terms of futures contracts set by exchanges, excluding price?

Contract specifications Signup and view all the answers

In the context of futures contracts, what does 'contract multiplier' refer to?

The predefined lot size for trading futures. Signup and view all the answers

When are prices of futures contracts determined?

Through the centralized trading platform. Signup and view all the answers

What is the underlying asset in a Nifty futures contract?

Nifty 50 Index Signup and view all the answers

Which of the following statements about futures contracts is incorrect?

Futures contracts guarantee availability of asset. Signup and view all the answers

What does the term 'tick size' in futures contracts refer to?

The minimum price movement of the contract. Signup and view all the answers

What happens to the profit or loss of a short futures position when the market price increases?

Profit decreases Signup and view all the answers

What is the profit when the market price of short futures is at Rs. 60 at expiry?

Rs. 40 Signup and view all the answers

Which model is NOT mentioned as a popular model for pricing futures contracts?

Arbitrage Pricing model Signup and view all the answers

How does the short futures position perform when the market price rises to Rs. 110?

Loss of Rs. 10 Signup and view all the answers

In futures pricing, why is there no single methodology for calculation of prices?

Different assets have different demand patterns Signup and view all the answers

What is the payoff when the market price of short futures is at Rs. 80?

Rs. 20 Signup and view all the answers

Why do market participants use different models for pricing futures?

Due to variations in underlying asset characteristics Signup and view all the answers

When the market price of a short futures position falls to Rs. 50, what is the corresponding payoff?

Rs. 50 Signup and view all the answers

Study Notes

Price-Weighted Index

A stock index where each stock's influence is proportional to its price.
Stocks with higher prices have more weight and impact the index's performance more.
The Dow Jones Industrial Average and Nikkei 225 are examples of popular price-weighted indices.

Futures Contract Features

A contract between two parties facilitated by an exchange.
Traded on a centralized platform.
Price discovery through open interaction between buyers and sellers.
Margins are paid by both parties.
The quality and quantity (contract size) are predetermined and standardized.

Limitations of Futures Contracts

Standardized nature of futures contracts on exchanges limits flexibility and imposes limitations like:
- Restricted maturities
- Limited number of underlying assets
- Lack of flexibility in contract design
- Increased administrative costs due to mark-to-market settlement

Contract specifications of futures contracts

Exchanges determine the terms and conditions of futures contracts, excluding the price.
These conditions are known as contract specifications.
Salient features of derivatives contracts, like maturity date, contract multiplier (size), tick size, etc., are included in the specifications.

Underlying Instrument and Underlying Price

The underlying instrument refers to the index or stock on which the futures contract is traded.
The underlying price refers to the spot price or the price at which the underlying asset is traded in the cash market.
The underlying price for a Nifty futures contract on May 10, 2023 would be the value of the Nifty index on that date.

Contract Multiplier or Contract Size

Futures contracts are traded in lots.
The lot size or contract size for index and stock futures is determined by the exchange.
Contract sizes differ for each stock and index traded in the derivatives segment.

Short Futures Position

Profits and losses for a short futures position are the opposite of a long futures position.
Making profits requires prices to fall.
If the price falls at expiry, the short seller buys at the lower market price and sells at the initial price, making a profit.

Futures Pricing

The pricing of a futures contract is influenced by the underlying asset's characteristics.
Due to differing demand and supply patterns, characteristics, and cash flow patterns, a single pricing methodology is difficult to develop.
Models like the Cost of Carry model and the Expectations model are used by market participants.

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Description

Explore the features and limitations of futures contracts, along with understanding price-weighted indices like the Dow Jones Industrial Average. This quiz will test your knowledge on how these financial instruments work and their impact on the market. Prepare to dive into the mechanics of trading and index calculation!