Futures Contracts Quiz

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Questions and Answers

What is counterparty risk primarily associated with?

The risk of economic loss from a counterparty's failure to meet contractual obligations (correct)

The risk of regulatory changes impacting contracts

The risk of market price fluctuations

The risk of illiquidity in financial markets

In a futures contract, which entity guarantees the settlement of trades?

The government regulatory authority

A central bank

The clearing corporation associated with the exchange (correct)

The individual traders themselves

What distinguishes futures contracts from forward contracts?

Futures contracts are traded on an organized exchange (correct)

Futures contracts are more flexible regarding contract terms

Futures contracts can only be settled in cash

Futures contracts require a physical delivery of assets

What happens if the market price of a commodity falls below the agreed contract price in a futures agreement?

The buyer will still have to purchase at the higher price Signup and view all the answers

Which of the following is NOT a feature of futures contracts?

They allow for individualized contract terms Signup and view all the answers

What is the role of the Index Committee?

To make final decisions about the inclusion or removal of securities from the index Signup and view all the answers

Which of the following actions does NOT trigger index maintenance?

Index creation Signup and view all the answers

How do index funds aim to achieve their investment objective?

By investing in stocks in the same proportions as they exist in the index Signup and view all the answers

What primarily differentiates index revision from index maintenance?

Index revision is a proactive process, while maintenance is reactive to corporate actions Signup and view all the answers

What is a major characteristic of index derivatives?

They have the index as the underlying asset Signup and view all the answers

Which of the following is true for the Sensex index fund?

It replicates the proportions of the 30 shares in the Sensex Signup and view all the answers

What is the primary reason for the 'tracking error' in index funds?

Management expenses and cash holdings for redemptions Signup and view all the answers

What feature of futures contracts involves payments made by both parties?

Margins Signup and view all the answers

What ensures that an index reflects the most vibrant lot of securities in the market?

Index revision as a continuous exercise Signup and view all the answers

Which aspect of futures contracts is determined by the exchange?

Contract specifications Signup and view all the answers

What is one limitation of futures contracts?

High administrative costs Signup and view all the answers

Which of the following is a characteristic of the contract size in futures trading?

It is determined by the exchange. Signup and view all the answers

What does the term 'underlying asset' in futures contracts refer to?

The index or stock on which the contract is based Signup and view all the answers

In the context of futures trading, what is a 'tick size'?

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

What is the expiry date of the Nifty futures contract mentioned in the example?

Oct 31, 2024 Signup and view all the answers

What is the underlying price of the Nifty index given in the example?

25250.10 Signup and view all the answers

What is the term for an unsettled sell position in a contract?

Short Position Signup and view all the answers

If a client holds a long position in 4 contracts and then subsequently shorts 6 contracts of the same security, what will be the client's net open position for that security?

Short 2 contracts Signup and view all the answers

What constitutes a naked position in futures trading?

A long or short position without any position in the underlying asset Signup and view all the answers

Which of the following descriptions aligns with a calendar spread position?

A long on one maturity contract and short on another maturity contract for the same asset Signup and view all the answers

What does 'closing a position' mean in futures trading?

Selling a contract that was previously bought or buying a contract that was previously sold Signup and view all the answers

If Mr.X shorts 5 contracts of a security and is simultaneously long on 3 contracts of another, how should his open position be recorded?

Open position = Long 3 and Short 5 Signup and view all the answers

If Ms.P sells 5 contracts on Sensex futures, what is her position?

Short Position Signup and view all the answers

What happens to a calendar spread position when the near month contract expires?

It is no longer an open position Signup and view all the answers

What is a key assumption of the Cost of Carry model regarding the underlying asset in the cash market?

The underlying asset is available in abundance. Signup and view all the answers

Which scenario indicates that the Cost of Carry model may not apply?

The underlying asset has a seasonal pattern of demand and supply. Signup and view all the answers

What makes the Cost of Carry model unsuitable for certain underlying assets?

These assets cannot be easily held or maintained. Signup and view all the answers

Why are margins not considered in the Cost of Carry model?

Margins do not affect the calculation of fair value. Signup and view all the answers

What is an aspect that may lead to the need for model adjustments in the Cost of Carry model?

The seasonal availability of the underlying assets. Signup and view all the answers

In which situation does the Cost of Carry model generally apply best?

When underlying assets are abundant and can be traded freely. Signup and view all the answers

What is a defining feature of the Convenience Yield in the futures market?

It reflects the non-monetary benefits of holding a physical asset. Signup and view all the answers

What implication does the assumption of no transaction costs have on the Cost of Carry model?

It simplifies the pricing of financial derivatives. Signup and view all the answers

What is the primary function of derivatives in financial markets?

To hedge against risks and speculations Signup and view all the answers

Which chapter discusses the differences between forwards and futures contracts?

Chapter 3 Signup and view all the answers

What does 'moneyness' of an option refer to?

The intrinsic value of an option relative to its strike price Signup and view all the answers

What is one key characteristic of index management?

Tracking the performance of a group of assets Signup and view all the answers

In which chapter would you find information about margining and mark to market under SPAN?

Chapter 7 Signup and view all the answers

Which type of trading is focused on the immediate transaction without future obligations?

Spot trading Signup and view all the answers

Which of the following is a characteristic of options contracts?

Right, but not obligation to buy or sell Signup and view all the answers

Which of the following is not a type of risk faced by participants in the derivatives market?

Utility risk Signup and view all the answers

What significant regulatory document governs the derivatives market in India?

Securities and Exchange Board of India Act, 1992 Signup and view all the answers

What is the primary purpose of the Investor Protection Fund?

To compensate investors for losses due to broker defaults Signup and view all the answers

What is the effect of implied volatility on option pricing?

Higher implied volatility increases option prices Signup and view all the answers

What is a primary use of futures contracts in financial markets?

To hedge against price fluctuations Signup and view all the answers

What is the significance of the put-call parity in options trading?

It defines the relationship between put and call option prices Signup and view all the answers

Signup and view all the answers

Study Notes

NISM Certification Examination - Series VIII: Equity Derivatives

This workbook is for candidates preparing for the NISM Series VIII: Equity Derivatives Certification Examination.
The workbook version is dated September 2024.
The National Institute of Securities Markets (NISM) published this workbook.
NISM is a capacity building initiative of SEBI.
The workbook's website is www.nism.ac.in.
All rights to the publication are reserved. Reproduction without permission is prohibited.
This specific version of the workbook is for candidates appearing on or after November 29, 2024.

Workbook Contents/Syllabus

The workbook covers various chapters, each with detailed topics and learning objectives, related to equity derivatives.
It includes chapters on the basics of derivatives, understanding indices, forwards and futures, options, trading strategies using equity futures and options, hedging, risk management, clearing, settlement, legal and regulatory environment, accounting and taxation, and sales practices and investor protection services.
A syllabus outline with weightage for each chapter is provided.

Examination Objectives

Candidates should be able to understand the basics of the Indian equity derivatives market.
Candidates should be able to understand the various trading strategies utilizing futures and options on both stocks and stock market indices.
Candidates should be able to understand clearing, settlement and risk management in equity derivative markets.
Candidates should be able to understand the operational mechanism of equity derivative markets.
Candidates should be able to understand the regulatory environment of equity derivative markets in India.

Examination Structure

The NISM-Series-VIII: Equity Derivatives Certification Examination consists of 100 multiple choice questions.
The examination duration is 2 hours.
There is negative marking of 25% for each incorrect answer.
The passing score is 60%.

How to Register

To register and find out more about the examination, visit www.nism.ac.in.
The test centres are equipped with Microsoft Excel or OpenOffice Calc.

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Description

Test your knowledge of futures contracts and their characteristics with this quiz. You'll explore concepts such as counterparty risk, trade settlement, and key differences from forward contracts. Perfect for finance students and professionals looking to refresh their understanding.