Futures Trading Concepts Quiz

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Questions and Answers

What is the total open interest after the trades on March 2?

150 contracts (correct)

200 contracts

50 contracts

100 contracts

What happens to the open interest on March 3 as A closes their short position?

Increases to 200 contracts

Decreases to 100 contracts

Remains at 150 contracts (correct)

Falls to 50 contracts

What is the effect on open interest when C closes their long position on March 4?

Decreases to 50 contracts (correct)

Falls below 50 contracts

Remains unchanged at 150 contracts

Increases to 100 contracts

How is the price band for a futures contract determined on the first trading day?

Based on the closing price of the cash market for the underlying asset Signup and view all the answers

What is a long position in the context of futures trading?

An outstanding or unsettled buy position in a contract Signup and view all the answers

What is the price range for trading a contract if the previous day's closing price is Rs.100 and the price band is 10%?

Rs.90 to Rs.110 Signup and view all the answers

What does it mean if open interest increases in the market?

More new long and short positions are being created Signup and view all the answers

What occurs when both long and short positions are closed at the same time?

Open interest decreases significantly Signup and view all the answers

What is the primary purpose of NISM certification examinations and training programs?

To offer a structured learning plan for a career in securities markets Signup and view all the answers

How many individuals had been certified by NISM through its examinations and programs by March 2023?

17 lakh Signup and view all the answers

Which of the following topics is NOT covered in the NISM workbook?

Taxation policies affecting securities trading Signup and view all the answers

What is a potential drawback mentioned about the information in the NISM publication?

It does not account for individual user circumstances or needs. Signup and view all the answers

Which of the following is emphasized about the reliability of information in the publication?

It is based on sources believed to be reliable but without guarantees. Signup and view all the answers

What kind of products does the NISM workbook help individuals understand better?

Various derivatives products in Indian equity markets Signup and view all the answers

What is advised before acting on the recommendations provided in the NISM publication?

Professional advice should be sought. Signup and view all the answers

What responsibility do NISM and SEBI assume regarding the publication's content?

They do not assume responsibility for actions taken based on the information. Signup and view all the answers

Which feature distinguishes forwards from futures contracts?

Forwards have low liquidity, while futures have high liquidity. Signup and view all the answers

What is a key characteristic of futures contracts regarding counter-party risk?

A clearing agency guarantees counter-party risk in futures contracts. Signup and view all the answers

In terms of price discovery, how do futures contracts compare to forwards?

Futures contracts have centralized trading for efficient price discovery. Signup and view all the answers

What can be concluded about the payoff structure of futures contracts?

Futures contracts have linear payoffs with unlimited profit or loss potential. Signup and view all the answers

How does liquidity differ between forwards and futures contracts?

Forwards have low liquidity due to their customized nature. Signup and view all the answers

Which statement about the quality of information is TRUE regarding futures contracts?

Quality of information is high because futures are traded nationwide. Signup and view all the answers

What impact does the operational mechanism have on forwards contracts?

Forwards are not traded on exchanges, affecting their visibility. Signup and view all the answers

What does the payoff diagram for futures contracts represent?

The relationship between the underlying asset's price and profit/loss. Signup and view all the answers

What happens to the profit in a short futures position if the market price at expiry is Rs. 70?

Profit of Rs. 30 Signup and view all the answers

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

Risk Premium model Signup and view all the answers

If a trader shorts futures at Rs. 100 and the market price drops to Rs. 50 at expiry, what is the trader's profit?

Rs. 50 Signup and view all the answers

What is the relationship between the long futures position and short futures position in terms of profit and loss?

Short and long positions have opposite profit/loss outcomes Signup and view all the answers

What happens to the short futures position payoff as the market price exceeds Rs. 100?

Payoff decreases negatively Signup and view all the answers

Under what condition does a short futures position become profitable?

When prices fall Signup and view all the answers

What aspect complicates the pricing of futures contracts?

Variable characteristics of underlying assets Signup and view all the answers

If a trader anticipates a market price of Rs. 120 at expiry after shorting at Rs. 100, what is the expected outcome?

Loss of Rs. 20 Signup and view all the answers

What is the ideal price calculated from the given bid and offer price of Rs. 9.80 and Rs. 9.90?

Rs. 9.85 Signup and view all the answers

How is the actual buy price calculated for buying 1500 shares from the given data?

[(10009.90)+(50010.00)]/1500 Signup and view all the answers

What defines impact cost in trading?

The percentage degradation experienced vis-à-vis the ideal price when buying or selling shares. Signup and view all the answers

Which of the following is NOT a part of index management?

Calculating the average trading volume Signup and view all the answers

What happens to risk reduction when increasing the number of stocks in an index beyond 50?

Risk remains unchanged after a certain point. Signup and view all the answers

For which type of trading scenario is impact cost particularly important?

Large transactions in a highly liquid market. Signup and view all the answers

Which entity manages the BSE indices?

Asia Index Pvt Ltd Signup and view all the answers

What is a significant trade-off when constructing a stock index?

Diversification versus liquidity. Signup and view all the answers

Study Notes

Open Interest and Trading Volume

Open Interest (OI) reflects the number of outstanding contracts at the end of a trading day.
Trading volume represents the total number of contracts traded during a specific day.

Price Band

Price Band is the daily price range within which futures contracts can trade.
It is calculated based on the previous day's closing price, with a percentage-based limit.
On the first trading day of a futures contract, the price band is determined by the underlying asset's closing price in the cash market.

Market Participant Positions

Long Position: A long position is an outstanding or unsettled buy position in a contract, like buying futures contracts.
Short Position: A short position is an outstanding or unsettled sell position in a contract, like selling futures contracts.

Differences Between Forwards and Futures

Operational Mechanism: Forward contracts are not traded on exchanges and are customized, while futures contracts are exchange-traded and standardized.
Counterparty Risk: Forward contracts have counterparty risk, potentially mitigated by a guarantor. Futures contracts have the clearing agency as a counterparty, guaranteeing settlement.
Liquidity Profile: Forwards have low liquidity due to their tailored nature, while futures have high liquidity due to standardization and exchange trading.
Price Discovery: Forwards have inefficient price discovery as markets are scattered. Futures have efficient price discovery due to a centralized trading platform.
Quality of Information: Forward contracts may have poor information quality and slow dissemination. Futures have high information quality and rapid dissemination.

Payoff Charts for Futures Contracts

Payoff charts illustrate profit/loss potential based on the underlying asset's price at expiry.
Long and short futures positions both have unlimited profit or loss potential.
The payoff for short futures is the opposite of the payoff for long futures.
Short futures profit when prices fall, while long futures profit when prices rise.

Impact Cost

Impact cost is the difference between the ideal price and the actual price paid/received when buying or selling a large volume of shares.
Ideal price: The average of the best bid and offer price.
Impact cost varies with the transaction size and can differ for buy and sell orders.

Index Management

Index construction: Deciding on index stocks and the calculation methodology.
Index maintenance: Adjusting the index for corporate actions like stock splits or mergers.
Index revision: Changing the index composition to reflect changes in the trading paradigm or market participant interest.
Index Management Agencies: Asia Index Pvt Ltd (BSE) and NSE Indices Limited (NSE)
Trade-off between diversification and liquidity: A good index balances diversification to reduce risk with liquidity to facilitate trading.

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Description

Test your knowledge on key concepts related to futures trading including open interest, trading volume, price bands, and market positions. Understand the differences between forwards and futures to enhance your trading strategies. This quiz will help you solidify your understanding of these fundamental concepts in the trading realm.