NISM: Equity Derivatives

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Questions and Answers

A trading member is establishing a relationship with a new client. Besides assessing investment objectives, what other crucial aspect must they evaluate?

The client's knowledge of technical analysis.
The client's preferred trading platform.
The client's willingness to trade intraday.
The client's background, genuineness, and financial soundness. (correct)

An investor holds a short position in a stock. Which strategy would best hedge against potential upside risk?

Covered call.
Protective put. (correct)
Short straddle.
Short strangle.

How does the exercise feature of a European call option differ from an American call option?

A European call option grants the buyer the right, but not the obligation, to buy from the seller an underlying at the prevailing market price only on the expiry date. (correct)
A European call option grants the buyer the right to buy the underlying asset at any time before expiration, while the American option can only be exercised on expiry date.
A European call option grants the buyer the right to buy the underlying asset at a strike price above the prevailing market price.
A European call option requires the seller to deliver the underlying asset before the expiry date.

What combination of futures price movement and open interest typically signals a bullish trend?

Rising futures price with rising open interest. (D) Signup and view all the answers

Who is responsible for paying margins in futures trading?

Both the buyer and the seller. (B) Signup and view all the answers

If a trading member fails to adequately assess a new client's financial soundness, what potential risk does this pose to the firm?

Potential for client default and financial loss for the firm. (C) Signup and view all the answers

An investor wants to protect a long stock position from a potential price decline. Which of the following strategies achieves this objective?

Buying a put option on the stock. (B) Signup and view all the answers

An investor believes a stock price will increase significantly by the option's expiration date. They purchase a European call option. When can the investor exercise this option?

Only on the expiration date. (A) Signup and view all the answers

Open interest in a futures contract is decreasing while the futures price is also declining. What market sentiment does this likely indicate?

A weakening bearish trend as short positions are covered. (C) Signup and view all the answers

What is the primary reason for requiring margins in futures trading?

To protect against counterparty risk and ensure obligations are met. (D) Signup and view all the answers

Flashcards

Client relationship duty

Reasonable steps include assessing background, genuineness, beneficial identity, financial soundness, and investment/trading objectives.

Protective Put

A protective put strategy involves owning an asset and purchasing put options to protect against downside risk.

European call option exercise?

False. European call options can only be exercised on the expiry date, not before.

Bullish trend indicator

A rising futures price combined with rising open interest indicates a bullish trend.

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Who pays futures margins?

Margins in futures trading are paid by both the buyer and the seller.

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Study Notes

When starting with a new client, trading members should check their background, identity, financial stability, and investment goals.
A 'protective put' is a type of hedged position.
A European call option provides the buyer with the right, not the obligation, to buy from the seller at the market price 'on or before' the expiry date.
A rising futures price along with rising open interest can show a bullish trend.
In Futures trading, margins are paid by both the buyer and the seller.

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