NISM Equity Derivatives FAQs

A derivative is a financial instrument whose value is derived from the value of an underlying asset.

Futures contracts are traded on an organized exchange, while forward contracts are negotiated directly between two parties.

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

<p>Call Options = Give the holder the right to buy an asset at a specified price. Put Options = Give the holder the right to sell an asset at a specified price.</p> Signup and view all the answers

<p>Forward contracting is very valuable in hedging and speculation.</p> Signup and view all the answers

<p>A futures contract is an agreement to buy or sell an asset on a publicly-traded exchange.</p> Signup and view all the answers

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

<p>Futures contracts are standardized by exchanges.</p> Signup and view all the answers

<p>Forward contracts are customized agreements between two parties.</p> Signup and view all the answers

<p>Expiry, contract size, initial margin, price quotation, tick value, mark to market, delivery date, and daily settlement.</p> Signup and view all the answers

<p>Lack of centralization, illiquidity, and counterparty risk.</p> Signup and view all the answers

<p>High risks due to leverage, limited flexibility, partial hedging, and potential over-trading.</p> Signup and view all the answers

<p>Long and short positions.</p> Signup and view all the answers

<p>Unlimited profits and losses with potential upside/downside.</p> Signup and view all the answers

<p>Unlimited profits and losses with potential downside/upside.</p> Signup and view all the answers

<p>Selected stocks meeting liquidity and volume criteria.</p> Signup and view all the answers

<p>Higher leverage, risk diversification, ease of trading long/short, and liquidity.</p> Signup and view all the answers

<p>Strategies employed by traders to trade options contracts</p> Signup and view all the answers

<p>Underlying asset price, cost of carry, and expected dividends.</p> Signup and view all the answers

<p>Based on the views of the trader on the direction of the price of the underlying and the future volatility of the price of the underlying.</p> Signup and view all the answers

<p>Bullish Option Strategies, Bearish Option Strategies, Range bound Option Strategies, Volatile Option Strategies</p> Signup and view all the answers

<p>Bullish Option Strategies = Used when expecting the underlying assets to rise Bearish Option Strategies = Used when expecting the underlying assets to decline Range bound Option Strategies = Used when expecting the underlying assets to remain within a specific range Volatile Option Strategies = Used when expecting high volatility in the underlying assets</p> Signup and view all the answers

<p>Sell the underlying at a specified price and within a specified period</p> Signup and view all the answers

<p>Buy the underlying at a specified price and within a specified period</p> Signup and view all the answers

<p>When expecting the prices to increase</p> Signup and view all the answers

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

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

<p>Determining the fair price or theoretical value for a call or a put option</p> Signup and view all the answers

<p>Type of systematic risk due to changing basis amounts at different contract times</p> Signup and view all the answers

<p>Hedging is a risk management strategy that involves offsetting losses in investments by taking an opposite position in a related asset.</p> Signup and view all the answers

<p>Binomial Model = Assumes share prices and index values follow a Binomial Distribution Black-Scholes Model = Assumes share prices and index values follow a Log-Normal Distribution</p> Signup and view all the answers

<p>Portfolio hedging refers to techniques used to reduce risk exposure in an investment portfolio due to market risk rather than stock-specific risk.</p> Signup and view all the answers

<p>The optimum hedge ratio of a portfolio is calculated using the formula N = (β * VA) / VF, where VA is the current value of the portfolio and VF is the current value of one futures contract.</p> Signup and view all the answers

<p>Cross hedging involves trading in the futures market of an asset that is closely associated with the underlying asset that does not have available futures contracts.</p> Signup and view all the answers

<p>An investor can hedge using futures by taking a position that offsets the risk in their existing position. For example, by shorting index futures to offset potential losses in a long stock position.</p> Signup and view all the answers

<p>Hedging cannot completely eliminate price risk, requires incurring transaction costs, needs margin maintenance, and is typically for a short period rather than a long-term solution.</p> Signup and view all the answers

<p>Arbitrageurs are investors who capitalize on mispricing of assets across different markets or locations to make profits.</p> Signup and view all the answers

<p>A futures price refers to the agreed-upon fixed price at which an underlying asset will be transacted on a future date.</p> Signup and view all the answers

<p>The futures spot parity equation is F0 = S0 * erT, where F0 is the futures price today, S0 is the spot price today, r is the risk-free interest rate, and T is the time until delivery date.</p> Signup and view all the answers

<p>Arbitrage involves exploiting pricing inefficiencies by taking offsetting positions across different markets or timeframes to lock in profits with minimal risk.</p> Signup and view all the answers

<p>Cash-and-carry arbitrage involves buying the underlying asset while simultaneously selling the futures contract to exploit price differentials in the markets.</p> Signup and view all the answers

<p>The buyer loses the premium paid to buy the contract and the seller earns the profit.</p> Signup and view all the answers

<p>When you buy an Options contract, you need to pay a premium amount. When you sell an Options contract, you need to pay a margin requirement.</p> Signup and view all the answers

<p>All Options contracts on indices are settled in cash on the expiration date. For single stock contracts, the option contracts are settled via delivery.</p> Signup and view all the answers

<p>Squaring off is taking the opposite of your existing position; exercising an option is taking delivery of the underlying asset.</p> Signup and view all the answers

<p>No, option buyers have limited rights compared to stock buyers.</p> Signup and view all the answers

<p>Options in India have a maximum 3-month trading cycle with contracts expiring on the last trading Thursday of the month.</p> Signup and view all the answers

<p>Covered calls have an opposite position in the underlying asset, while naked calls do not.</p> Signup and view all the answers

<p>The underlying asset is the asset from which an Option's value is derived, such as Stock, Commodity, Index, or Currency.</p> Signup and view all the answers

<p>Volatility estimates potential stock price changes. Historical Volatility looks at past movements, while Implied Volatility forecasts future volatility.</p> Signup and view all the answers

<p>The risk and reward vary based on the type of option and market outlook.</p> Signup and view all the answers

<p>The intrinsic value is the amount by which an option is in-the-money, calculated as the immediate exercise value of the option.</p> Signup and view all the answers

<p>Intrinsic value cannot be negative because it is the value when the option is in-the-money and traders will only exercise the option if it is profitable.</p> Signup and view all the answers

<p>Time value is the premium for the possibility of an option becoming profitable before expiration due to favorable price changes.</p> Signup and view all the answers

<p>Underlying asset price, Exercise price, Interest rates, and Time to expiry are key factors affecting option value.</p> Signup and view all the answers

<p>Options premium is determined by competitive bids and offers in the trading environment after knowing the theoretical price with the help of pricing models. The premium is the sum of intrinsic value and time value.</p> Signup and view all the answers

<p>Option Greeks are measurements of the sensitivity of option prices to factors like the price of the underlying asset, volatility, and time to expiry.</p> Signup and view all the answers

<p>Developmental Institutions, Mutual Funds, Domestic and Foreign Institutional Investors, Brokers, and Retail Investors.</p> Signup and view all the answers

<p>The risk for an Options buyer is limited to the premium paid.</p> Signup and view all the answers

<p>The risk for an Options writer is unlimited while their gains are limited to the premiums earned.</p> Signup and view all the answers

<p>Stock Index Options have a stock index as the underlying asset, representing a group of stocks.</p> Signup and view all the answers

<p>Index Options enable investors to gain broad market exposure with reduced transaction costs.</p> Signup and view all the answers

<p>Index Options are attractive to a wide range of users, from conservative investors to aggressive traders.</p> Signup and view all the answers

<p>Options on individual stocks are contracts where the underlying asset is a specific equity stock.</p> Signup and view all the answers

<p>Over the Counter (OTC) options are customized contracts traded directly between parties.</p> Signup and view all the answers

<p>The option value consists of Intrinsic Value and Time Value.</p> Signup and view all the answers

<p>Time decay is the reduction in the value of an option as it approaches expiry, with the time value component diminishing to zero.</p> Signup and view all the answers

<p>Squaring up options involves closing a position by taking an equal but opposite position in the same option or allowing it to expire.</p> Signup and view all the answers

<p>Open interest refers to the total number of outstanding contracts, while volume is the number of contracts traded in a day.</p> Signup and view all the answers

<p>Options on NSE and BSE can be traded from 9:15 am to 3:30 pm on trading days, excluding holidays.</p> Signup and view all the answers

<p>1-month Option contracts expire on the last Thursday of the month, typically at 3:30 pm.</p> Signup and view all the answers

<p>Selling a call option involves receiving a premium and capping potential profits, while buying a put option involves paying a premium and having unlimited profit potential.</p> Signup and view all the answers

<p>Selling a put option involves receiving a premium and facing potential loss, while buying a call option involves paying a premium and having limited risk.</p> Signup and view all the answers

<p>A contract cycle refers to the process of buying contracts maturing in a nearby month and selling the deferred month contracts in commodities and financial derivatives markets.</p> Signup and view all the answers

<p>A bull spread in futures involves buying contracts in the nearby month and selling contracts in the deferred month to profit from the spread between the prices.</p> Signup and view all the answers

<p>A bear spread in futures refers to selling contracts in the nearby month and buying contracts in the distant month to take advantage of savings in the cost of carry.</p> Signup and view all the answers

<p>Contango is a situation where futures contract prices are higher than the spot price and the futures contracts maturing earlier.</p> Signup and view all the answers

<p>Backwardation is a situation where futures contract prices are lower than the spot price and the futures contracts maturing earlier.</p> Signup and view all the answers

<p>Basis is calculated as the cash price minus the futures price, indicating whether the futures are trading at a premium (Contango) or discount (Backwardation).</p> Signup and view all the answers

<p>Cash settlement is a process of fulfilling a futures contract by paying the monetary difference rather than physically delivering the underlying asset.</p> Signup and view all the answers

<p>Offset refers to liquidating a futures contract by entering into an opposite position (purchase or sale) of an identical contract.</p> Signup and view all the answers

<p>The settlement price is the price at which all outstanding trades in a market are settled, resulting in the payment of profits or losses.</p> Signup and view all the answers

<p>Convergence refers to the continuous decline in the difference between the spot and futures contract prices, aiming to reach zero at the contract's maturity.</p> Signup and view all the answers

<p>Yes, as futures approach expiry, prices naturally converge due to factors such as cost of carry and market demand, leading to equilibrium between spot and futures prices.</p> Signup and view all the answers

<p>A call option gives the holder the right to buy a specified quantity of the underlying asset at the strike price on the expiration date.</p> Signup and view all the answers

<p>A put option gives the holder the right to sell a specified quantity of the underlying asset at the strike price on or before the expiry date.</p> Signup and view all the answers

<p>Option premium is the price paid by the option buyer to acquire the right to buy or sell the underlying asset.</p> Signup and view all the answers

<p>The strike price is the predetermined price at which the underlying asset can be bought or sold if the option buyer exercises their right.</p> Signup and view all the answers

<p>The expiration date is the date on which the option contract expires, and the option is either exercised or becomes worthless.</p> Signup and view all the answers

<p>The exercise date is when the option is actually exercised, determining the specific time when the contract terms are fulfilled.</p> Signup and view all the answers

<p>Open Interest is the total number of outstanding futures and options contracts in the market at a specific time, indicating the level of active participation.</p> Signup and view all the answers

<p>Open Interest reflects the total number of outstanding contracts, while traded volumes represent the quantity of contracts traded during a specific period.</p> Signup and view all the answers

<p>An option holder or buyer purchases an option contract, gaining the right to buy (in the case of a call) or sell (in the case of a put) the underlying asset at a defined price within a specified timeframe.</p> Signup and view all the answers

<p>An option writer or seller is the individual who sells an option contract, obligating themselves to buy (in the case of a put) or sell (in the case of a call) the underlying asset if the option buyer decides to exercise their right.</p> Signup and view all the answers

<p>An American Option is an option contract that can be exercised, bought, or sold at any time until its expiry date.</p> Signup and view all the answers

<p>A European Option is an option contract that can only be exercised on its expiration date, unlike American options which allow exercise at any time until expiry.</p> Signup and view all the answers

<p>Options provide buyers with the right but not the obligation to buy or sell an underlying asset at a specified price, while futures contracts require both parties to fulfill the contract terms.</p> Signup and view all the answers

<p>An option is 'at-the-money' when the strike price equals the underlying asset price; 'in-the-money' when the strike price is below the asset price (for calls) or above (for puts); and 'out-of-the-money' when the strike price is higher than the asset price (for calls) or lower (for puts).</p> Signup and view all the answers