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Questions and Answers
What is the primary risk associated with the default by a counterparty in derivatives trading?
What is the primary risk associated with the default by a counterparty in derivatives trading?
Which type of risk involves the inability to exit from a position in the derivatives market?
Which type of risk involves the inability to exit from a position in the derivatives market?
What document should participants carefully read before trading in derivatives?
What document should participants carefully read before trading in derivatives?
What is a significant factor that makes derivatives possibly unsuitable for certain market participants?
What is a significant factor that makes derivatives possibly unsuitable for certain market participants?
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What is the term for the simultaneous purchase and sale of a share in different markets to exploit price differences?
What is the term for the simultaneous purchase and sale of a share in different markets to exploit price differences?
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Which of the following is NOT considered an operational risk in trading derivatives?
Which of the following is NOT considered an operational risk in trading derivatives?
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What does a financial index primarily measure?
What does a financial index primarily measure?
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What type of product is an index option classified as?
What type of product is an index option classified as?
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What is the primary goal of the NISM-Series-VIII examination?
What is the primary goal of the NISM-Series-VIII examination?
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How many questions are there in the NISM-Series-VIII examination?
How many questions are there in the NISM-Series-VIII examination?
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Which of the following is NOT a focus of the NISM-Series-VIII examination?
Which of the following is NOT a focus of the NISM-Series-VIII examination?
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What is the passing score required to successfully complete the NISM-Series-VIII examination?
What is the passing score required to successfully complete the NISM-Series-VIII examination?
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Which software is recommended for candidates to be familiar with for the NISM-Series-VIII examination?
Which software is recommended for candidates to be familiar with for the NISM-Series-VIII examination?
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What consequence does the NISM-Series-VIII examination have for incorrect answers?
What consequence does the NISM-Series-VIII examination have for incorrect answers?
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Which aspect of equity derivatives is covered in the examination?
Which aspect of equity derivatives is covered in the examination?
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Which of the following best describes the assessment structure of the NISM-Series-VIII examination?
Which of the following best describes the assessment structure of the NISM-Series-VIII examination?
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If a person goes long on a futures contract at Rs. 100 and the market price at expiry is Rs. 110, what is their profit?
If a person goes long on a futures contract at Rs. 100 and the market price at expiry is Rs. 110, what is their profit?
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What does the Y-axis represent in a futures payoff chart?
What does the Y-axis represent in a futures payoff chart?
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What happens if the market price of the underlying falls to Rs. 70 for a long futures position at Rs. 100?
What happens if the market price of the underlying falls to Rs. 70 for a long futures position at Rs. 100?
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In a futures contract, if one person goes long, what must occur?
In a futures contract, if one person goes long, what must occur?
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What is the loss incurred when a long futures contract is held and the market price at expiry drops to Rs. 80?
What is the loss incurred when a long futures contract is held and the market price at expiry drops to Rs. 80?
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If the market price at expiry is Rs. 150 for a short futures contract sold at Rs. 100, what is the outcome for the short seller?
If the market price at expiry is Rs. 150 for a short futures contract sold at Rs. 100, what is the outcome for the short seller?
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At a market price of Rs. 60 in a long futures contract purchased at Rs. 100, what is the payoff?
At a market price of Rs. 60 in a long futures contract purchased at Rs. 100, what is the payoff?
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What does the horizontal axis in a payoff chart indicate?
What does the horizontal axis in a payoff chart indicate?
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What condition must be met regarding the underlying asset for the Cost of Carry model to be applicable?
What condition must be met regarding the underlying asset for the Cost of Carry model to be applicable?
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Which of the following is NOT one of the key assumptions of the Cost of Carry model?
Which of the following is NOT one of the key assumptions of the Cost of Carry model?
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Why might the Cost of Carry model be rendered unsuitable for certain seasonal commodities?
Why might the Cost of Carry model be rendered unsuitable for certain seasonal commodities?
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What does the assumption of no margin requirements imply in the Cost of Carry model?
What does the assumption of no margin requirements imply in the Cost of Carry model?
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In case of agricultural commodities, what price trend can be expected just before new supplies arrive in the marketplace?
In case of agricultural commodities, what price trend can be expected just before new supplies arrive in the marketplace?
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What adjustment can be made to the Cost of Carry model to improve its accuracy?
What adjustment can be made to the Cost of Carry model to improve its accuracy?
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Which scenario would likely necessitate not using the Cost of Carry model for pricing futures contracts?
Which scenario would likely necessitate not using the Cost of Carry model for pricing futures contracts?
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What is implied when the text refers to the model being unsuitable for pricing futures contracts?
What is implied when the text refers to the model being unsuitable for pricing futures contracts?
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What is the definition of convenience yield?
What is the definition of convenience yield?
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In which situation is convenience yield likely to be highest?
In which situation is convenience yield likely to be highest?
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How does convenience yield affect the pricing of futures contracts in relation to the cash market?
How does convenience yield affect the pricing of futures contracts in relation to the cash market?
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What does the formula for fair price of futures contracts include?
What does the formula for fair price of futures contracts include?
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What can cause the cash and carry model to break down?
What can cause the cash and carry model to break down?
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Which of the following accurately describes convenience yield?
Which of the following accurately describes convenience yield?
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According to the expectations model of futures pricing, what primarily drives market movement?
According to the expectations model of futures pricing, what primarily drives market movement?
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Why is convenience yield difficult to quantify?
Why is convenience yield difficult to quantify?
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Study Notes
NISM-Series-VIII: Equity Derivatives Certification Examination
- The examination establishes minimum knowledge requirements for individuals working as approved users or sales personnel in the equity derivatives market.
- The exam aims to improve understanding of equity derivative products, regulations, risks, and clearing/settlement mechanisms.
- It also emphasizes knowledge related to the Indian financial structure and relevant rules, especially those governing equity derivatives.
Examination Objectives
- Upon completion of the examination, candidates should possess a comprehensive understanding of the Indian equity derivatives market.
- Candidates should be able to comprehend various trading strategies using futures and options on stocks and stock indices.
- They should possess a strong grasp of clearing, settlement, risk management, and operational aspects of equity derivatives markets.
- Understanding the regulatory environment in India for equity derivatives markets is a key objective.
Assessment Structure
- The NISM-Series-VIII exam consists of 100 multiple-choice questions, each worth one mark, totaling 100 marks.
- The examination duration is two hours, and there is a negative marking of 25% for incorrect answers.
- A passing score of 60% is required to clear the exam.
Registration and Examination Details
- Visit the official website of the National Institute of Securities Markets (NISM) (www.nism.ac.in) for registration and examination details.
Test Center Information
- Test center workstations utilize Microsoft Excel or OpenOffice Calc for numerical computations.
- Candidates are advised to familiarize themselves with both software programs for effective numerical calculations.
Risks in Derivatives Trading
- Derivatives, being leveraged instruments, entail various risks, including counterparty risk, price risk, liquidity risk, legal/regulatory risk, operational risk, and others.
- Market participants should carefully assess their risk tolerance, resources, and trading experience before engaging in derivatives trading.
- Participants should thoroughly review the Model Risk Disclosure Document provided by their broker, outlining important information about equity and F&O trading.
Understanding the Index
- An index serves as a statistical indicator, measuring changes in the economy or specific sectors, including financial sectors.
- In financial markets, an index represents a portfolio of securities representing a particular market or market segment.
Futures Payoffs
- Long Futures: A buyer of a futures contract at Rs. 100 agrees to purchase the underlying asset at that price at expiry.
- If the underlying asset price increases to Rs. 150 at expiry, the buyer makes a profit of Rs. 50 by buying at Rs. 100 and selling in the cash market at Rs. 150.
- If the price falls to Rs. 70, the buyer incurs a loss of Rs. 30.
Short Futures
- In a futures contract, a seller (short position) compensates for a buyer's (long position) trade.
- The difference in perceived fair values of futures contracts among market participants contributes to market activity and continuous trading cycles.
Cost of Carry Model Assumptions
- This model relies on assumptions regarding underlying assets, including abundance in the cash market, non-seasonal demand and supply, ease of holding and maintaining the asset, short-selling feasibility, negligible transaction costs and taxes, and no margin requirements.
- This model may not be applicable to all situations, particularly when the underlying asset exhibits a seasonal demand-supply pattern, is difficult to hold/maintain, or cannot be sold short.
- While transaction costs, taxes, and margins are not factored into the model, adjustments can be made to incorporate these factors.
Convenience Yield
- Convenience yield is a subjective intangible value that market participants derive from holding an asset.
- It can arise due to perceived benefits or mental comfort during periods of asset scarcity, particularly in situations like a flood where people store essential commodities.
- This yield is primarily observed with consumption assets (commodities) rather than financial assets (equities, bonds, currencies).
- In cases where convenience yield dominates the cost of carry, futures may trade at a discount to the cash market, potentially making reverse arbitrage difficult.
Expectations Model of Futures Pricing
- According to the expectations hypothesis, expected spot and futures prices, rather than current prices, play a crucial role in market movements, particularly when short-selling or storage of the asset is not feasible.
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Description
Prepare for the NISM-Series-VIII examination focused on equity derivatives. This quiz covers essential concepts, trading strategies, and regulatory frameworks pertinent to the Indian equity derivatives market. Enhance your understanding of risk management and the operational aspects of this financial segment.
