NISM-Series-VIII Equity Derivatives Exam

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.