Podcast
Questions and Answers
How many calendar spread possibilities arise from three futures series of one, two, and three months?
How many calendar spread possibilities arise from three futures series of one, two, and three months?
- 2
- 1
- 4
- 3 (correct)
What is the term used to describe the ratio of change in option premium for a unit change in volatility?
What is the term used to describe the ratio of change in option premium for a unit change in volatility?
- Vega (correct)
- Theta
- Rho
- Delta
When the price of a futures contract decreases, which of the following statements is true regarding the margin accounts?
When the price of a futures contract decreases, which of the following statements is true regarding the margin accounts?
- The margin account of the buyer will be debited for the loss.
- The margin account of the seller will be credited for the gain.
- Both A and B. (correct)
- Neither A nor B.
In the context of options, what does Vega primarily measure?
In the context of options, what does Vega primarily measure?
What is the implication for the buyer of a futures contract when the contract price falls?
What is the implication for the buyer of a futures contract when the contract price falls?
Where should the initial margin for entering into an option contract be shown in the balance sheet?
Where should the initial margin for entering into an option contract be shown in the balance sheet?
Which type of option allows the holder to buy the underlying asset at any time before the expiry date?
Which type of option allows the holder to buy the underlying asset at any time before the expiry date?
Can foreign exchange be classified as a liquid asset for Clearing Members with the clearing corporation?
Can foreign exchange be classified as a liquid asset for Clearing Members with the clearing corporation?
Is the book net worth criterion for Professional Clearing Members the same as that for Trading cum Clearing Members?
Is the book net worth criterion for Professional Clearing Members the same as that for Trading cum Clearing Members?
What type of option only allows the holder to exercise their right on the expiry date?
What type of option only allows the holder to exercise their right on the expiry date?
Which of the following is NOT considered a liquid asset for Clearing Members?
Which of the following is NOT considered a liquid asset for Clearing Members?
Which characteristic distinguishes American options from European options?
Which characteristic distinguishes American options from European options?
What is the initial margin for entering an option contract debited to?
What is the initial margin for entering an option contract debited to?
What does Theta represent in options trading?
What does Theta represent in options trading?
How can Unsystematic Risk be mitigated?
How can Unsystematic Risk be mitigated?
In which scenario are future prices generally more transparent than forward prices?
In which scenario are future prices generally more transparent than forward prices?
If interest rates rise, what is the expected effect on the premium of a CALL option?
If interest rates rise, what is the expected effect on the premium of a CALL option?
Which of the following statements about Unsystematic Risk is true?
Which of the following statements about Unsystematic Risk is true?
What distinguishes FUTURES contracts from FORWARD contracts?
What distinguishes FUTURES contracts from FORWARD contracts?
Which option represents a component of price risk unique to a specific security?
Which option represents a component of price risk unique to a specific security?
Which factor does primarily influence the Theta of an option?
Which factor does primarily influence the Theta of an option?
Which of the following certification exams is specifically related to Equity Derivatives?
Which of the following certification exams is specifically related to Equity Derivatives?
What type of certification does NCFM's Financial Markets: A Beginners Module provide?
What type of certification does NCFM's Financial Markets: A Beginners Module provide?
Which certification exam focuses on Investment Advisers at Level 2?
Which certification exam focuses on Investment Advisers at Level 2?
Which of the following is NOT included in the list of NISM certification exams?
Which of the following is NOT included in the list of NISM certification exams?
Which module is specifically related to dealing in derivatives?
Which module is specifically related to dealing in derivatives?
What can lead to a penalty or suspension of a stock broker's registration under SEBI regulations?
What can lead to a penalty or suspension of a stock broker's registration under SEBI regulations?
Which of the following scenarios could result in a stock broker's suspension?
Which of the following scenarios could result in a stock broker's suspension?
What is the maximum potential loss for a seller of a call option?
What is the maximum potential loss for a seller of a call option?
If a trader sells a futures contract and the prices rise, what will happen when he squares up the position?
If a trader sells a futures contract and the prices rise, what will happen when he squares up the position?
What action could also result in the suspension of a stock broker besides not adhering to the code of conduct?
What action could also result in the suspension of a stock broker besides not adhering to the code of conduct?
How does the financial position of a stock broker affect their registration status?
How does the financial position of a stock broker affect their registration status?
Which of the following best describes a call option seller's belief regarding market prices?
Which of the following best describes a call option seller's belief regarding market prices?
What could be a consequence for a stock broker if they fail to resolve investor complaints?
What could be a consequence for a stock broker if they fail to resolve investor complaints?
What is the value of Nifty futures that should be sold to obtain a complete hedge for a portfolio worth Rs 25 lacs with a beta of 1.20?
What is the value of Nifty futures that should be sold to obtain a complete hedge for a portfolio worth Rs 25 lacs with a beta of 1.20?
If a stock has a beta of 0.7 and you hold a buy position of Rs 3,00,000, how much Nifty should you sell to achieve a complete hedge?
If a stock has a beta of 0.7 and you hold a buy position of Rs 3,00,000, how much Nifty should you sell to achieve a complete hedge?
Which market participant is NOT primarily associated with a derivative market?
Which market participant is NOT primarily associated with a derivative market?
What does a beta of 1 indicate about a stock's volatility compared to the market?
What does a beta of 1 indicate about a stock's volatility compared to the market?
In a scenario where a portfolio has a beta greater than 1, what can be inferred about its price movement?
In a scenario where a portfolio has a beta greater than 1, what can be inferred about its price movement?
To hedge against a rising market, what position should an investor take in Nifty futures?
To hedge against a rising market, what position should an investor take in Nifty futures?
If a stock's beta is 1.3, how much more volatile is it compared to the market?
If a stock's beta is 1.3, how much more volatile is it compared to the market?
Which of the following reflects a characteristic of a hedger in a derivative market?
Which of the following reflects a characteristic of a hedger in a derivative market?
Flashcards
Calendar Spread Possibilities
Calendar Spread Possibilities
Number of possible calendar spreads with 3 future contract series (1, 2, 3 months).
Vega
Vega
Measures how option price changes with volatility.
Future Contract Price Decrease
Future Contract Price Decrease
Buyer's margin account is debited, seller's is credited.
Futures Contract Buyer
Futures Contract Buyer
Margin account debited if futures contract price decreases.
Signup and view all the flashcards
Futures Contract Seller
Futures Contract Seller
Margin account credited if futures contract price decreases.
Signup and view all the flashcards
Option Margin Account
Option Margin Account
An account used to record initial margin payments for option contracts.
Signup and view all the flashcards
American call option
American call option
An option that allows the holder to buy an underlying asset any time before the expiry date.
Signup and view all the flashcards
Liquid assets
Liquid assets
Assets easily converted into cash, such as cash, bank guarantees, and government securities.
Signup and view all the flashcards
Professional Clearing Members criteria
Professional Clearing Members criteria
Professional Clearing Members have a higher net worth requirement than Trading-cum-Clearing members.
Signup and view all the flashcards
Option Margin Account Location
Option Margin Account Location
Shown under 'Current Assets' in the balance sheet.
Signup and view all the flashcards
European call option
European call option
An option that allows the holder to buy an underlying asset only on the expiry date.
Signup and view all the flashcards
Trading-cum-Clearing members
Trading-cum-Clearing members
Members executing trades AND clearing those trades.
Signup and view all the flashcards
Foreign Exchange as Liquid Asset
Foreign Exchange as Liquid Asset
Foreign exchange is NOT considered a liquid asset by clearing members.
Signup and view all the flashcards
Unsystematic Risk
Unsystematic Risk
Company-specific risk that cannot be diversified away. It relates to factors like a strike at a factory or a decline in demand for a particular product.
Signup and view all the flashcards
What does Unsystematic Risk mean?
What does Unsystematic Risk mean?
Unsystematic risk is a risk that is specific to a particular company, industry, or asset. It is not related to the overall market risk, and it can be reduced through diversification.
Signup and view all the flashcards
Future vs. Forward Price Transparency
Future vs. Forward Price Transparency
Futures prices are more transparent than forward prices because they're traded on organized exchanges, making the prices readily available.
Signup and view all the flashcards
Call Option Premium and Interest Rates
Call Option Premium and Interest Rates
When interest rates rise, the premium on a call option usually increases.
Signup and view all the flashcards
What is the impact of a higher interest rate on a call option?
What is the impact of a higher interest rate on a call option?
An increase in interest rates makes the call option premium rise. This is because the underlying security becomes more valuable as the cost of borrowing money increases.
Signup and view all the flashcards
What is the relationship between time and option premium?
What is the relationship between time and option premium?
Theta measures the rate at which an option's premium decays as time approaches expiration. The closer an option is to expiration, the faster the value depreciates.
Signup and view all the flashcards
What is a call option?
What is a call option?
A call option gives the buyer the right, but not the obligation, to buy an underlying asset at a specific price (strike price) at or before a specific date (expiration date).
Signup and view all the flashcards
What does Beta measure?
What does Beta measure?
Beta measures how much a security's price moves compared to the overall market over time, based on historical prices.
Signup and view all the flashcards
What does a Beta of 1 mean?
What does a Beta of 1 mean?
A Beta of 1 indicates that the security's price will move in line with the market.
Signup and view all the flashcards
What does a Beta less than 1 mean?
What does a Beta less than 1 mean?
A Beta less than 1 means the security is less volatile than the overall market.
Signup and view all the flashcards
What does a Beta greater than 1 mean?
What does a Beta greater than 1 mean?
A Beta greater than 1 means the security is more volatile than the overall market.
Signup and view all the flashcards
How to hedge a portfolio using Nifty futures?
How to hedge a portfolio using Nifty futures?
To hedge a portfolio, you sell Nifty futures contracts. The value of the Nifty futures sold should equal the portfolio's value multiplied by its beta.
Signup and view all the flashcards
Complete Hedge for a Buy Position
Complete Hedge for a Buy Position
To completely hedge a buy position, you need to sell Nifty futures contracts. The value of the Nifty futures sold equals the value of your buy position multiplied by the stock's beta.
Signup and view all the flashcards
Who participates in a derivative market?
Who participates in a derivative market?
A derivative market primarily consists of speculators and hedgers.
Signup and view all the flashcards
Long-term investors in the market
Long-term investors in the market
Long-term investors participate in the cash market and take delivery of securities.
Signup and view all the flashcards
What is NCFM?
What is NCFM?
NCFM stands for National Commodity & Derivatives Exchange Limited. It is a leading commodity exchange in India, offering futures and options contracts on various commodities.
Signup and view all the flashcards
What are the NCFM modules?
What are the NCFM modules?
NCFM offers various modules, including Financial Markets (beginners), Capital Market (Dealers), and Derivative Market (Dealers). These modules provide training and certification in different aspects of the financial markets.
Signup and view all the flashcards
What is a BCSM?
What is a BCSM?
BCSM stands for Certificate on Security Market. This certification provides a foundation in the security market and its operations.
Signup and view all the flashcards
What are Equity Derivatives?
What are Equity Derivatives?
Equity derivatives are financial instruments whose value is derived from the underlying equity asset, such as stocks. They include options and futures that allow investors to speculate on the price movements of stocks or hedge their portfolio.
Signup and view all the flashcards
What is NISM Series VIII?
What is NISM Series VIII?
NISM Series VIII certification focuses on Equity Derivatives. It provides a deep understanding of the concepts, products, and trading mechanisms related to equity derivatives.
Signup and view all the flashcards
Stock Broker Suspension
Stock Broker Suspension
A stock broker's registration can be suspended or penalized under SEBI regulations for various reasons, including violating registration conditions, failing to pay fees, or being suspended by a stock exchange.
Signup and view all the flashcards
Call Option Seller Risk
Call Option Seller Risk
The seller of a call option faces unlimited potential losses because the price of the underlying asset can rise indefinitely.
Signup and view all the flashcards
Future Contract Loss
Future Contract Loss
A trader who sells a future contract and then squares up the position (buying back the contract) will make a loss if the price of the underlying asset rises.
Signup and view all the flashcards
Stock Broker Violations
Stock Broker Violations
SEBI regulations can suspend or penalize a stock broker for violating provisions of the Act, not following the code of conduct, failing to resolve investor complaints, market manipulation, or financial deterioration.
Signup and view all the flashcards
Stock Broker Fees
Stock Broker Fees
Failure to pay fees can result in a stock broker's registration being suspended or penalized under SEBI regulations.
Signup and view all the flashcards
Stock Broker Code of Conduct
Stock Broker Code of Conduct
Stock brokers must follow a specific code of conduct to avoid suspension or penalties, as outlined in SEBI regulations.
Signup and view all the flashcards
Stock Broker Market Manipulation
Stock Broker Market Manipulation
SEBI regulations can suspend or penalize stock brokers for engaging in market manipulation, price rigging, or cornering the market.
Signup and view all the flashcards
Stock Broker Investor Complaints
Stock Broker Investor Complaints
A stock broker's registration can be penalized or suspended if they fail to resolve investor complaints as per SEBI regulations.
Signup and view all the flashcardsStudy Notes
NISM Series VIII - Equity Derivatives Certification Examination
- PASS4SURE is India's leading practice test bank for NSE, NISM, and BSE exams.
- The practice test bank provides thorough preparation for the Equity Derivatives Certification Examination.
- The question bank contains 400-500 practice questions and answers.
- Questions are carefully analyzed by experts, and have a high probability of appearing in the actual exam, aiming for a 100% success rate.
- The practice tests are regularly updated by adding new and important questions, and removing old ones.
- The test includes 100 questions, and the total time allowed for the exam is 2 hours.
- 60% passing marks and negative marking of 0.25% per wrong answer.
- Viewing rights expire within 60 days of purchase.
Example Questions and Answers
-
Question 1: Mr. Sam, an equity fund manager, is bearish on the market. How can he hedge his position?
- Correct Answer: Sell index futures.
- Explanation: As a fund manager, Mr. Sam already holds stocks. Selling index futures hedges against potential stock market declines.
-
Question 2: Is the minimum capital adequacy requirement for derivative clearing members higher than for spot market members?
- Correct Answer: TRUE.
- Explanation: Derivative brokers/dealers face higher risks than cash market members, thus requiring a higher capital adequacy.
-
Question 3: What is the Delta of a far out-of-the-money option?
- Correct Answer: Near 0.
- Explanation: Delta approaches zero as an option nears expiration.
-
Question 4: A penalty or suspension of registration for a stock broker from derivatives exchange can occur for various offenses.
- Correct Answer: All of the above
-
Question 5: Can an equity-oriented mutual fund hedge its equity exposure by selling stock index futures?
- Correct Answer: Yes.
- Explanation: A fund manager can use index futures for hedging purposes, like if they anticipate market decline.
-
Question 6: A trader buys a January ABC stock futures contract at Rs. 768, with a lot size of 1200. What is the profit/loss if the position is squared off at Rs. 778?
- Correct Answer: Rs. 12000.
- Explanation: The profit is calculated as (Rs.778-Rs.768)*1200 = Rs. 12000
-
Question 7: Which complaints can an exchange take up for redressal?
- Correct Answer: Excess brokerage charged by a broker.
- Explanation: Complaints like claims for expenses or loss of opportunity for a disputed trade are outside the exchange's purview.
-
Question 8: A trader takes a short position in call option, but does not take any offsetting position in the underlying stock. What is this strategy known as?
- Correct Answer: Writing a naked call.
-
Question 9: If there are three series of one, two, and three months futures open, how many calendar spread possibilities are there?
- Correct Answer: Three calendar spreads (1 to 2, 2 to 3, and 1 to 3).
-
Question 10: What is Vega?
- Correct Answer: Ratio of change in option premium for a unit change in volatility.
-
Question 11: When the price of a future contract decreases, what happens to the margin account of the seller?
- Correct Answer: Seller's account is credited.
-
Question 12: What is a forward contract?
- Correct Answer: A bilateral commitment between two parties to buy/sell an underlying asset at a future date at a specified price.
-
Question 13: Do brokers and dealers for derivative exchanges have to register with SEBI?
- Correct Answer: TRUE.
-
Question 14: Are "Bulls" investors who believe the market will rise?
- Correct Answer: TRUE.
-
Question 15: In forward contracts, are price limits specified by an authority?
- Correct Answer: FALSE
-
Question 16: Are all 50 stocks in the NSE Nifty index equally weighted?
- Correct Answer: FALSE.
-
Question 17: Does the clearing corporation provide exposure limits to clearing members based on the number of trading members using their services?
- Correct Answer: TRUE.
-
Question 18: Is arbitrage the simultaneous purchase and sale of an asset to profit from price discrepancies?
- Correct Answer: TRUE.
-
Question 19: Where is the initial margin for entering into an option contract shown in the balance sheet?
- Correct Answer: Under current assets.
-
Question 20: What option gives the holder the right to buy a security at a certain price on/before a specific date?
- Correct Answer: American Call Option.
-
Question 21: Can foreign exchange be part of liquid assets maintained by clearing members?
- Correct Answer: FALSE
-
Question 22: Is the net worth criterion for professional clearing members the same as trading members?
- Correct Answer: FALSE
-
Question 23: What is Theta?
- Correct Answer: Time to expiry.
-
Question 24: What is unsystematic risk?
- Correct Answer: Risk in a specific security; can be reduced by diversification.
-
Question 25: Are future prices usually more transparent than forward prices?
- Correct Answer: TRUE.
-
Question 26: If interest rates increase, does the premium on a call option increase?
- Correct Answer: TRUE.
-
Question 27: Ms. Gayatri bought a call option with a strike price of Rs. 300 when the spot price was Rs. 337. What is the intrinsic value?
- Correct Answer: Rs. 37.
-
Question 28: What is the time value of an option?
- Correct Answer: Difference between the premium and the intrinsic value
-
Question 29: How to hedge a portfolio of Rs 25 lacs with a beta of 1.20?
- Correct Answer: Sell Nifty futures of Rs 30 lacs.
-
Question 30: A stock's beta is 0.7 and you own Rs 3,00,000 worth of the stock. How much Nifty futures should you sell to hedge your position?
- Correct Answer: Sell Rs 2,10,000 Nifty futures.
-
Question 31: What types of participants are usually found in a derivative market?
- Correct Answer: Speculators and Hedgers
-
Question 32: How to buy a futures contract of Tata Steel shares?
- Correct Answer: Make margin payments as calculated by the exchange.
-
Question 33: Are forward contracts customizable per the parties' requirements?
- Correct Answer: TRUE.
-
Question 34: What assets are under the Securities Contracts (Regulation) Act of 1956?
- Correct Answer: Securities (e.g., shares, stocks, bonds).
-
Question 35: What is the strike price in an option contract?
- Correct Answer: Price per share for purchasing/selling the underlying security.
-
Question 36: What actions could result in a penalty or suspension for a stock broker as per SEBI regulations?
- Correct Answer: Any of the specified offenses
-
Question 37: What are the potential losses for a seller of a call option?
- Correct Answer: Unlimited.
-
Question 38: If a trader sells a future contract and prices rise, what is the result on closing the position?
- Correct Answer: The trader will make a loss.
-
Question 39: What standardizes underlying asset quality in futures contracts?
- Correct Answer: Exchange.
-
Question 40: Who approves the bye-laws of an Indian Stock Exchange?
- Correct Answer: SEBI
-
Question 41: Do clearing members with equal liquid assets have equal exposure limits?
- Correct Answer: Yes
-
Question 42: What combination of Call/Put options creates a Bear spread?
- Correct Answer: Selling a Call of a lower strike price and buying a Call of a higher strike price, or selling a Put of a lower strike price and buying a Put of a higher strike price.
-
Question 43: Are Treasury bills considered a permitted liquid asset for clearing members?
- Correct Answer: Yes.
-
Question 44: If the spot price of ABC stock is Rs. 347 and the strike price of a call option is Rs. 325, what is the intrinsic value?
- Correct Answer: Rs. 22
-
Question 45: What type of options are traded on a recognized exchange?
- Correct Answer: Standardized options
-
Question 46: If a futures contract is sold at Rs. 260 and repurchased at Rs. 251, what is the profit/loss for a lot size of 1000?
- Correct Answer: Rs. 9,000 profit.
-
Question 47: Who are responsible for margins in futures trading?
- Correct Answer: Both the buyer and seller.
-
Question 48: What is an in-the-money option?
- Correct Answer: Positive intrinsic value.
-
Question 49: Are orders on the derivative trading system exclusive of brokerage?
- Correct Answer: TRUE.
-
Question 50: What is the term for buying and selling a security in different markets to benefit from price differences?
- Correct Answer: Arbitrage.
Studying That Suits You
Use AI to generate personalized quizzes and flashcards to suit your learning preferences.
