NISM Series VIII - Equity Derivatives Certification Exam - Practice Test No. 3 PDF

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India:s No. 1 Practice Test Bank for clearing NSE-NISM-BSE exams NISM -Series-VIII : Equity Derivatives Certification Examination  NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION EXAM – PRACTICE TEST NO. 3 About PASS4SURE.in PASS4SURE is a professional online practice test bank for various NSE NCFM, NISM and BSE exams. The team behind PASS4SURE has decades of experience in the financial and stock markets and have succeeded in preparing practice question bank which will help not only to pass the exams easily but also get good knowledge of the subject. Our online mock exams contain questions which are carefully analysed by the experts and have a high probability of being asked in the exams. Thus all PASS4SURE questions are highly valued and contribute to an almost 100% success rate. We do not believe in offering you thousands of questions but most important 400 – 500 practice questions and answers. 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No Part of this documents may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission from PASS4SURE.in. For any clarification regarding this document or if you feel there are errors in the question bank, please write us at [email protected]  NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION EXAM – PRACTICE TEST NO. 3 PRACTICE TEST NO. 3 Question 1 Mr. Sam is a equity fund manager and he is bearish on the stock market. How will he use this view to create a hedge? (a) He will sell all his stocks (b) He will decrease the NAV of his fund (c) He will sell index futures (d) He will buy index futures Correct Answer He will sell index futures Answer Mr. Sam is a fund manager which means his fund already has a portfolio of stock. Explanati He thinks that the stock market can fall so he will sell index futures to create a on hedge. In case the market falls, he will have a loss on his stocks but will earn on his index futures position. Question 2 The absolute amount of minimum capital adequacy requirement for derivative clearing member is higher than that of spot market - State whether True or False? (a) TRUE (b) FALSE Correct Answer TRUE Answer The absolute amount of minimum capital adequacy requirement for derivative Explanati brokers/dealers is much higher than for cash market as the risk involved are on higher. Further, if a broker/dealer is involved both in cash and futures segments, or in several exchanges, the capital adequacy requirement should be satisfied for each exchange/segment separately.  NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION EXAM – PRACTICE TEST NO. 3 Question 3 What will be the Delta for a Far Out-of-the-money option? (a) Near 0 (b) Near 1 (c) Near -1 (d) Near 2 Correct Answer Near 0 Answer Delta for Out of the Money Call and Put option approaches zero as it nears expiry. Explanati on Delta for In the Money Call option approaches 1 and delta for In the Money Put option approaches -1 as it nears expiry. Question 4 A penalty or suspension of registration of a stock broker from derivatives exchange/segment under SEBI (Stock Broker and Sub-broker) Regulations, 1992 can take place if. (a) The stock broker fails to resolve the complaints of the investors (b) The stock broker indulges in manipulating, or price rigging or cornering of the market (c) The stock broker does not follow the code of conduct (d) All of the above Correct Answer All of the above Answer A penalty or suspension of registration of a stock - broker under the SEBI (Stock Explanati Broker) on Regulations, 1992 can be ordered if: - The stock broker violates the provisions of the Act - The stock broker does not follow the code of conduct - The stock broker fails to resolve the complaints of the investors - The stock broker indulges in manipulating, or price rigging or cornering of themarket - The stock broker’s financial position deteriorates substantially - The stock broker fails to pay fees - The stock broker violates the conditions of registration - The stock broker is suspended by the stock exchange  NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION EXAM – PRACTICE TEST NO. 3 Question 5 Can a Equity oriented mutual fund hedge its equity exposure by selling stock index futures? (a) Yes (b) No Correct Answer Yes Answer Yes, a mutual fund can sell index futures for hedging purposes. Explanati on For eg - If a fund manager of an equity mutual fund feels that the stock markets can fall in the near future, he can hedge his position by selling Nifty / Sensex futures. Question 6 A trader buys a January ABC stock futures contract at Rs 768 and the lot size is 1200. What is his profit or loss , if he squares off the position at Rs 778 ? (a) Rs. 12000 (b) Rs 1200000 (c) - Rs 12000 (d) - Rs 10000 Correct Answer Rs. 12000 Answer The trader buys at Rs 768 and sells off at Rs 778, so he makes a profit of Rs 10. Explanati on Lot size is 1200. So the total profit is Rs 10 X 1200 = Rs 12000  NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION EXAM – PRACTICE TEST NO. 3 Question 7 Which of these complaints against a trading member can an Exchange take up for redressal? (a) Claims for expenses incurred for taking up the matter with the ISC (b) Losses for transaction which are not within the framework of exchange (c) Claims for opportunity loss for the particular disputed trade (d) Excess brokerage charged by a broker Correct Answer Excess brokerage charged by a broker Answer Complaints against trading members on account of the following can be Explanati taken by an Exchange for redressal : on - Non-receipt of funds / securities - Non- receipt of documents such as member client agreement, contract notes, settlement of accounts, order trade log etc. - Non-Receipt of Funds / Securities kept as margin - Trades executed without adequate margins - Delay /non – receipt of funds - Squaring up of positions without consent - Unauthorized transaction in the account - Excess Brokerage charged by Trading Member - Unauthorized transfer of funds from commodities account to other accounts etc. 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 ? (a) Protective Put strategy (b) Writing a naked call (c) Writing a covered call (d) Butterfly strategy Correct Answer Writing a naked call Answer Naked position in options market simply means a long or short position Explanati in any option contract without having any position in the underlying on asset. When one sells (short) a call it is also known as 'writing' a call. So the above strategy is - Writing a naked call option.  NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION EXAM – PRACTICE TEST NO. 3 Question 9 If there are three series of one, two and three months futures open at a given point of time, how many calendar spread possibilities arise? (a) 4 (b) 3 (c) 2 (d) 1 Correct Answer 3 Answer The three calendar spreads can be between months 1 and 2, 2 and 3 and 1 and 3. Explanati on Question 10 is the ratio of change in option premium for a unit change in volatility. (a) Rho (b) Theta (c) Delta (d) Vega Correct Answer Vega Answer Vega (ν) is a measure of the sensitivity of an option price to changes in market Explanati volatility. It is the change of an option premium for a given change in the on underlying volatility.  NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION EXAM – PRACTICE TEST NO. 3 Question 11 When the price of a future contract decreases, the margin account. (a) of the seller of futures contract will be credited for the gain (b) of the buyer of futures contract will be debited for the loss (c) Both 1 and 2 (d) None of the above Correct Answer Both 1 and 2 Answer The buyer of futures will have a notional loss and so his margin account will be Explanati debited by the notional loss amount. on The seller of futures will have a notional profit if the price falls and his margin account will be credited by the notional gain amount. Question 12 A forward contract is (a) is a type of Option (b) is settled and cleared through a Clearing Corporation (c) a bilateral commitment of trade between two parties (d) is entered through an Exchange Correct Answer a bilateral commitment of trade between two parties Answer Forward Contract - It is a contractual agreement between two parties to buy/sell Explanati an on underlying asset at a certain future date for a particular price that is pre-decided on the date of contract.  NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION EXAM – PRACTICE TEST NO. 3 Question 13 Brokers and dealers of derivative exchanges have also to be registered with SEBI in addition to their registration with stock exchange - State whether True or False? (a) TRUE (b) FALSE Correct Answer TRUE Answer In addition to their registration as brokers of existing stock exchanges, Derivative Explanati brokers/dealers and clearing members are required to seek registration from on SEBI. Question 14 'Bulls' are those investors who believe the market will rise - State True or False? (a) TRUE (b) FALSE Correct Answer TRUE Answer Investors who believe that the markets will rise are called Bulls and investors Explanati who believe that markets will fall are known as Bears. on  NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION EXAM – PRACTICE TEST NO. 3 Question 15 In case of forward contracts, the rules regarding the minimum amount by which the price would change and the price limits are specified by an authority - State True or False ? (a) TRUE (b) FALSE Correct Answer FALSE Answer In a Forward Contract, there is no such authority. Forward contract is agreement Explanati between two parties to buy/sell an underlying asset and no other authority like a on Stock Exchange or SEBI is involved. Question 16 All the 50 stocks of NSE Nifty index are equally weighed while calculating the index - State True or False ? (a) TRUE (b) FALSE Correct Answer FALSE Answer The NIFTY 50 index is a well-diversified 50 companies index reflecting overall Explanati market conditions. on NIFTY 50 Index is computed using free float market capitalization method. As per this method, the 50 stocks of Nifty are weighed as per their free float market capitalisation. For eg - Reliance Industry has a weightage of appx 7% where as Wipro has a weightage of appx 2% in Nifty.  NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION EXAM – PRACTICE TEST NO. 3 Question 17 The Clearing Corporation gives exposure limits to Clearing Members based on the number of Trading Members using the services of that Clearing Member - State True or False ? (a) TRUE (b) FALSE Correct Answer TRUE Answer As per rules - Both trading-cum-clearing member and professional clearing Explanati member are required to on bring in additional security deposits in respect of every trading member whose trades they undertake to clear and settle. Question 18 Arbitrage is simultaneous purchase and sale of an asset or replicating asset in the market in an attempt to profit from discrepancies in their prices - State True or False ? (a) TRUE (b) FALSE Correct Answer TRUE Answer An arbitrage is a deal that produces risk free profits by exploiting a mispricing Explanati in the market. A simple arbitrage occurs when a trader purchases an asset on cheaply in one location/ exchange and simultaneously arranges to sell it at another location/ exchange at a higher price.  NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION EXAM – PRACTICE TEST NO. 3 Question 19 The seller or writer of an option is required to pay initial margin for entering into the option contract. Where is this shown in the balance sheet ? (a) Under Current Assets (b) Under Current Liabilities (c) Under Fixed Assets (d) Under Fixed Liabilities Correct Answer Under Current Assets Answer The seller/ writer of the option is required to pay initial margin for entering into Explanati the option contract and its should be debited to an appropriate account, say, on "Equity Index/ Stock Option Margin Account". In the balance sheet, such account should be shown separately under the head "Current Assets". Question 20 Which Option gives the holder a right to buy the underlying asset on or before a particular date for a certain price ? (a) European call option (b) European put option (c) American call option (d) American put option Correct Answer American call option Answer American option: The owner of such option can exercise his right at any time Explanati on or before the expiry date/day of the contract. on A Call Option gives the holder a right to buy the underlying asset - So the answer is American Call Option. (European option: The owner of such option can exercise his right only on the expiry date/day of the contract. In India, Index options are European.)  NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION EXAM – PRACTICE TEST NO. 3 Question 21 Foreign Exchange can be a part of liquid assets to be maintained by Clearing Members with the clearing corporation - State True or False ? (a) TRUE (b) FALSE Correct Answer FALSE Answer Liquid assets can comprise of Cash, Bank Guarantees, Govt. Securities etc. but Explanati not foreign exchange. on Question 22 The book networth criterion for Professional Clearing Members is the same as that for Trading cum Clearing members - State True or False ? (a) TRUE (b) FALSE Correct Answer FALSE Answer The networth criterion for Professional Clearing Members is higher than that for Explanati Trading cum Clearing members. on  NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION EXAM – PRACTICE TEST NO. 3 Question 23 Theta is the rate of change in option premium for a unit change in. (a) volatility (b) price of the underlying asset (c) time to expiry (d) interest rates Correct Answer time to expiry Answer Theta is the change in option price given a one-day decrease in time to expiration. Explanati It is a measure of time decay. on (Please memorize the details for Delta, Gamma, Theta, Rho etc.) Question 24 What is Unsystematic Risk ? (a) Unsystematic Risk is related to risk in a specific security and not pertaining to overall market (b) Unsystematic Risk can be reduced through diversification (c) Both 1 and 2 (d) None of the above Correct Answer Both 1 and 2 Answer Unsystematic risk is the component of price risk that is unique to particular Explanati events of the company and/or industry. For example : Strike in a factory or on threats from cheaper imports to steel industry. This risk is inseparable from investing in the securities. This risk could be reduced to a certain extent by diversifying the portfolio.  NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION EXAM – PRACTICE TEST NO. 3 Question 25 Future prices are usually more transparent than Forward prices - State True or False ? (a) TRUE (b) FALSE Correct Answer TRUE Answer A futures contract is similar to a forward, except that the deal is made through an Explanati organized and regulated exchange rather than being negotiated directly between on two parties. Since the futures are traded in an organised manner and mostly done through screen based trading, they are much more transparent than forwards. Question 26 If the interest rate increases, the premium on CALL option will also increase - State True or False ? (a) TRUE (b) FALSE Correct Answer TRUE Answer High interest rates will result in an increase in the value of a call option and a Explanati decrease in the value of a put option. on  NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION EXAM – PRACTICE TEST NO. 3 Question 27 Ms. Gayatri buys a call option of strike price Rs. 300 when the spot price is Rs 337. What is the intrinsic value of this call option? (a) -37 (b) 37 (c) Zero (d) 637 Correct Answer 37 Answer The option premium of any security consist of two varables ie. the intinsic value Explanati and time value. on For example if the spot price is Rs 100 and the call option price of a Rs 95 strike price option is Rs 12, then Rs 5 (100 - 95) is the intrinsic value and the balance Rs 7 ( 12 - 5 ) is the time value. In the above question, the intrinsic value is 337 - 300 = Rs 37. Question 28 What is time value of an option ? (a) Its the general bank interest rate (b) Its the volatility of the underlying asset (c) Its the difference between the intrinsic value and the premium (d) Its the time left for the option to expiry Correct Answer Its the difference between the intrinsic value and the premium Answer Option premium consists of two components - intrinsic value plus the time value. Explanati on So the time value can be known by the difference in option premium and intrinsic value.  NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION EXAM – PRACTICE TEST NO. 3 Question 29 A portfolio of Rs 25 lacs has a beta of 1.20. A complete hedge is obtained by. (a) by selling Nifty futures of Rs 25 lacs (b) by selling Nifty futures of Rs 28 lacs (c) by selling Nifty futures of Rs 30 lacs (d) by buying Nifty futures of Rs 28 lacs Correct Answer by selling Nifty futures of Rs 30 lacs Answer Beta measures the sensitivity of a scrip/ portfolio vis-a-vis index movement over Explanati a period of time, on the basis of historical prices. A beta of 1 indicates that the on security's price will move with the market. A beta of less than 1 means that the security will be less volatile than the market. A beta of greater than 1 indicates that the security's price will be more volatile than the market. For example, if a stock's beta is 1.3, it's theoretically 30% more volatile than the market. So to obtain a hedge for a portfolio of shares, one has to sell Nifty futures. The beta of a portfolio in the above case is 1.20. The portfolio value is Rs 25 lacs. 25 Lacs x 1.20 = Rs 30 lacs.Therefore to get a complete hedge for this portfolio, Nifty worth Rs 30 lacs have to be sold. Question 30 The beta of a stock is 0.7 and you have a buy position of Rs 3,00,000 in it. Which of the below options will give you a complete hedge ? (a) Sell Rs 2,10,000 Nifty (b) Buy Rs 2,10,000 Nifty (c) Buy Rs 3,00,00 Nifty (d) Sell Rs 3,00,000 Nifty Correct Answer Sell Rs 2,10,000 Nifty Answer To get a complete hedge against your buy position , you will have to sell Nifty. Explanati on 0.7 x Rs 3,00,000 = Rs 2,10,000.  NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION EXAM – PRACTICE TEST NO. 3 Question 31 A derivative market would primarily have. (a) Speculators (b) Hedgers (c) Long term investors (d) Both 1 and 2 Correct Answer Both 1 and 2 Answer A derivative market has both speculators and hedgers. Long term investors in Explanati vest in the cash market and take delivery of securities. on Question 32 Mr. Sunil wishes to buy a futures contract of Tata Steel shares. He should. (a) make payments for the full value of the contract (b) make the margin payments as calculated by the exchange (c) hedge his position in Tata Steel in the Options market (d) None of the above Correct Answer make the margin payments as calculated by the exchange Answer To buy a futures contract, one does not have to make full payment but only the Explanati margin payment as per the percentage decided by the stock exchange. on  NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION EXAM – PRACTICE TEST NO. 3 Question 33 Forward Contracts are those contracts which can be customised as per the requirements of the concerned parties - True or False ? (a) FALSE (b) TRUE Correct Answer TRUE Answer Forward contracts are as per the choice of the transacting parties where as the Explanati future contracts, the parameters quantity, expiry date etc. are customised by the on exchanges. Question 34 Which amongst the following comes under the purview of Securities Contracts (Regulation) Act-1956 ? (a) Currency (b) Securities (c) Gold (d) Commodities Correct Answer Securities Answer As per the Securities Contracts (Regulation) Act-1956, the term ‘Securities’ Explanati include: on - Shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate - Derivative - Units or any other instrument issued by any collective investment scheme to the investors in such schemes - Government securities - Such other instruments as may be declared by the Central Government to be securities - Rights or interests in securities  NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION EXAM – PRACTICE TEST NO. 3 Question 35 Strike price is the price per share for which the underlying security may be purchased or sold by the option holder - State True or False ? (a) TRUE (b) FALSE Correct Answer TRUE Answer Strike price or Exercise price is the price per share for which the underlying Explanati security may be purchased or sold by the option holder. on Question 36 A penalty or suspension of registration of a stock broker from derivatives exchange/segment under SEBI (Stock Broker and Sub-broker) Regulations, 1992 can take place if (a) The stock broker violates the conditions of registration (b) The stock broker fails to pay fees (c) The stock broker is suspended by the stock exchange (d) In any of the above situations Correct Answer In any of the above situations Answer A penalty or suspension of registration of a stock - broker under the Explanati SEBI (Stock Broker) Regulations, 1992 can be ordered if: on - The stock broker violates the provisions of the Act - The stock broker does not follow the code of conduct - The stock broker fails to resolve the complaints of the investors - The stock broker indulges in manipulating, or price rigging or cornering of the market - The stock broker’s financial position deteriorates substantially - The stock broker fails to pay fees - The stock broker violates the conditions of registration - The stock broker is suspended by the stock exchange  NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION EXAM – PRACTICE TEST NO. 3 Question 37 The losses for a seller of a Call options are. (a) limited (b) Unlimited Correct Answer unlimited Answer The seller of a call option believes that prices will go down. Explanati on The losses begin when the prices rise and theoretically prices can rise to unlimited levels, so the losses can be unlimited. Question 38 A trader sells a future contract and prices rises. The trader will if he squares up the position. (a) make a profit (b) make a loss (c) Insufficient data (d) None of the above Correct Answer make a loss Answer For eg - He sells at Rs 100 and prices rises to Rs 110. If he squares up, he shall Explanati make a loss of Rs 10. on  NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION EXAM – PRACTICE TEST NO. 3 Question 39 The quality of the underlying asset is standardized by the in case of futures contract. (a) RBI (b) SEBI (c) Exchange (d) The buyer and seller Correct Answer Exchange Answer Exchange traded futures and options are standardised as per the rules of the Explanati Exchange in terms of quality, time, duration, quantity etc. on Question 40 The Bye Laws of an Indian Stock Exchange are to be approved by. (a) Finance Ministry (b) RBI (c) Clearing Corporation (d) SEBI Correct Answer SEBI  NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION EXAM – PRACTICE TEST NO. 3 Question 41 Clearing member Ram has 6 trading members who are all in Mumbai and Clearing member Shyam has 6 trading members who are all outside Mumbai. Both of them have deposited same amount of liquid assets with the clearing corporation. Which amongst the following statement is True ? (a) Clearing Member Ram will have a higher exposure limit than Clearing Member Shyam (b) Clearing Member Shyam will have a higher exposure limit than Clearing Member Ram (c) Both Ram and Shyam will have the equal exposure limits (d) None of the above Correct Answer Both Ram and Shyam will have the equal exposure limits Answer As per Dr. L. C. Gupta Committee recommendations: Members’ exposure should be Explanati linked to the amount of liquid assets maintained by them with the clearing on corporation. There is no mention of any geographical limitations. Question 42 Which one of the below mentioned option will result in a Bear Spread ? (a) Selling a Call of a lower strike price and buying a Call of a higher strike price (b) Selling a Put of a lower strike price and buying a Call of a higher strike price (c) Selling one Call of a lower strike price and buying two Puts of a higher strike price (d) None of the above Correct Answer Selling a Call of a lower strike price and buying a Call of a higher strike price Answer Bear Spread can be created by : Explanati on 1) Selling a low strike call and buying a high strike call OR 2) Selling a low strike Put and buying a high strike Put Remember : Bear spread involves either 2 Calls or 2 Puts and not Call and Put.  NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION EXAM – PRACTICE TEST NO. 3 Question 43 Are Treasury Bills included in the list of permitted liquid assets which can be offered to Clearing Corporation by the Clearing Members ? (a) Yes (b) No Correct Answer Yes Answer Liquid Assets can be in the form of Cash, Cash Equivalents (Government Explanati Securities, Fixed Deposits, Treasury Bills, Bank Guarantees, and Investment on Grade Debt Securities) and Equity Securities. Question 44 The Spot Price of ABC Stock is Rs. 347. Rs. 325 strike call is quoted at Rs. 39. What is the Intrinsic Value? (a) 0 (b) 22 (c) 39 (d) 61 Correct Answer 22 Answer When the Strike Price is below the Spot Price, the Call Option is 'In the Money' Explanati ie. profitable. on Intrinsic Value for a such a Call Option = Spot Price - Strike Price = 347 – 325 = 22  NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION EXAM – PRACTICE TEST NO. 3 Question 45 Options which are traded on a recognised exchange ie. Exchange traded options are (a) usually in-the-money options (b) usually out-of-the money options (c) Standardized options (d) Customized options Correct Answer Standardized options Answer Exchange Traded Options are standarised as per the rules and regulation of the Explanati exchanges. Only the price is variable. The lot size quantity, time (maturity) etc. on are all fixed by the exchanges. Question 46 You sold one SBI Ltd. futures contract at Rs.260 and the lot size is 1,000. What is your profit or loss, if you purchase the contract back at Rs.251 ? (a) 9000 (b) -9000 (c) 7500 (d) -7500 Correct Answer 9000 Answer When you sell a stock future contract you make a profit if the share falls. In this Explanati case SBI has fallen by Rs9 x 1000 = Profit of Rs 9000 on  NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION EXAM – PRACTICE TEST NO. 3 Question 47 Margins in futures trading are applicable to - (a) Only Institutional players. (b) Both the buyer and the seller (c) Only the buyer (d) Only the Seller Correct Answer Both the buyer and the seller Answer In a futures market margins are payable by both the parties. Explanati on Question 48 An in-the-money option is a option with (a) a negative intrinsic value (b) a positive intrinsic value (c) either negative or positive intrinsic value (d) zero time value Correct Answer a positive intrinsic value Answer Intrinsic value refers to the amount by which option is in the money i.e. the Explanati amount an option buyer will realize, before adjusting for premium paid, if he on exercises the option instantly. For eg - Spot price of a stock is Rs 100. The Call option of strike price Rs 95 is in the money and Rs 5 is the Intrinsic value Therefore, only in-the-money options have intrinsic value whereas at-the-money and out- of-the-money options have zero intrinsic value.  NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION EXAM – PRACTICE TEST NO. 3 Question 49 All the orders entered on the Trading System of a Derivative Exchange are at Prices exclusive of brokerage. True or False ? (a) FALSE (b) TRUE Correct Answer TRUE Answer The prices are exclusive ie. with out any brokerage. Brokerage is added later Explanati and is reflected in the contract note. on Question 50 If a person buys a share in one market and the simultaneously sells in a different market to benefit from differentials is known as. (a) Long trading (b) Arbitrage (c) Speculation (d) Jobbing Correct Answer Arbitrage Answer Arbitrage means the simultaneous purchase and sale of an asset in order to profit Explanati from a difference in the price. on It is a trade that profits by exploiting price differences of identical or similar financial instruments, on different markets. For example- If SBI is quoted on NSE at Rs 200 and on BSE there is a buyer at Rs 203, then the arbitrageur will buy on NSE and sell on BSE and Rs 3 (less brokerage etc.) will be is profit. Arbitrage exists as a result of market inefficiencies; it provides a mechanism to ensure prices do not deviate substantially from fair value for long periods of time. *******************************  NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION EXAM – PRACTICE TEST NO. 3 Practice Question Banks also available for : NISM NISM Series I: Currency Derivatives Certification Exam NISM Series V A: Mutual Fund Distributors Certification Exam NISM Series VI: NISM Series VI - Depository Operations Certification Exam NISM Series VII: Securities Operations and Risk Management NISM Series VII: Equity Derivatives Certification Exam NISM Series III A: Securities Intermediaries Compliance certification Exam NISM Series X A : Investment Adviser (Level 1) Certification Exam NISM Series X B: Investment Adviser (Level 2) Certification Exam And many more.. NCF M NCFM Financial Markets: A Beginners Module NCFM Capital Market (Dealers) Module NCFM Derivative Market (Dealers) Module BS E Certificate on Security Market (BCSM) NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION EXAM – PRACTICE TEST NO. 3