NISM 8 MCQ's PDF

Q 1. A client can use cross margining across Cash and Derivatives segment - True or False ? a) True b) False Explanation: A client can use the margin he has paid in any segment provided he has signed on the necessary declarations in the account opening forms etc. Q 2. When a Client default...

Q 1. A client can use cross margining across Cash and Derivatives segment - True or False ? a) True b) False Explanation: A client can use the margin he has paid in any segment provided he has signed on the necessary declarations in the account opening forms etc. Q 2. When a Client default in making payment in respect of Daily Settlement, the action taken is a) the client is given 2 days to clear the payments b) the contract is closed out c) the broker pays the money and the client refunds to him in 7 working days d) the client can give bank guarantee in 2 working days to avoid the contract being closed out. Q 3. At the year-end, any balance in the "Deposit for Mark-to-Market Margin Account" should be shown as a deposit under the head "Current Assets" - True or False ? a) True b) False Q 4. Put option gives the buyer a right to ______________ the underlying asset,. a) Sell b) Buy c) Speculate d) None of the above Explanation: Option, which gives buyer a right to buy the underlying asset, is called Call option and the option which gives buyer a right to sell the underlying asset, is called Put option. Q 5. If all things remain constant throughout the contract period, the option price will always in price by expiry. a) Fall b) Rise c) Either Rise or Fall d) None of the Above Explanation: Even if the price of the underlying remains constant, the option price will fall due to Time Decay. This the advantage of Time Decay is used by the Option Sellers. Q 6. The Non Cash Component of Liquid Assets which are given as a form of margin can include Equity Shares which are physical form - True or False ? a) False b) True Explanation: Non Cash Component can include Equity Shares as per Capital Market Segment which are in demat form (and not in physical form) as specified by clearing corporation from time to time deposited with approved custodians Q 7. If the Initial Margin is changed then it will apply only to fresh contracts and not to previous outstanding contracts - True or False ? a) True b) False Explanation: Initial Margin, if changed, will apply to all outstanding contracts and not only to fresh contracts. Q 8. Impact cost is low when the liquidity in the system is poor a) True b) False Explanation: Impact cost is said to be low when large orders can be executed without moving the prices in a big way. So when volumes / liquidity will be high the impact cost will be low. Q 9. The advantage of time decay usually goes to _____________ a) Option Buyers b) Option Sellers c) Long Term Investors d) Short Term Investors Explanation: If all things remain constant throughout the contract period, the option price will always fall in price by expiry due to time decay. Thus option sellers are at a fundamental advantage as compared to option buyers as there is an inherent tendency in the price to go down. Q 10. Churning means _________________ a) A specialized arbitrage between Futures and Options b) Excessive unwarranted trading by brokers/agents for generating commissions c) Delta Hedging using Rho and Theta d) Specialized Portfolio Management Explanation: Churning refers to when securities professionals making unnecessary and excessive trades in customer accounts for the sole purpose of generating commissions. Q 11. When different Clearing Members clear for client/entities in Cash and Derivatives segments they are required to enter into necessary agreements for availing cross margining benefit - True or False ?  a) True b) False Q 12 To facilitate Foreign Institutional Investors, SEBI has allowed them to make weekly payments of Mark to Market Margin due to their huge volumes of trading - True or False ? a) True b) False Explanation: A SEBI registered FIIs and its sub-account are required to pay initial margins, exposure margins and mark to market settlements in the derivatives market as required by any other investor i.e. Daily. Q 13. As a special provision for NRI’s, the Mark to Market Margin payable them can be done on a consolidated weekly basis — True or False ? a) False b) True Explanation: All types of investors have to make daily payments of Mark to Market margins Q 14. SEBI's centralized web based complaints redress system which provides online access 24 x 7 is called a) SERA b) SEBI COMPSYS c) SWCOMP d) SCORES Explanation: SEBI Complaints Redress System - SCORES Q 15. STT is applicable on all ________________ transactions for both futures and option contracts. a) Buy b) Sell c) Both Buy and Sell d) No STT on Futures Trading Explanation: Securities Transaction Tax (STT) is paid only on the sale side of F&O transactions. Q 16. A Manager / Dealer in the Cash market with a registered Trading Member, can also become a Manager / Dealer in the Derivatives segment without any additional formalities — True or False? a) True b) False Explanation: Apart from other formalities, he will also have to clear the Derivative Exam. Q 17. As per the regulations, the minimum contract value of a futures contract shall not be less than Rs. 1 Lakh - True or False? a) True b) False Explanation: The minimum contract value shall not be less than Rs. 2 Lakhs. Q 18. Accounting for open options as on the balance sheet date is shown under the "Equity Index/Stock Option Premium Account" — True or False? a) True b) False Q 19. In the Arbitration procedure, the arbitrator conducts the arbitration proceeding and passes the award normally within a period of months from the date of initial hearing. a) one b) two c) three d) four Q 20. The option premium is decided by ____________ a) SEBI b) Stock Exchanges c) By buyers and sellers d) By Stock Brokers Explanation: SEBI and Stock Exchanges decide the rules and provide the platform for trading. The option prices are decided by the buyers and sellers based on the spot price, time value, volatility and many other factors. Q 21. Equities can also be traded through Professional Clearing Members. a) True b) False Explanation: Professional clearing member clears the trades of his associate Trading Member and institutional clients. I-le need not be a Member of an exchange. Q 22. "ETFs are basket of securities that trade like individual stock on an exchange- True or False? a) True b) False Explanation: Exchange Traded Funds (ETFs) is basket of securities that trade like individual stock on an exchange. They have number of advantages over other mutual funds as they can be bought and sold on the exchange. Since, ETFs are traded on exchanges intraday transaction is also possible. Q 23. An option which would give a negative cash flow to its holder if it were exercised immediately is known as ____________________ a) At the money option b) In the money option c) Out of the money option d) None of the above Explanation: Out of the Money option is a loss making option and would give the holder a negative cash flow if it were exercised immediately. A call option is said to be OTM, when spot price is lower than strike price. And a put option is said to be OTM when spot price is higher than strike price. For e.g. If the spot price of a stock is Rs 100, then the Call Option of strike price of Rs 105 is Out of the Money. Q 24. On what occasion form the below, the derivative segment of the stock market has to report to SEBI? a) Occasions when the 90% Value at Risk (VaR) limit has been violated b) Occasions when the 96.5% Value at Risk (VaR) limit has been violated c) Occasions when the 95% Value at Risk (VaR) limit has been violated d) Occasions when the 99% Value at Risk (VaR) limit has been violated Q 25. As an option moves more In The Money, the absolute value of Delta will _________ a) Increase b) Decrease c) Remain same d) None of the above Explanation: Delta for call option buyer is positive. This means that the value of the contract increases as the share price rises Q 26. "Ms. Patil sold four futures contract of Bata India Ltd at Rs 820 (lot size 250 shares). What is her profit or loss if she purchases back the contracts at Rs 806? a) Rs 3500 b) Rs 9500 c) Rs 14000 d) Rs 16000 Explanation: Ms. Patil sold Bata India shares at Rs 820 and bought back at Rs 806. So she made a profit of Rs 14 per share. Total quantity sold - 250 x 4 lots = 1000 So total profit is Rs 14 x 1000 = Rs 14000. Q 27. If the price of Infosys stock rises, the call option premium will also rise.  a) True b) False Explanation: A rise in spot prices will lead a rise in the intrinsic value and so the option premium will rise. Q 28. _________________measures change in delta with respect to change in price of the underlying asset. a) Vega b) Rho c) Gamma d) Theta Explanation: Gamma measures change in delta with respect to change in price of the underlying asset. Gamma = Change in an option delta/ Unit change in price of underlying asset Gamma signifies the speed with which an option will go either in-the-money or out-of-the-money due to a change in price of the underlying asset. When the option is deep in or out of the money, gamma is small. When the option is near or at the money, gamma is at its largest. Q 29. Diversification is used to control Systematic Risks - True or False? a) True b) False Explanation: Systematic risks are risks which are associated with movement of entire market due to economic / political and other factors. These cannot be controlled by diversifying ones portfolio as the entire portfolio will fall in case of negative news. The Systematic risks can be controlled by hedging in the F&O section. Q 30. **Ms. Geeta goes long in a PUT option of a higher strike price and shorts another PUT option of a lower strike price, of the same scrip and same expiry. This strategy is called a) Bullish Spread b) Bearish Spread c) Calendar spread d) Straddle Explanation: Bearish Spread - The trader is bearish on the market and so goes long in one put option by paying a premium. Further, to reduce her cost, she shorts another low strike put and receives a premium. Q 31. The initial margin in derivatives is fixed depending on the volatility of the stock. True / False? a) False b) True Explanation: If the stock is very volatile it could result in looses to the trader in a short period of time. So to safe gourd the trading member and the trader, higher initial margin are levied on volatile stocks. Q 32. "If you SELL a PUT option at premium of Rs 30 at the Strike Price of Rs 200, lot is of 400 shares, and then the maximum possible loss is _______________ a) Rs 6000 b) Rs 68,000 c) Rs 80,000 d) Unlimited Explanation: When you sell a PUT option, you beli.e.ve the share will rise. In case it falls you make a loss and theoretically the price can become zero. So in the above example if the price falls from 200 to zero, you make a loss of Rs 200. You have received a premium of Rs 30. So the loss will be Rs 200 - Rs 30 = Rs 170 Rs 170 x 400 (lot size) = 68000 Q 33. Margins are collected on a _________________ a) 3 hour basis b) Daily basis c) T+2, so on a two day basis d) Weekly basis, Monday to Friday. Q 34. "Index futures is - a) An OTC product b) A Cash market security c) A derivative product d) An call or put option Explanation: The future price of an index is derived from the spot / cash price. So Index Future is a derivative product. Q 35. "NSE Nifty consists of _____ stocks. a) 25 b) 30 c) 50 d) 60 Q 36. When you buy a put option on a stock you are owning, this strategy is called ___________ a) Straddle b) writing a covered call c) calendar spread d) protective put Explanation: Protective Put is a risk-management strategy that investors can use to guard against the loss of unrealized gains. The put option acts like an insurance policy - it costs money, which reduces the investor's potential gains from owning the security, but it also reduces his risk of losing money if the security declines in value. Q 37. A trader buys a call and a put option of same strike price and same expiry. This is called as ____________ a) Butterfly b) Short Straddle c) Long Straddle d) Calendar Spread Explanation: To do a long straddle strategy one has to buy a call and a put option of the same strike price and expiry. Together, they produce a position which will lead to profit’s if the market / stock is very volatile and it makes a big move - either up or down. For e.g.- A person buys a Rs 200 call at Rs 30 and a Rs 200 put at Rs 20 of a stock. If the stock rises significantly the call will rise greatly but his put will fall by maximum Rs 20. So he makes a good profit. If the stock falls significantly, he loses his call money buy gains greatly in the put option as it rises. Thus the Long Straddle is used when a trader expects a big move in the stock - in any direction is ok. Q 38. Vega is __________ a) the change in option price given a one percentage point change in the risk-free interest rate b) a measure of the sensitivity of an option price to changes in market volatility c) the change in option price given a one-day decrease in time to expiration d) speed with which an option moves with respect to price of the underlying asset Q 39. If a trader buys a put option with a higher strike price and sells a put option with a lower strike price, both of the same underlying then this strategy is called a) Bullish Spread b) Bearish Spread c) Straddle d) Butterfly spread Explanation: Bearish Vertical Spread using puts - The trader is bearish on the market and so goes long in one put option by paying a premium. Further, to reduce his cost, he shorts another low strike put and receives a premium. Q 40. "A derivative contract made directly over telephone by two parties is called futures contract - True or False? a) True b) False Explanation: Such contracts are called Forward or OTC contracts. Q 41. **Important element (s) of risk management is (are): a) Monitoring capital adequacy requirements of members b) Regular evaluation of trading members positions c) Collection of Margins d) All of the above Q 42. A calendar spread will attract __________________ margin. a) Zero b) Higher c) Lower d) None of the above Explanation: Calendar spread position is a combination of two positions in futures on the same underlying - long on one maturity contract and short on a different maturity contract. Calendar spreads carry only basis risk and no market risk i.e. no risk even if market rises or falls by a big amount hence lower margins are adequate. Q 43. Risk which is Non Systematic can be reduced by diversifying ones portfolio. a) True b) False Explanation: Specific risk or unsystematic risk is the component of price risk that is unique to particular events of the company and/or industry. This risk is inseparable from investing in the securities. This risk could be reduced to a certain extent by diversifying the portfolio. Q 44. "Ask price is the price at which – a) Buyer is willing to buy b) Seller is willing to sell c) Arbitrageur is willing to negotiate d) Hedger is willing to buy Explanation: Bid price is the price buyer is willing to pay and ask price is the price seller is willing to sell. For e If the share price of Reliance Industry is Rs 950 -951 than the bid rice is Rs 950 and ask rice is Rs 951 Q 45. With a fall in interest rates, the premiums on CALL Options will _________ a) Rise b) Fall c) No Effect d) None of the above Explanation: When the interest rates falls, the cost of carry also falls, thus reducing the premium on call options. On the other hand, the premium on put options will rise with a fall in interest rates. Q 46. When a stock which is part of the index has a stock split, it does not have an impact on the index. a) True b) False Explanation: Stock Split has an effect on Options, Strike Price etc. but has no impact on the index as such. Q 47. A Call Option is said to be OUT OF THE MONEY, ____________ a) when spot / market price is higher than strike price b) when spot / market price is lower than strike price c) when spot / market price is equal to strike price d) strike price is zero Explanation: A call option is said to be OTM, when spot price is lower than strike price For e.g. - Market Price of XYZ stock is 200 and the trader has a bought a call option of strike price 220, so he is in a loss. A put option is said to be OTM when spot price is higher than strike price. Q 48. If a company declares a dividend, what will be the effect on the pricing of call options? a) Call option price will rise b) Call option price will fall c) No effect on option pricing d) None of the above Explanation: Dividends are receivable only for shares which are bought in the cash market. No dividend is receivable on F&O positions. So when the stock becomes ex-dividend in cash market, the price generally falls to the extent of dividend paid. This fall will be reflected in the Call option premium in advance. So when a dividend is declared, the Call option premium falls and Put option premium rises. Q 49. You have a short position in LPQ Stock futures at Rs 350 (one lot size is 500 shares) and you have made a profit of Rs 28000. To do this you will have to: a) Sell one lot are Rs 406 b) Sell one lot at Rs 294 c) Buy one lot at 406 d) Buy one lot at Rs 294 Explanation: Profit = Rs 28000, Lot size = 500, so per share profit = 28000/500 = Rs 56 Since he has a short position, he will be in a profit if the share falls and he buys at a lower price. So the price has to fall by Rs 56 from Rs 350 = Rs 294 Q 50. In case of futures, the initial margin is paid only by the sellers. a) True b) False Explanation: In case of futures, the initial margin is paid by both buyers and sellers. In case of Options, the initial margin is paid only by the sellers. Q 51. Hedging would ensure that your profits are always on the higher side compared to an unheeded position - State True or False? a) True  b) False Explanation: Hedging controls your losses but also controls your profit’s. It does not ensure higher profits. An open position can give you more profit’s or more losses. Q 52. **An index option like NIFTY OPTION is a ___________ a) Treasury instrument b) Debt instrument c) Derivative Product d) Cash market product Explanation: Nifty options are derived from the NSE index i.e. Nifty and so it’s a derivative product. Q 53. What is a covered call? a) It’s a strategy to sell calls at various strike prices to profit from the premium received b) It’s used to generate extra income from existing holdings in the cash market. c) It’s a strategy of buying a call and sell its future for hedging d) It’s done by buying a call and put of the same strike price. Explanation: If an investor has bought shares and intends to hold them for some time, then he would like to earn some income on that asset, without selling it, thereby reducing his cost of acquisition. So he sells a call option of that stock and benefit’s from the premium received. Q 54. Covered calls carry greater risk then Naked Calls — true or false? a) True b) False Explanation: In a naked call, the trader has to take a view on the market and accordingly go long or short. The covered call strategy is used to generate extra income from existing holdings in the cash market. Therefore, the naked call strategy is much riskier. Q 55. A common individual investor cannot write an option. a) True b) False Explanation: Writing an option means selling an option. Any person can write an option after he has fulfilled the necessary formalities like client registration, margin payments etc. Q 56. In futures contract, the clearing house / clearing corporation practically becomes the counter party for all transactions - State True or False? a) True b) False Q 57. Of the below options, which is more difficult to manipulate? a) Individual Stocks b) IT sector stocks c) Stock Index d) All of the above Explanation: A stock index contains a basket of high market cap stocks. So it’s very difficult to manipulate it when compared to individual stocks. Q 58. **The option seller has an obligation and since his losses can be unlimited, he can be a potential risk for the stability of the system. Therefore he has to pay a) Extra Premium b) Special Loss Charges c) Margins d) All of the above Explanation: The buyer of an option pays the premium upfront and that's his maximum loss - so there is no margin collected from him. On the other hand, the seller of an option can have huge / unlimited losses which can cause risk to the markets stability – so margins are collected from him. Q 59. "The Derivative markets mostly comprises of — a) Long term investors b) Hedgers c) Speculators d) Both 2 and 3 Explanation: Long term investors buy stocks in Cash market for delivery. Hedgers and Speculators are active in the derivative markets. Q 60. OTC derivative market is less regulated market because these transactions occur in private among qualified counterparties, who are supposed to be capable enough to take care of themselves. True or False? a) False b) True Explanation: In an OTC market, no exchange is involved. Q 61. A trader buys a June XYZ stock futures contract at Rs 242. After a few days the price of XYZ futures was Rs 269. What will be your profit / loss if you square up your position? (The market lot of XYZ share is 1000) a) -20000 b) -27000 c) 20000 d) 27000 Explanation: Purchase Price - Rs 242 Sale Price - Rs 269 So profit of Rs 27 x 1000 lot = Rs 27000. Q 62. **An Over the Counter Option is — a) A private contract b) Standardized c) Governed by the rules of stock exchange d) All of the above Explanation: Options traded on the over-the-counter market, where participants can choose the characteristics of the options traded. This trading is between two private parties and no exchange is involved. The flexibility of these options is attractive to many. With OTC options, both hedgers and speculators can benefit from avoiding the restrictions that normal standardized exchanges place on options. The flexibility allows participants to achi.e.ve their desired position more precisely and cost effectively. OTC market is not a physical market place but a collection of broker-dealers scattered across the country. Trading is done through negotiated bidding process over a network of telephone or electronic media that link thousands of intermediaries. OTC derivative markets have witnessed a substantial growth over the past few years, very much contributed by the recent developments in information technology. The OTC derivative markets have banks, financial institutions and sophisticated market participants like hedge funds, corporations and high net-worth individuals. Q 63. If the tick size of scrip is 5 paisa and the spot price of that scrip is Rs. 70, what will be the next upward tick? a) 69.95 b) 70.005 c) 70.05 d) 70.50 Explanation: Tick size is the minimum move allowed in the price quotations. So a 5 poise tick size will lead to an upward tick of.05. Q 64. "Clearing Corporation acts as a legal counterparty to all trades on F&O segment and also guarantees their financial settlement. True / False. a) True b) False Explanation: Clearing Corporation or the Clearing House is responsible for clearing and settlement of all trades executed on the F&O Segment of the Exchange. Clearing Corporation acts as a legal counterparty to all trades on this segment and also guarantees their financial settlement. The Clearing and Settlement process comprises of three main activities, viz., Clearing, Settlement and Risk Management. Q 65. **The net worth of a trading member does not include — a) Intangible Assets b) Prepaid expenses c) Bad Deliveries d) All of the above Explanation: As per the L.C.Gupta committee report the net worth of the member shall be computed as follows: Capital + Free reserves - Less non-allowable assets which are: Fixed assets Pledged securities Member's card Non-allowable securities (unlisted securities) Bad deliveries Doubtful debts and advances Prepaid expenses intangible assets 30% marketable securities Q 66. A trader Mr. Raj wants to sell 10 contracts of June series at Rs.5200 and a trader Mr. Rahul wants to buy 5 contracts of July series at Rs. 5250. Lot size is 50 for both these contracts. The Initial Margin is fixed at 10%. They both have their accounts with the same broker. How much Initial Margin is required to be collected from both these investors by the broker? a) Rs 2,60,000 b) Rs 1,31,250 c) Rs 3,91,250 d) Rs 1,28,750 Explanation: Payment of Initial Margin by a broker cannot be netted against two or more clients. So he will have to pay the margin for the open position of each of his clients. So margin payable for Mr. Raj is: 10 x 5200 x 50 at 10% = Rs 2, 60,000 Margin payable for Mr. Rahul is: 5 x 5250 x 50 at 10%: Rs 1, 31,250 Total = Rs 3, 91,250. Q 67. Mr. A had bought 300 shares of XYZ and wants to protect himself if the price falls. Which of the below options will Be preferred by him. a) Place a limit sell order b) Place a limit buy order c) Place a limit stop loss order d) Place an 100 i.e. Immediate or Cancel order Explanation: The facility of STOP LOSS helps the user to determine what is the maximum loss he can make on a trade. Accordingly a STOP LOSS order is entered in the system. This order is only released if the trigger price is reached. For e.g.- If one has bought a share at Rs 300 and his stop loss price is Rs 280 and trigger price is Rs 281, then the order will be released in the system when the price falls to 281 and the shares will be sold till Rs 280. Q 68. A risky trader / speculator believes that the future price of ABC company will fall and being a smart trader he will ______________ a) buy ABC futures now and sell them later when it falls b) wait till the price of ABC futures and cash market price become same c) sell ABC futures now and buy them later when the price falls d) will do nothing as he had suffered a loss in his previous trade Q 69. **The spot price of LKK share is Rs 300, the put option of Strike Price Rs 280 is _________ a) In the money b) Out of the money c) At the money d) None of the above Explanation: Out of the Money Option - A call option with a strike price that is higher than the market price of the underlying asset, or a put option with a strike price that is lower than the market price of the underlying asset. An out of the money option has no intrinsic value, but only possesses time value. As in the above example, LKK is trading at Rs 300. For such a stock, call options with strike prices above Rs 300 would be out of the money calls, while put options with strike prices below Rs 300 would be out of the money puts. Out of the money options are significantly cheaper than in the money or at the money options. Q 70. The Brokers of an exchange can be a part of the Governing Board of the derivatives segment. a) False b) True Explanation: As per the L.C.Gupta Committee recommendations - No broker members should be allowed to sit on the Governing Board of the Clearing Corporation. Q 71. If price of a futures contract increases, the margin account of the seller of this futures contract is debited for the loss. a) True b) False Explanation: When the price increases the seller of the future contract will have losses and these losses will be debited on a daily basis to the margin account of the seller. Q 72. "Derivatives market helps in transfer of various risks from those who are exposed to risk but have low risk appetite to participants with high risk appetite. True or False? a) False b) True Explanation: Derivatives were first invented as a Hedging tool so that people who wanted to play safe can use them to transfer the risk by hedging. Q 73. A clearing member is required to bring in Interest free security deposit (IFSD) of Rs. ________ Lakhs and Collateral security deposit (CSD) of Rs. __________ Lakhs per trading member he undertakes to clear and settle. a) 2 , 8 b) 5, 10 c) 7, 12 d) 1, 5 Q 74. The minimum Net worth requirement for a trading member of Capital Market Segment and F&O segment is — a) Rs 50 lakhs b) Rs 100 lakhs c) Rs 250 lakhs d) Rs 500 lakhs Q 75. When trading in futures contract, the terms of the contract are decided mutually by the trading parties. a) False b) True Explanation: The terms are mutually decided by the parties in FORWARD contract. In future contracts the terms are standardised by the exchange. Q 76. Rho is ___________ a) is the change in option price given a one percentage point change in the risk-free interest rate b) the change in option price given a one-day decrease in time to expiration c) speed with which an option moves with respect to price of the underlying asset d) a measure of the sensitivity of an option price to changes in market volatility Explanation: Please memories: Rho = change in INTEREST rate. Q 77. The trading members are required to maintain a net worth of minimum Rs 4 crores. a) True b) False Explanation: The minimum net worth for Trading / Clearing members of the derivatives clearing corporation/house shall be Rs.300 Lakhs (Rs 3 crores). The net worth of the member shall be computed as follows: - Capital + Free reserves - Less non-allowable assets which are : Fixed assets  Pledged securities Member's card Non-allowable securities (unlisted securities) Bad deliveries Doubtful debts and advances Prepaid expenses Intangible assets 30% marketable securities Q 78. A call option is said to be, when spot price is higher than strike price. a) At the money b) Out of the money c) In the money d) European Explanation: A call option with a strike price that is lower than the market price of the underlying asset, or a put option with a strike price that is higher than the market price of the underlying asset. For example, consider a stock that is trading at Rs 100. For such a stock, call options with strike prices below Rs 100 would be in the money calls (i.e. Rs 80, Rs 90 calls) while put options with strike prices above Rs 100 (Rs 110, Rs 120 calls etc.) would be in the money Puts. For easy understanding, those calls or puts which are profitable are In the Money. Q 79. "A long position in a January future contract can be reversed by a short position in those stock futures of February month — true / false? a) False b) True Explanation: A position in futures can be reversed by squaring up in the same month and not in a different month. So in the above case the position can be reversed by selling the stock future in January month. Q 80 When a person sells a put option, he has an — a) Bullish view b) Bearish view c) Mixed view d) Long term view Q 81. You have sold a put option of a strike price of Rs 370 for Rs 38. What is the maximum gain you can have on expiry of this position? a) Unlimited b) Rs 370 c) Rs 38 d) Rs 332 Explanation: The maximum gain for a seller of PUT option is the premium he receives. In this case he has sold the put option at Rs 38 and received this premium, so that is his maximum gain. Q 82. Calendar spreads carry only __________ risk. a) speculative b) market c) basis d) interest Explanation: Basis means the difference between Spot Price and Future Price or difference between two future prices of the same underlying. Basis risk is the chance that the basis will have strengthened or weakened from the time the hedge is implemented to the time when the hedge is removed – i.e. the risk that the two future prices will not fluctuate identically. Q 83. You have sold a CALL option on a stock at Rs. 16 per call with strike price of Rs. 170. If on exercise date, stock price is Rs. 196, ignoring transaction cost, you will choose a) to exercise the option b) not to exercise the option c) may or may not exercise the option depending on the company's background d) none of the above Explanation: You have sold a CALL which means you expect the stock to fall. On the exercise day the stock has risen which means there is a loss and so you will not exercise the option. Q 84. **Non Systematic risks can be reduced by diversifying one's portfolio — true or False? a) True b) False Explanation: Specific risk or unsystematic risk is the component of price risk that is unique to particular events of the company and/or industry. This risk is inseparable from investing in the securities. This risk could be reduced to a certain extent by diversifying the portfolio. Q 85. **In the Option segment, if you buy a CALL at a premium of Rs 35 at the Strike Price of Rs 400, lot is of 200 shares, and then the maximum possible loss is a) Unlimited b) Rs 400 c) Rs 7000 d) Rs 73000 Explanation: The minimum loss for a buyer of an option is the premium they pay. In the above case the premium paid is Rs 35 x 200 shares: Rs 7000. Q 86. Longer the time to expiry/maturity of a call option, higher will be the time value.  a) False b) True Q 87. **Mr. Shah purchased two futures contract of Ambuja Cements Ltd at Rs. 180 (lot size 2000 shares). What will be his profit or loss if he sells them at Rs 187? a) Rs 14000 b) Rs 28000 c) Rs 20000 d) Rs 27500 Explanation: Mr. Shah bought at Rs 180 and sold at Rs 187, so he made a profit of Rs 7. Lot size is Rs 2000 and he has purchased 2 lots, so 4000 shares x Rs 7 profit = Rs 28,000 Q 88. The Ask price is always greater than the Bid price. a) False b) True Explanation: Bid - Ask : The bid price is the buyers price and Ask is the sellers price. So the seller’s price is always higher than the buyer’s price. Q 89. **An Out of the Money option will have: a) More than 1 intrinsic value b) Zero intrinsic value c) Negative intrinsic value d) None of the above Explanation: Intrinsic value in options is the in-the-money portion of the option's premium. For example, if a call options strike price is Rs15 and the underlying stock's market price is at Rs 25, then the intrinsic value of the call option is Rs 10. Option premium consists of two components - intrinsic value and time value. For an option, intrinsic value refers to the amount by which option is in the money i.e. the amount an option buyer will realize, before adjusting for premium paid, if he exercises the option instantly. Therefore, only in-the-money options have intrinsic value whereas at-the-money and out-of- the-money options have zero intrinsic value. The intrinsic value of an option can never be negative. Q 90. '‘*It is recommended but not compulsory that all Stock Exchanges of India have a uniform settlement cycle. True or False? a) False b) True Explanation: Uniform settlement cycle across all exchanges is recommended but the exchanges can fix their settlement cycle as per their wish and what suits them best. Q 91. A wheat exporter has entered into a contract to supply wheat after two months. He will be buying that wheat soon. But he is afraid that a sudden rise in wheat prices may erode his profits. What should he do? a) He should sell wheat futures b) He should buy wheat futures c) He should visit the farmers to see the possibility of wheat prices increasing or decreasing d) He can import wheat and export them at a later date Explanation: By buying wheat futures he has locked in his buying price. When he wishes to take actually export he can sell in the futures market and buy in the spot market as the prices will be almost same. Q 92. The minimum price movement in scrip is called BASIS. a) True b) False Explanation: The minimum price movement in scrip is called TICK. It is minimum move allowed in the price quotations. Exchanges decide the tick sizes on traded contracts as part of contract specification. The difference between the spot price and the futures price is called basis. Q 93. Mr. A buys a August futures contract of ICICI Bank at Rs 900. On the last Thursday of the month i.e. expiry, the last traded price in August futures is Rs 912 and the closing price in cash I spot market is Rs 910. What is the profit/loss of Mr. A if his position is sq-up by the exchange. Market lot of ICICI Bank is 250. a) Rs 3000 b) Rs 2500 c) Rs -3000 d) Rs -2500 Explanation: As Mr. A has not squared up his position, the exchange will do it and the same is done at the CASH MARKET CLOSING PRICE. So Buying Price - Rs 900 Sq Up price - Rs 910 Profit of Rs 10 x 250 lot: Rs 2500 Q 94. ____________ is the change in option price given a one percentage point change in the risk-free interest rate. a) Delta b) Rho c) Vega d) Gamma Explanation: The rate at which the price of a derivative changes relative to a change in the rate of interest. Rho measures the sensitivity of an option or options portfolio to a change in interest rate. For example, if an option has a rho of 10.36 then for every percentage-point increase in interest rates, the value of the option increases 10.36%. Rho = Change in an option premium/ Change in cost of funding the underlying Q 95. **In India the future contracts are available for— a) All scrips listed on NSE b) A few selected stocks c) All scrips above the price of Rs 100 d) All stocks with a market cap of Rs 300 crore or more. Explanation: Selection of scripts which can be traded in F&O is as per certain guidelines and so only a selected few scripts which qualify can be traded on the futures market. Q 96. A cotton exporter has entered into a contract to supply cotton after three months. He will be buying that cotton soon. But he is afraid that a sudden rise in cotton prices may erode his profits. What should he do? a) He can import cotton and export them at a later date b) He should cancel the contract as cotton prices are very volatile c) He should buy cotton futures d) He should sell cotton futures Explanation: By buying cotton futures he has locked in his buying price. When he wishes to take actually export he can sell in the futures market and buy in the spot market as the prices will be almost same. Q 97. What is the main reason for which hedgers enter the futures market? a) to profit from price fluctuations b) to make long term investments c) to protect against any price uncertainities d) to make big profit’s Explanation: Hedging means making an investment to reduce the risk of adverse price movements in an asset. Normally, a hedge consists of taking an offsetting position in a related security, such as a futures contract. An example of a hedge would be if you owned a stock, then sold a futures contract stating that you will sell your stock at a set price, therefore avoiding market fluctuations. Investors use this strategy when they are unsure of what the market will do. Q 98. An Investor Mr. Shah wants to buy 8 contracts of January series at Rs 740 and an investor Mr. Patel wants to sell 5 contracts of February series at Rs 754. Initial Margin is fixed at 6%. How much initial margin has to be collected from them? Market lot is 250. a) Rs 56,550 b) Rs 88,800 c) Rs 1,45.350 d) Rs 1,87.600 Explanation: Margin to be collected from Mr. Shah: Rs 740 X 8 contracts X 250 (Market lot) at 6% = Rs 1480000 x 6% = Rs 88,800 Margin to be collected from Mr. Patel: R: 754 X 5 contract: X 250 (Market lot) at 6% = Rs 942500 x 6%: Rs 56,550 So the total margin 88,800 + 56,550 = Rs: 145350 Q 99. A commodity future exchange ____________ a) trades in cash and future commodities b) trades only in future of commodities c) trades in commodities of which it has stocks in its various go downs d) None of the above Q 100 Value-at-risk calculations are done on the basis of ________ a) best possible market conditions b) ideal market conditions c) volatility d) 90 % risk parameter Q 1. On expiry, the Forward contracts are settled by___________ a) Difference in price b) Cash c) delivery of the asset d) payment of margins Q 2. On expiry, the settlement price for Wipro will be the______________ a) Last half hour weighted average price of Wipro Futures b) Closing price of Wipro in the cash market c) Opening price of Wipro in the cash market d) The last traded price of Wipro in the cash market Explanation: The final settlement price is the closing price of the relevant underlying security in the Capital Market segment on the last trading day (expiry) of the futures contracts. (The Daily Settlement price is the closing price of the futures contract for the trading day) Q 3. On the Balance Sheet date, the balance in the initial margin equity index account should be shown separately under the head_____________ 1. Prepaid Expenses 2. Outstanding balance 3. current assets 4. current liabilities Q 4. Dividends which are _______________ of the market value of the underlying stock would be deemed to be extra ordinary Dividends. a) below 10 % b) above 10 % c) below 20 % d) above 20 % Q 5. In futures trading, the profits are received and the losses are paid ____________ a) on expiry i.e. last Thursday of the month b) on a weekly settlement basis c) on a fortnightly settlement basis d) on a daily settlement basis Q 6. Even though there are no price bands applicable in derivatives segment, to avoid erroneous order entry operating price ranges are kept and the operating price range for index futures is _______________ a) 5% b) 10% c) 15% d) 20% Explanation: Operating ranges and day minimum/maximum ranges are kept as below: For Index Futures: at 10% of the base price For Futures on Individual Securities: at 10% of the base price For Index and Stock Options: A contract specific price range based on its delta value is computed and updated on a daily basis. Q 7. An investor has ICICI Bank shares in his portfolio. He wants to protect against the downslide in this stock as he thinks the market may go down. What should he do? a) Buy ICICI Put Option b) Buy ICICI Call Option c) Buy Nifty futures d) Buy Bank Nifty Q 8. In case of open position of any NRI exceeding the specified limit, the penalty charged on the clearing member for each day of the violation would be _______________.  a) 1 % of the value of quantity in violation per client or Rs 100000 per client whichever is lower b) 1 % of the value of quantity in violation per client or Rs 100000 per client whichever is higher c) 2 % of the value of quantity in violation per client or Rs 200000 per client whichever is lower d) 2 % of the value of quantity in violation per client or Rs 200000 per client whichever is higher Explanation: In case of open position of any Client / NRI / sub-account of FII / scheme of MF exceeding, the specified limit following penalty would be charged on the clearing member for each day of violation: 1% of the value of the quantity in violation (i.e., excess quantity over the allowed quantity, valued at the closing price of the security in the normal market of the Capital Market segment of the Exchange) per client or Rs.1,00,000 per client, whichever is lower, subject to a minimum penalty of Rs.5,000/- per violation / per client. Q 9. 26th Jan is the last Thursday of the month which is a public holiday. So the derivative contract for the Jan series will expire on ________________ a) 25th Jan b) 26th Jan c) 27th Jan d) 31st Jan Q 10. _______________ is at the lowest level of hierarchy of a trading firm. a) Speculator b) Dealer c) Branch Manager d) Regional Manager Q 11. You have purchased Jan call option at Rs 100 for a premium of Rs 18. What will be your breakeven? a) Rs 100 b) Rs 82 c) Rs 118 d) Rs 18 Q 12. any member or client who increases his existing positions or has created a new position in a F&O banned security, the client/trading members will be subject to a penalty 1% of the value of increased position subject to a minimum of Rs. _____________ and maximum of Rs. ____________ a) 5000 , 100000 b) 5000. 50000 c) 10000. 100000 d) 10000. 25000 Q 13. The intrinsic value of a call option is ____________ a) the amount the option is OTM b) the amount the option is ITM c) the amount the option is ATM  d) None of the above Q 14. The theoretical future price is considered for____________ is case a futures contract is not traded during the day. a) the opening price b) the daily math to mark settlement price c) premium settlement d) last traded price Q 15. Mr. Suraj buys stock futures 1000 shares at Rs 260 and sells 800 the same day at Rs 263. The settlement price for the day was Rs 256. What will be his MTM profit / loss? a) Profit of Rs 2400 b) Profit of Rs 1600 c) Loss of Rs 800 d) Loss of Rs 2400 Explanation: Mr. Suraj buys 1000 at 260 and sells 800 at 263. Here he makes a profit of Rs 3 X 800 shares = Rs 2400 For the balance open position of 200 shares, the settlement price is 256. Here there is a MTM loss of Rs 4 (260 - 256) Rs 4 x 200 shares = Rs 800 So Net profit: 2400 – 800= Rs 1600 Q 16. Which of these PUT options are OTIVI - Out of the Money? a) Spot price 130 , Strike price 100 b) Spot price 100 , Strike price 100 c) Spot price 100 , Strike price 130 d) None of the above Q 17. ABC stock is quoting at Rs 475 in the cash market. The call option for 450 calls is quoted at Rs 35. What is the intrinsic value of this option? a) Rs 50 b) Rs 35 c) Rs 25 d) Rs 70 Explanation: When the Strike Price is below the Spot Price, the Call Option is 'In the Money' i.e. profitable. Intrinsic Value for a such a Call Option = Spot Price - Strike Price = 475 - 450 = Rs 25 The Option premium consists of two values: Intrinsic Value and Time Value In this example Rs 25 is the intrinsic value and Rs 10 is the Time Value. Q 18. On expiration, the time value of an option will be _____________ a) zero b) 1 c) 10 d) 100 Explanation: Time value decreases with passage of time and is zero on expiration. Q 19. The adjustment factor for a stock which issues a Bonus in the ratio A: B is __________ a) (A+B)/B b) (A - B)/ B c) (A + B) x B d) (A-B)XA Explanation: The adjustment factor for : Bonus Ratio - A: B Adjustment factor: (A+B)/B Stock Split’s and Consolidations Ratio - A: B Adjustment factor: A/B Right Ratio - A: B and Issue price of rights is 5. Adjustment factor: (P-E)/P Where P: Spot price on last cum date E = (P-S) * A / (A+B) Q 20. The normal trading in the derivative banned scrip is resumed after the open outstanding position comes down to _________________ or below of the market wide position limit. a) 90% b) 85% c) 80% d) 75% Q 21. Buying calls at a strike of 5100 and selling calls at a strike of 5300 is an example of ______________. a) Calendar Spread b) Bull Spread c) Bear Spread d) Arbitrage Spread Explanation: A bull spread is created when the underlying view on the market is positive but the trader would also like to reduce his cost on position. So he takes one long call position with lower strike and sells a call option with higher strike. Q 22. The payoff for a person who sells a future contract is similar to the payoff of a person who _______________ an asset. a) Hedges b) goes long in c) shorts d) speculates in Q 23. An Option Contract which will not be exercised on the expiry date is ______________ a) an Out of the Money option b) an Deep in the Money option c) an In the Money option d) None of the above Q 24. Spot Value of Nifty is 5880. An investor buys one month Nifty 5950 call option for a premium of Rs 12. This option is _____________.  a) In the Money b) At the Money c) Out of the Money d) The data is insufficient Q 25. Persons own a portfolio of Rs 5 lakhs which has a beta of 1. The current Nifty is 5000. He would like to protect his portfolio against a fall of more than 10%. Put options are available at four strike prices. Which strike price will give the required protection? a) 5500 b) 5000 c) 4900 d) 4500 Explanation: When a holder of a portfolio buys a Put Option he is protecting against a fall in the market because when the market falls the put option premium rises. A 10% fall in 5000 Nifty means a fall till 4500. So if he buys a 4500 put option, and if the nifty falls to 4500 - his losses of more than 10% from the portfolio devaluation will be compensate by the profits of Put Option rise. Will be compensating by the profits of Put Option rise. Q 26. Value of taxable securities transaction relating to an "option in securities" shall be the option premium, in case of sale of an option in securities - True or False ? a) True b) False Q 27. What is the outstanding future position on which initial margin will be charged - Client A purchases 800 shares and Client B purchases 200 shares and sells 1000 shares? a) NIL b) 800 shares c) 1000 shares d) 1600 shares Explanation: Client A net position = 800 shares Buy Client B net position : 800 shares Sell ( 1000 - 200 ) Initial Margin is paid on total of all outstanding position i.e. 800 + 800 = 1600 shares. Q 28. On exercise of an option the buyer / holder of an option will recognize the option premium as ________________ a) Differed Income b) Income c) Expense d) None of the above Q 29. A trader sells one ABC share future contract at Rs 542 and buys back the same at Rs 491. What are his Profit / Loss? The market lot is 500 shares. a) Rs 27.600  b) Rs 25.500 c) Rs 27,600 d) Rs 25,500 Explanation: The trader sells at Rs 542 (higher price) and buys back at Rs 491(lower price) - so there is a profit. Rs 542 - Rs 491 = Rs 51 Rs 51 * 500 (lot size) = Rs 25,500 Q 30. In India, the first exchange traded financial derivative commenced with the trading of ______________. a) interest rate futures b) index options c) index futures d) stock option Q 31. Nifty Put option of strike price 5000 is selling at a premium of Rs 30. At what index level will it break even for the buyer of the option? a) 5000 b) 4970 c) 5030 d) 5060 Explanation: Buyer of a Nifty Put option expects the market to fall. He pays a premium of Rs 30. So when the market will fall by 30 points, the breakeven point will be reached. So when the index fall to 4970 (5000 - 30) - it will be the breakeven point. Q 32. Margins can be deposited by Trading Members in the form of _____________ a) Cash/Cheque only b) Cash and Fixed Deposit’s only c) Cash , Fixed Deposit’s, Approved securities and Bank Guarantee d) 50% Cash and Balance in Approved Securities Q 33. Delivery based settlement in single stock futures is provided by _____________ a) BSE b) NSE c) OTCEI d) None of the above Explanation: At present, derivative contracts on both individual stocks and on stock indices are cash settled on NSE but on B5E, derivative contracts on stock indices are cash settled while those on individual stocks are delivery based. Q 34. What will be the payoff if a stock future was bought at Rs 100 and sold at Rs 87? The lot size is 1000 shares. a) NIL b) + 13000  - 13000 - 8700 Explanation: There will be a negative pay off as there is loss. Rs 100 - Rs 87 = Rs 13 x 1000 lot size = Loss of Rs 13000. Q 35. In a STOP LOSS BUY order, the Limit Price is _______________. a) Greater than the trigger price b) Greater than or equal to the trigger price c) Less than the trigger price d) Less than or equal to the trigger price Explanation: A STOP LOSS BUY order is put when a trader wants to cover his short position. For e.g. - A trader short sells a share at Rs 100 expecting it to fall. But he will incur losses if the price rises. So to protect himself against high losses he will put a STOP LOSS BUY order. Let’s assume Rs 5 is the loss he can bear. So the Stop loss order will be Buy at 105 (Limit Price) when the share reaches 104.50 (Trigger Price). Trigger price can also be equal to Limit Price i.e. 105. So the limit price is greater than or equal to trigger price. Q 36. Time Spread is also known as Vertical Spread - True or False? a) True b) False Explanation: Horizontal spread involves same strike, same type but different expiry options. This is also known as time spread or calendar spread. Q 37. The parties for the Futures contract have the flexibility of closing out the contract prior to the maturity by squaring Off the transactions in the market - True or False? True False Q 38. Time value of an option is the difference between ________________ Its Strike price and premium Its strike price and spot price Its premium and spot price It’s premium and intrinsic value Q 39. Equity Index options are a form of _______________ Swapations Options on Futures Basket Options Special Warrants Q 40. Mr. P is long in 4 Nifty contracts at Rs. 5945. Nifty future closes at 5905. What is the mark to market for Mr. P? (Nifty Contract is of 50) NIL 8000 5000 -8000 Explanation: Mr. P is long in Nifty and price has fallen. So he will have to pay (-ve) 5945 - 5905 = -40 Qty: 4 lots X 50: 200 M to M = -40 X 200 = -8000 Q 41. The relationship between _______________ and _____________ is represented by Cost of Carry. Spot price and Cash price Spot price and Future Price Spot price and Call Option price Spot price and Put Option price Explanation: Cost of Carry is the relationship between futures prices and spot prices. In equity derivatives, carrying cost is the interest paid to finance the purchase less (minus) dividend earned if any for e.g. - If the spot price of share is Rs 100 and the one month future is trading at Rs 101, then Re 1 is the cost of carry. Q 42. A bull spread can be created only by___________ Buying and selling Futures Buying and selling Cash and Futures Buying and selling Options Buying and selling ETF's Q 43. One of the eligibility criteria of a stock which can be traded in the derivative segment is that it shall be chosen from amongst the top 100 stocks in terms of average daily market capitalization and average daily traded value in the previous six months on a rolling basis - True or False? True False Explanation: It shall be chosen from amongst the top 500 stock in terms of average daily market capitalization and average daily traded value in the previous six months on a rolling basis Q 44. The penalty levied for the 9th instance of margin / limit violation in a month is _________________. 0.07%a per day 0.07% per day + Rs.5, 000/- 0.07% per day + Rs.20, 000/- + Rs 10,000 as per days None of the above Explanation: Penalty for margin / limit violation is levied on a monthly basis based on slabs as mentioned below: 1st instance - 0.07% per day 2nd to 5th instance of disablement - 0.07% per day + Rs.5, 000/- per instance from 2nd to 5th instance 6th to 10th instance of disablement - 0.07% per day + Rs.20, 000/- (for 2nd to 5th instance) + Rs.10000/- per instance from 6th to 10th instance Q 45. Potentially unlimited profit’s and limited losses is the risk reward for ___________ Buyer of a futures contract Buyer of a call option Seller of a futures contract Seller of a call option Q 46. The main objectives of Trade Guarantee Fund is / are _____________ To inculcate confidence in the minds of market participants To protect the interest of the investors in securities To guarantee settlement of bonafide transactions of the members of the exchange All of the above Q 47. Initial Margin is monitored by _____________ The Exchange Clearing Corporation SEBI The Trading Members Q 48. The spot price of a stock is Rs 200. A trader buys the Rs 195 strike price call option by paying a premium of Rs 10. On expiry the settlement price is Rs 220. What is the net profit for the trader? Rs 25 Rs 15 Rs 10 NIL Explanation: The Rs 195 strike price call option settlement price is Rs 220 - So there is profit of Rs 25 ( 220 - 195 ) He has paid Rs 10 as premium, so his net profit will be Rs 15 (25 - 10) Q 49. Mr. Mohit buys 3 Call options of strike price 200 when the spot price was 190 at a premium of Rs 16. Will he have to pay STT? Yes No Explanation: STT - Securities Transaction Tax is paid only by the seller in case of derivative contracts. Q 50. Long Strangle is a strategy with _________________ Limited Profit’s and limited losses Limited losses and unlimited profit’s Limited Profit’s and unlimited losses Unlimited Profit’s and unlimited losses Explanation: The long strangle involves buying both a call option and a put option of the same underlying security. Like a straddle, the options expire at the same time, but unlike a straddle, the options have different strike prices. A strangle can be less expensive than a straddle if the strike prices are out-of-the-money Q 51. A client Mr. P has bought March series contract and another client Mr. Q has sold March series contract on Nifty futures. This has been done through the same broker. Will this qualify as a calendar spread? Yes No Explanation: Calendar spread position is a combination of two positions in futures on the same underlying - long on one maturity contract and short on a different maturity contract. The above example is not a Calendar spread because here we have the same expiry i.e. March series. Also the spread has to be done by the same client. Q 52. For calculation of minimum net worth of members of derivative exchange, the non allowable assets include - Unlisted securities Doubtful debts and advances Bad deliveries All of the above Q 53.To do arbitrage between overpriced futures, we will have to ______________ Buy futures and sell cash Buy futures and buy cash Buy cash and sell futures Sell futures and sell cash Explanation: For e.g. - If ABC stock is at Rs 100 in cash market and Rs 105 in one month futures, then to profit from it and do the arbitrage we will have to buy at 100 in cash and sell at 105 in futures. Q 54. Any person or persons acting in concert who together own ____________ or more of the open interest shall be required to report this fact to the exchange. 10% 12% 20% 15% Q 55. The value of a call option decreases with a ___________ in spot price. Increase Decrease No change Either increase or decrease Q 56. Counterparty risk is the risk arising due to a failure of a political party of the central government - True or False? True False Explanation: Counterparty risk is the risk arising due to the default by one of the parties to the transaction / contract. Q 57. The daily settlement of all open positions in futures contract is called - Mark to Market settlement (MTM) Exercising of the futures contract Interim Settlement VaR settlement Q 58. Nifty consists of securities having _______________ market capitalisation stocks. Large Medium Small All of the above Q 59. The open position of a Trading Member is arrived by ____________ Adding up all his proprietary positions Adding up all his clients net outstanding positions Adding both - his proprietary positions and all his clients net outstanding positions None of the above Q 60. If a stock exchange introduces physical settlement in stock derivatives in a phased manner, the same should be completed in ____________ Three months Six months Nine months One year Explanation: A Stock Exchange may introduce physical settlement in a phased manner. On introduction, however, physical settlement for all stock options and/or all stock futures, as the case may be, must be completed within a period of six months. Q 61. Income or loss on derivative transactions which are carried out in a "recognized stock exchange" _______________ is not taxed as speculative income or loss Loss can be set off against any other income during the year Can be carried forward to subsequent assessment years All of the above Q 62. A seller of an Option __________________ Pays premium Gives delivery of underlying Receives premium Receives delivery of underlying Q 63. A protective put payoff is similar to that of _____________ Short Futures Long Call Long Futures Short Call Explanation: A protective put payoff is similar to that of long call and is called synthetic long call position. Q 64. In the F&O segment of N SE one can trade in the following derivative instruments except __________________ Index based futures Individual stock options Index based options Individual warrant options Q 65. A spread that is designed to profit if the prices go down is called _______________ Hedge Spread Arbitrage Spread Bull Spread Bear Spread Q 66. Which of the following Act governs the trading of derivatives in India? SEBI Act 1992 Capital Issue (Control) Act 1947 Securities Contract (Regulation) Act 1956 Companies Act Q 67. When a trader buys a put option, he ________________ Is neutral and wants less movement in market He is bearish and wants the market to fall He is bullish and want the a market to rise He is neutral but will benefit from any large movement in the market Q 68. Delta is _____________ Speed with which an option moves with respect to price of the underlying asset The change in option price given a one-day decrease in time to expiration Is the change in option price given a one percentage point change in the risk-free interest rate? A measure of the sensitivity of an option price to changes in market volatility Q 69. The Final Settlement Price in Options is the Closing price of such underlying security on the last trading day of the options contract - True or False? True False Q 70. Exercise settlement for options contract takes place at _______________ Closing price of the underlying Settlement price of the futures contract Closing price of the option contract Closing price for the month contract Q 71. **Currently the future contracts are settled on _______________ basis. T+0 T+1 T+2 T+5 Explanation: The trades of futures market are settled on T+1 working day basis. Brokers with a funds pay-in obligation are required to have clear funds in their account on or before 10.30 a.m. on the settlement day. The payout of funds is credited to the account of the members thereafter. The margins like Mark to Market have to be paid on the next day of trade and every subsequent day if there is a debit. Q 72. An exchange traded option after maturity _______________ Can be traded in the spot market Can be traded for next 7 days Cannot be traded None of the above Q 73. A derivative market would primarily have ____________ Speculators Hedgers Long term investors Both 1 and 2 Explanation: A derivative market has both speculators and hedgers. Long term investors invest in the cash market and take delivery of securities. Q 74. An investor takes a short position on nifty by selling 10 lots at 5500. When he squares up the position he finds that he has made a profit of Rs 25000. The lot size of Nifty is 50. Which of the following actions helped the investor this profit? Buying 10 lots at 5475 Selling 10 lots at 5550 Selling 10 lots at 5450 Buying 10 lots at 5450 Explanation: Total Nifty bought = 10 lots x 50 each lot = 500 Total profit made = 25000 Profit made on each Nifty = 25000 / 500= Rs 50. The investor has sold Nifty. He will make a profit of Rs 25000 when fifty falls 50 points i.e. from 5500 to 5450. So Rs 50 x 10 lots x 50 each lot = Rs 25000 profit. Q 75. Of the below mentioned contracts, which are traded on registered derivative exchanges in India? Daily Options Future Contracts Forward Contracts Swapations Explanation: From the above 4 options, we have only future contracts traded on registered Indian stock exchanges. Q 76. "A farmer agrees to sell 100 tons of sugarcane to a factory after 2 month at a specific price. What is this type of contract known as? Swapations Future Contract Forward Contract None of the above Explanation: A contract which is between two or more persons as per their agreed terms and in which no Stock Exchange or any other Exchange is involved is a Forward contract. Q 77. "The market price of a share is Rs 120 and the 110 call is quoted at Rs 24, what is the intrinsic value of this call Option? 10 20 30 130 Explanation: Option Premium consists of two variables - Intrinsic Value and Time Value. In the above case, the cash market price is 120 and the strike price is Rs 110. So the Intrinsic value is Rs 10 (120 - 110). The balance of option premium (24 - 10) i.e. Rs 14 is the time value. Q 78. "Generally the Future prices converge to Spot prices on expiry day - True or False? False True Explanation: Future Price essentially means Spot Price + Cost of Carry i.e. interest cost etc. On the expiry day i.e. the last day, the cost of interest etc. will be nil, so the Future Price and Spot price should ideally be same. Q 79. "A PUT option gives - The option writer the obligation but not the right to sell the underlying asset at a specified price. The option writer the right but not the obligation to buy the underlying asset at a specified price. The option holder the right but not the obligation to buy the underlying asset at a specified price. The option holder the right but not the obligation to sell the underlying asset at a specified price. Explanation: In a PUT option, the buyer of the put has the right, but not an obligation, to re-sell the asset at the strike price by the future date, while the other party, the seller of the put, has the obligation to repurchase the asset at the strike price if the buyer exercises the option. Q 80. What is the intrinsic value of a CALL option? The amount the option is At the Money The amount the option is Out of the Money The amount the option is in the Money The amount the option is Over the Money Q 81. Mr. Kailash has bought 200 shares of Reliance Industries at Rs.850 per share. He expects the price to go up but wants to protect himself if the price falls. He does not want to lose more than Rs. 4000 on this long position. What should the he do? Place a limit buy order for 200 shares Rs.830 per share Place a limit sell order for 200 shares Rs. 830 per share Place a stop loss sell order for 200 shares Rs.830 per share Place a limit buy order for 200 shares at Rs.870 per share Explanation: Mr. Kailash will make a loss if the price of Reliance Industries falls. His loss bearing capacity is Rs 4000. Therefore 4000 /200 shares = Rs 20. So if the shares fall by Rs 20, he will make a loss of Rs 4000. 850 - 20 = 830. Therefore 830 will be his stop loss price and he will place a stop loss order at Rs 830. Q 82. All the trades and open positions on a derivative exchange are guaranteed by the Clearing Corporation and it becomes a legal counter party. True False Explanation: Clearing Corporation or the Clearing House is responsible for clearing and settlement of all trades executed on the F&O Segment of the Exchange. Clearing Corporation acts as a legal counterparty to all trades on this segment and also guarantees their financial settlement. The Clearing and Settlement process comprises of three main activities, viz., Clearing, Settlement and Risk Management. Q 83.."What does Value-at-risk measures? value of a volatile portfolio Risk level of a financial portfolio Value of illiquid shares portfolio Index PE value Explanation: Value at Risk calculates the expected maximum loss, which may be incurred by a portfolio over a given period of time and specified confidence level. Q 84. A member has two clients Rohit and Mohit. Rohit has purchased 100 contracts and Mohit has sold 300 contracts in March Tata Steel futures series. What is the outstanding liability (open Position) of the member towards Clearing Corporation in number of contracts? 100 300 400 200 Explanation: For a member i.e. Stock Broker, the liability will be the sum of all the contracts of all his clients. The contracts cannot be netted in between two clients. So in this case the sum of contracts is 100 + 300 = 400 contracts. Q 85. **The speculators play an important role in the futures market because - They buy in one market and sell in another for arbitrage gains. They transfer their risk to the hedgers They add to the liquidity to the futures markets They take delivery of the commodities at expiration Explanation: Speculators are typically risk-taking investors with expertise in the market(s) in which they are trading. Speculators take large risks, especially with respect to anticipating future price movements, in the hope of making quick gains. They trade quiet frequently and so add to the liquidity of the markets. Q 86. "Mark-to-Market margins are collected on a basis. monthly weekly Bi weekly i.e. Mondays and Thrusdays daily Explanation: In the futures market, profit’s and losses are settled on day-to-day basis - called mark to market (MTM) settlement. The exchange collects these margins (MTM margins) from the loss making participants and pays to the gainers on day-to-day basis. Q 87. Of the below mentioned options, in which option is the strike price better than the market price and therefore it is profitable to exercise the option ? At-the-money option Out-of-the money option In the money option None of the above Explanation: In an In The Money Option, the strike price is better than market price. Such options have both Intrinsic Value and Time Value. Q 88**Are Broker-Members allowed on the Clearing Council of the Clearing Corporation of the derivatives segment ? Yes No Explanation: No, broker members are not allowed on the Clearing Council of the Clearing Corporation of the derivatives segment. Q 89. What does selling short a stock means ? Seller owns the stock he is supposed to deliver Seller has sufficient time to deliver the stock which he sold Seller does not own the stock he is supposed to deliver Seller has to deliver the stock within a short time Q 90. One of the important duties of a trading member is to assess the financial soundness, genuineness and background of a new client - True or False ? True False Q 91. Of the below options, when will the April index future contract be introduced on NSE ? On the 1st trading day after last Thursday in March On the 1st trading day after last Friday in March On the 1st trading day after last Thursday in January On the 1st trading day after last Friday in January Explanation: There are always 3 contracts running. So for eg. we will have Jan-Feb-Mar contracts trading in January. When January contracts expire on last Thursday of January, on Friday the April contracts will be introduced and so we will have Feb-Mar-April contracts Q 92 Beta a measure of systematic risk of a security that cannot be avoided through diversification. True False Q 93 A long position in a PUT option can be closed by taking a short position in CALL option. True False Explanation: A long position in any option can be closed by selling that option and not in any other way. So a long position in a PUT option can be closed by selling that PUT option. Q 94. In India, the derivatives product can be traded by Brokers of NSE / BSE SEBI registered brokers SEBI registered brokers for trading in derivatives All of the above Explanation: Special permission has to be taken from SEBI for trading in derivatives. Q 95. "STT means — Stock Trading Tax Stock Transaction Tax Securities Transaction Tax Securities Trading Tax Explanation: Securities Transaction Tax (STT) is payable by the Trading Members / Brokers who collect the same from their clients. The current rate of STT in derivatives section is : a) On Sale of an Option - 0.017 % of the option premium b) On sale of Futures - 0.017 % of the total contract value c) When option is exercised - 0.125 % payable by purchaser. Q 96. *'`You have bought a CALL of Ambuja Cements of Strike price of Rs 200 of January. To close the position, you will Sell a CALL of same strike price of January. True or False ? False True Explanation: When you buy a CALL option, it can only be squared up by selling the same CALL option. Q 97. Initial Margin is — The margin which is paid when a trading member starts his business The Margin which is paid at the time of buying shares in the spot market. The margin which a trading member needs to pay when applying for membership The margin which is paid at the time of entering futures contract Explanation: The amount one needs to deposit in the margin account at the time entering a futures contract is known as the initial margin. Q 98. "Mr. Banerjee sells a put option of a higher strike price and buys a put option of a lower strike price, both on the same share and same expiration. This strategy is called Bearish Spread Bullish Spread Calendar Spread Straddle Explanation: Bullish Spread using Puts - the call on the market is bullish, hence, the trader would like to short a put option. If prices go up, trader would end up with the premium on sold puts. However, in case prices go down, the trader would be facing risk of unlimited losses. In order to put a floor to his downside, he may buy a put option with a lower strike. While this would reduce his overall upfront premium, benefit would be the embedded insurance against unlimited potential loss on short put. This is a net premium receipt strategy. Q 99. "Main objectives of Trade Guarantee Fund (TGF) are : To protect the interest of the investors in securities. To inculcate confidence in the minds of market participants. To guarantee settlement of bonafide transactions of the members of the exchange. All of the above Q 100 As per the rules, the minimum net worth of clearing members who handle and clears/settles only deals executed by no. him is higher than those clearing members who handle institutional trades. False True Q 1. very important for it’s use ____________ in portfolio management as a benchmark of portfolio performance as a barometer for market behavior All of the above Q 2. If a stock fails to meet the retention criteria for equity derivatives trading for three months consecutively, existing unexpired contracts may be permitted to trade till expiry and new strikes may also be introduced in the existing contract months - True or False ? True False Explanation: The criteria for retention of stock in equity derivatives segment are : a) The stock's median quarter-sigma order size over last six months shall not be less than Rs. 5 lakhs (Rupees Five Lakhs). b) MWPL of the stock shall not be less than Rs. 200 crores (Rupees Two Hundred crores). c) The stock's average monthly turnover in derivatives segment over last three months shall not be less than Rs. 100 crores If a stock fails to meet these retention criteria for three months consecutively, then no fresh month contract shall be issued on that stock. However, the existing unexpired contracts may be permitted to trade till expiry and new strikes may also be introduced in the existing contract months. Further, once the stock is excluded from the F&O list, it shall not be considered for re-inclusion for a period of one year. Q 3. The clearing member/trading member is required to disclose to the clearing corporation details of any person(s) acting in concert who together own % or more of the open interest of all futures and options contracts on a particular underlying index on the stock exchange. 12 15 17 20 Q 4. What penalty is levied for first instance margin / limit violation ? 0.07% per day 0.07% per day + Rs.5,000/- per instance 0.07% per day + Rs.20,000/- None of the above Explanation: Penalty are levied as under : 1st instance - 0.07% per day 2nd to 5th instance of disablement - 0.07% per day + Rs.5,000/- per instance from 2nd to 5th instance 6th to 10th instance of disablement - 0.07% per day + Rs.20,000/- ( for 2nd to 5th instance) + Rs.10000/- per instance from 6th to 10th instance Q 5. Which of the following factor(s) do not affect the value of an option ? The Open Interest The Spot Price The volatility in underlying instruments The strike price Q 6. You sold a Put option on a share. The strike price of the put was Rs.245 and you received a premium of Rs.49 from the option buyer. Theoretically, what can be the maximum loss on this position? 206 196 49 NIL Explanation: When you sell a Put option you beli.e.ve the share will go up. If the share goes down you will make a loss. Theoretically the share of 245 can fall to zero. So you can make a loss of 245. You have received a premium of 49. So the maximum loss can be 245 - 49 = 196 Q 7. An Equity based Mutual Fund can sell Index Futures to hedge it’s position - True or False ? True False Q 8. Futures differs from forwards in the sense that ________________ settlement of contract takes place in the future both parties are bound to give/take delivery positions are marked-to-market everyday contracts are custom designed Q 9 Which of these PUTs are In the Money ? Spot 300 ; Strike Price 300 Spot 300 ; Strike Price 280 Spot 300 ; Strike Price 320 None of the above Explanation: A Put option is In the Money when the Spot price is below the Strike price. A Call option is In the Money when the Spot price is above the Strike price. Q 10. In Indian context, derivative includes: A) A security derived from a debt instrument, share, loan whether secured or unsecured, risk instrument or contract for differences or any other form of security; B) A contract which derives it’s value from the prices, or index of prices, of underlying securities. A B Both A and B Neither A or B Q 11. The beta of SBI is 0.9. If a trader has a buy position of Rs 3,00,000 of SBI, which of the following will give him a complete hedge ? Sell Nifty of 270000 Sell Nifty of 330000 Sell Nifty of 300000 Beta of below 1 cannot be hedged Explanation: SBI has a beta of 0.9 means that if Nifty falls by 100, the 513I will fall by 90 i.e. 10% less. So we need to hedge 10% less of NIfty, i.e. 10% of Rs 300000 = 30,000 So we need to sell 270000 of Nifty Q 12. A stock broker applies for registration to SEBI _____________ directly on his own through stock exchange(s) of which he or she is admitted as a member through Ministry of Finance through association of members Q 13. An investor has bought 100 SBI shares at Rs 2000. How will he hedge it ? The Current market price of SBI is Rs 2000. Buy SBI futures at Rs 1000 Buy SBI Call options of strike price 2000 Buy SBI Put options at strike price 2000 Sell SBI Put options at strike price 2000 Explanation: Buying a Put options will help him hedge against a downfall in share price by paying the premium. Q 14. **An trader purchases three contracts of Reliance Industries in the futures market at Rs 900. On the expiry day, Reliance closes at Rs 918. Lot size is 250 shares. What will the trader receive ? He will receive 750 shares of Reliance Industries He will receive nothing as he has not squared up his position He will receive the difference between the purchase price and closing/expiry price None of the above Explanation: On the expiry day, if the client does not square up his position, then it’s automatically squared up by the exchange by the closing price of that underlying. The closing price is the last half hour weighted average price of the underlying on the expiry day. Q 15. Irrespective of the type of option, the option value is directly proportional to Interest rate difference and strike price Underlying asset price and strike price Time to maturity and volatility Volatility and strike price Q 16. As per the rules of European Call Option, it gives the right but not the obligation to buy from the seller an underlying at the prevailing market price on or before the expiry - True or False ? False True Explanation: European Option is an an option that can only be exercised at the end of it’s life, at it’s maturity / expiry and not before that. An American option can be exercised any time. A buyer of an European option that does not want to wait for maturity to exercise it can sell the option to close the position. Q 17. **If an investor buys a future contract but does not sell it till expiry than what happens to that contract ? The investor will receive the delivery of the underlying The exchange will square up the position by the closing price A new buy position will be automatically be created in the next month The client has to pay a stiff penalty Explanation: As per the rules in the Indian Stock markets, if the open position of a trader is not squared up till maturity i.e. last Thursday of the month, then the position is automatically squared up by the exchange by the closing price. For example - Mr. A bought one Ambuja Cement contract of 1000 shares at Rs 180 on 8th January. He does not sell it even by the last day i.e. last Thursday of January. If the closing price of Ambuja Cement is Rs 184, his contract will be squared up at Rs 184 and Rs 4 x 1000 = Rs 4000 ( less brokerage etc. ) will be his profit. In case Ambuja Cement closes below Rs 180, then he will incur a loss. Q 18. What is the intrinsic value of a call option of SBI if the spot price is 2000 and the strike price is 1950. 50 -50 2000 0 Explanation: Intrinsic Value of an In the money call option is the Spot Price - Strike Price. Q 19. **Margins in futures trading are applicable to - Only Institutional players. Both the buyer and the seller Only the buyer Only the Seller Explanation: In a futures market margins are payable by both the parties. Q 20. **Mr. Manoj buys a put option on PQR stock for Rs 20 of strike price Rs 130. If on the exercise day, the spot price of PQR is Rs 175, Mr. Manoj will choose ________________ Not to exercise the option To exercise the option Explanation: Mr. Manoj bought a PUT option so he had a viewthat the stock will fall. On the exercise day the stock has risen and so Mr. Manoj is in a loss. So he will not exercise the option. Q 21. The Clearing Corporation can transfer a defaulting members client's position to Liability a/c. Another solvent member Investor Protection Fund a/c. The Stock Exchange Explanation: As per SERI rules, the Clearing Corporation can transfer client positions from one broker member to another broker member in the event of a default by the first broker member. Q 22. The Spot Price of ABC Stock is Rs. 347. Rs. 325 strike call is quoted at Rs. 39. What is the Intrinsic Value? 0 22 39 61 Explanation: When the Strike Price is below the Spot Price, the Call Option is 'In the Money' i.e. profitable. Intrinsic Value for a such a Call Option = Spot Price - Strike Price = 347 - 325 = 22 Q 23. "Mr. Deshmukh took a short position of one contract in May Nifty futures (Contract multiplier50) at a price of Rs.5600. When he closed this position after a few days, he realized that he has made a profit of Rs.5000. Which of the following closing actions would have enabled him to generate this profit ? Selling 1 May Nifty futu es contract at 5700 Buying 1 May Nifty futu es contract at 5700 Selling 1 May Nifty futures contract at 5500 Explanation: Mr. beshmukh is short i.e. he has sold Nifty futures. He will make a profit when Nifty falls. His profit is Rs 5000 and lot size is 50, so per share he has to get Rs 100 to make a profit of Rs 5000 ( 50 x 100) So when Nifty falls to 5500 and Mr. beshmukh buys it to square up his position, he will make a profit of It’s 5000. Q 24. By using Financial derivatives one can engage in Hedging Arbitraging Speculation All of the above Explanation: Modern traders and investors also use financial derivatives for Arbitrage and Speculation, apart from hedging. Q 25. "If an trader does an calendar spread in index futures and the near leg of the calendar spread expires, the Further leg becomes a regular open position. True or False ? True False Explanation: Calendar spread means an options or futures spread established by simultaneously entering a long and short position on the same underlying asset but with different delivery months. In the above question, let’s assume a trader has gone long in index options in current month and short in index options in third month. In case he does not close his position by the end of current month, his current month option will expire and the third month option contract will become an open position as there is no opposite option contract in his account. Q 26. "Mr. Nayar has purchased 8 contracts of March series and sold 6 contracts of April series of the NSE Nifty futures. How many lots will get categorized as Regular (non-spread) open positions? 14 8 2 6 Explanation: Various future contract position in the same underlying ( even at various expiry dates ) are netted off before arriving at open postion. Here in this case it’s 8 - 6 = 2. This is because a long and a short position in the same underlying will have no risk (if one will make profit, the other will be in similar loss) and only the open position will have the risks and margins will be collected from these open positions. Q 27. If the price of a stock is volatile, then the option premium would be relatively Lower Higher No effect of volatility zero Explanation: Higher volatility means higher risk and higher risk means one has to pay a higher premium. Q 28. The strategy in which an trader buys a call option of lower strike price and sells another call option with a higher strike price of the same share and same expiry date is called __________________ Butterfly spread Bearish spread Calendar spread Bullish spread Q 29. "The spot price of Grasim Industri.e.s Ltd share is Rs 2900, the call option of Strike Price Rs 2800 is _____________ At the money Out of the money In the money None of the above Explanation: In call options, when the Spot price is higher than Strike price - that call option is In the Money. Q 30. Of the below mentioned options, which would attract margins ? Buyer of PUT Option Seller of CALL Option Seller of PUT Option Both 2 and 3 Explanation: Buyers of Options pay the premium and that is the maximum loss they can suffer - so they need not pay any margin. A seller of options receives the premium but he can suffer infinte losses - so margins are collected both from sellers of Call and Put options Q 1.The Option price is the ________________ price paid by the seller of option to the buyer of option price paid by the buyer of option to the seller of option the intrinsic value of the option All of the above Q 2. An investor is bearish about Yes Bank and sells ten one-month Yes Bank futures contracts at Rs.3,03,000. On the last Thursday of the month, Yes Bank closes at Rs.300. He makes a. (assume one lot = 100) Profit of Rs.3000 Loss of Rs.3000 Profit of Rs.300 Loss of Rs.300 Explanation: Sale of 10 lots of 100 shares at Rs 303000 i.e. each share at Rs 303 Closing price Rs 300 So It’s 3 per per share profit Rs 3 x 10 lots x 100 lot size = Rs 3000 Q 3. An investor owns one thousand shares of Reliance. Around budget time, he gets uncomfortable with the price movements. One contract on Reliance is equivalent to 100 shares. Which of the following will give him the hedge he desires? Buy 5 Reliance futures contracts Buy 10 Reliance futures contracts Sell 5 Reliance futures contracts Sell 10 Reliance futures contracts Q 4. A trader has bought 100 shares of XYZ at Rs.780 per share. He expects the price to go up up but wants to protect himself if the price falls. He does not want to lose more than Rs.1000 on this long position in XYZ. What should the trader do? Place a stop loss sell order for 100 shares of XYZ at Rs.770 per share Place a limit buy order for 100 shares of XYZ at Rs.770 per share Place a stop loss buy order for 100 shares of XYZ at Rs.790 per share Place a limit sell order for 100 shares of XYZ at Rs.770 per share Explanation: By placing a stop loss sale order, if the price falls to 770, his shares will be automatically sold and the maximum loss he will suffer will be Rs 10 x 100 shares i.e.Rs 1000. Q 5. The initial margin amount is large enough to cover a one-day loss that can be encountered on ______________ % of the days. 100 99 95 90 Q 6. On expiry, the settlement price of an index futures contract is opening price of futures contract closing index value closing price of futures contract opening index value Explanation: The Spot closing price of the index is the settlement price. Q 7. Client KKK has purchased 10 contracts of December series and sold 7 contracts of January series of the NSE Nifty futures. How many lots will get categorized as regular (non-spread) open positions? 3 5 11 15 Q 8. The trading memberlFlllmutual fund position limit’s in equity index futures contracts is higher of Rs. ____________ Crores or 15% of the total open interest in the market in equity index futures contracts. 200 500 700 1000 Q 9. ____________ means the total number of equity futures contracts that have not been offset and closed by an opposite position. Open Position Closed Position Arbitrage Position Squared off Position Q 10. Index options on the S&P CNX Nifty can be exercised__________ any time upto maturity on a date pre-specified by the trading member upon maturity any time on or before maturity Q 11. In which option is the strike price not better than the market price (i.e., price difference is not advantageous to the option holder) and therefore it will lead to losses if the option is exercised ? In The Money Out of the Money Deep In the Money All of the above Q 12. The value of a put option __________________ with an increase in spot price. increases decreases remains constant either increases or decreases Explanation: When the spot prices rise, the premium of Put option falls. Q 13. Which of the following are derivatives? Options Forwards Futures All of the above Q 14. **The maximum profit for a seller of options contract is - determined by the derivative exchange depends on the strike price Premium received Unlimited Explanation: The maximum profit for the seller of an option is the premium he receives. But the maximum losses can be unlimited. Q 15. "If you are an exporter what would you do to safeguard against dollar rate fluctuations ? Buy Dollars Sell Dollars Sell Euro as it’s a stronger currency None of the above Explanation: You will sell dollars which you are supposed to receive in the futures market so that you are protected against any fluctuations. Q 16. For calculation of minimum net worth of members of derivative exchange, the non allowable assets include - members card pledged securities doubtful debts and advances all of the above Explanation: The minimum net worth for clearing members of the derivatives clearing corporation/house shall be Rs.300 Lakhs. The net worth of the member shall be computed as follows: - Capital + Free reserves - Less non-allowable assets viz., o Fixed assets o Pledged securities o Member's card o Non-allowable securities o Bad deliveries o Doubtful debts and advances o Prepaid expanses o Intangible assets o 30% marketable securities Q 17. You have sold a PUT option of strike price 100 for a premium of Rs 12. Theoretically what can be your maximum loss ? Unlimited Rs 112 Rs 88 Rs 12 Explanation: When you sell a put option you expect the price to rise. If it falls you make a loss and theoretically the price can fall to zero. In the above example the price can fall from 100 to zero, so the loss can be Rs 100. But you have received Rs 12 as premium, so the loss will be Rs 100 - Rs 12 = Rs 88 Q 18. Which price is closest to the 3rd month future price of share if the spot price is Rs 326 and the interest rate is 12% pa. 326 335.80 354.80 362.10 Explanation: 3 month future price means 3 months of interest cost has to be added. 12% per year = 1% per month So for 3 months it will be 3% 3% of Rs 326 = 9.78 Thus the 3 month future price will be 326 + 9.78 = 335.78 or 335.80 Q 19. Who can clear trades in index options? All AMFI and IRDA members Members of a stock exchange Members and sub brokers of the stock exchange Clearing members registered in the derivatives segment. Q 20. If one does a calendar spread contract in index futures, then it attracts ____________ Lower margin than sum of two independent legs of futures contract No margin need to be paid for calendar spread positions Higher margin than sum of two independent legs of futures contract Same margin as sum of two independent legs of futures contract Explanation: Calendar spread position is a combination of two positions in futures on the same underlying - long on one maturity contract and short on a different maturity contract. When the market fluctuates, if there is a loss in the long position then there will be an almost equal profit in short position. So Calendar spreads carry no market risk - hence lower margins are adequate. Calendar spread carries on only basis risk. Basis risk means both the contracts will not fluctuate identically. Q 21. You sold one Zee Ent 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 ? 9000 -9000 7500 -7500 Explanation: When you sell a stock future contract you make a profit if the share falls. In this case Zee has fallen by Rs9 x 1000 = Profit of Rs 9000 Q 22. **Options which are traded on a recognised exchange i.e. Exchange traded options are ____________ usually in-the-money options usually out-of-the money options Standardized options Customized options Explanation: Exchange Traded Options are standardized as per the rules and regulation of the exchanges. Only the price is variable. The lot size quantity, time (maturity) etc. are all fixed by the exchanges. Q 23. '‘*An in-the-money option is a option with a negative intrinsic value a positive intrinsic value either negative or positive intrinsic value zero time value Explanation: Intrinsic value refers to the amount by which option is in the money i.e. the amount an option buyer will realize, before adjusting for premium paid, if he exercises the option instantly. For e.g. - 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. Q 24.**Impact cost is low when the liquidity in the system is poor - True or False ? True False Explanation: Impact cost basically means what additionally a trader must pay because of the order size i.e. due to price increase if there it is a big buy order and price decrease if there is a big sell order. If the scrip is very liquid i.e. there are huge buyers and sellers, the impact cost will be very low. So in the above question, the impact cost will be high if the liquidity is poor in the system. Q 25. "If you have sold a ITC futures contract (contract multiplier 500) at 300 and bought it back at 328, what is your gain/loss? A gain of RS. 6,800 A loss of Rs. 6,800 A loss of Rs. 14,000 A gain of Rs. 14,000 Explanation: You had sold ITC believing that it will fall down, but it has risen - so there will be a loss. 300 - 328 = -28 Loss -28 x 500 shares = - Rs 14000 Q 26. Value-at-risk is calculated ___________ for a specific time frame at a specific confidence level only when stocks are very volatile Both 1 and 2 Explanation: The clearing corporation computes and collects the Initial margins which are based on 99% value at risk over a one day time horizon. Q 27. Who monitors the collection of Initial margin ? The Stock Exchange The Clearing Corporation NSDL or CDSL SEBI Q 28. **If you are a buyer of put option, it will give you the right to sell how much of the underlying to the writer of the option? The specified quantity or less than the specified quantity The specified quantity or more than the specified quantity Only the specified quantity (lot size of the option contract) Any quantity Explanation: Only the quantity of the lot size as determined by the stock exchange. Q 29. "In the Option segment, if you sell a CALL at a premium of Rs 45 at the Strike Price of Rs 400, lot is of 200 shares, then the maximum possible Profit is Rs 9000 Rs 18000 Rs 80000 Unlimited Explanation: In the Options market, the maximum profit a seller of an option can make is the premium he receives. In the above case the premium received is Rs 45 x 200 shares = Rs 9000. Q 30. The settlement in futures contract happen only in ____________ Cash Physical Delivery Cash or Delivery as per the choice of buyer None of the above Explanation: There is no delivery involved in Futures and Options. The profit or loss is settled by cash i.e. Debit - Credit payments. Q 1. The NEAT F&O trading system _____________ does not allow combination trades allows only a single order placement at a time allows one to enter combination trades none of the above Q 2. For FlI’s, the short position In Index derivatives should not exceed the long positions in delivery holdings - True or False? True False Q 3. The buyer of an option cannot lose more than the option premium paid. True only for American options True only for European options True for all options False for all options Explanation: A buyer of an option cannot lose more than the option premium paid in all types of options. Q 4. The payoff for a trader who sells a future contract is similar to the payoff for a trader who __________ an asset. goes long shorts hedges does arbitrage in Q 5. A writer of a call option is a person who _____________ Has the obligation to buy the underlying asset Has the obligation to sell the underlying asset Has the right to buy the underlying asset Has the right to sell the underlying asset Explanation: A call option the seller/ writer will deliver equity shares for which the call option was entered into. Q 6. Options which can be exercised only on the expiration date are _________ options. American Options Indian Options European Options Commodity Options Q 7. Short straddle is created by shorting a call and a put option of same strike and same expiry - True or False? True False Explanation: In a short straddle the trader's view is that the price of underlying would not move much or remain stable. So, he sells a call and a put so that he can profit from the premiums. (A long straddle position is created by buying a call and a put option) Q 8 To take a selling position in a Stock Futures contract, a trader should___________ have the underlying stock in his demat account pay only the margin amount as specified by the exchange pay the full value of future contract None of the above Q 9. Seller of a put option expects ___________ Dec rease in the price of underlying asset Increase in the price of underlying asset No change in the price of underlying asset Bot