NISM Series - I Currency Derivatives Cert. Mock Test-3

Explanation:

Margins across the various clients of a member are collected on a gross basis and should not be netted off

For eg. – Client A has bought 10 lots of USDINR and Client B has sold 4 lots of USDINR on the same day. The margin payable by the member (broker) will be on 14 lots and not 6 lots.

Explanation:

When a client defaults in making payments for a daily settlement, the contract is closed out, and the amount not paid by the client is adjusted against the initial margin paid by the client. This ensures that the necessary funds are used to cover the default and maintain the financial integrity of the trading arrangement.

Explanation:

Limit price: An order to buy a specified quantity of a security at or below a specified price, or an order to sell it at or above a specified price (called the limit price). This ensures that a person will never pay more for the futures contract than whatever price is set as his/her limit.

Explanation:

A day order is an order which is valid for the day on which it is entered. If the order is not executed during the day, the system cancels the order automatically at the end of the day.

Explanation:

The formula for Interest Rate Parity is :

Future Rate = Spot Rate X (1 + Interest Rate of Quoted Currency) /

( 1 + Interest Rate of Base Currency)

= 64 X ( 1 + 0.1 ) / ( 1 + 0.02 )

= 64 X ( 1.1 / 1.02)

= 64 x 1.07843137

= 69.0196

So the interest cost is 69.0196 – 64 = 5.0196 for one year

For six months it will be 5.0196 / 2 = 2.509

So the six month future rate will be 64 + 2.509 = 66.51

Explanation:

Mr. Satish has bought 30 grams gold at 25000 and sold at 28000

The profit he has made = 28000 – 25000 x 30 = Rs 90000

He has also sold 15 lots USDINR at 60 and covered back at 63. So he has made a loss here

60 – 63 X 15 X 1000 (lot size)

= -45000 Loss

Net Postion : 90000 Profit – 45000 Loss = 45000 Profit

Explanation:

The lot size in the case of EURINR is EUR 1000

In case of USDINR it is USD 1000; GBPINR it is GBP 1000; JPYINR it is JPY 100,000.

Explanation:

In the futures market, the entire risk is managed by the Clearing Corporation by effective margining systems etc. This will lead to controlled speculation and thus avert bankruptcies etc.

Explanation:

Selling GBPINR – view is weakening of GBP against INR

Buying EURINR – view is strengthening of EUR against INR

Taking a collective view – GBP weakening against EUR or EUR strengthening against GBP

Explanation:

He should sell one month futures at Rs 80.50 ( 80 + 0.50 premium)

If the price remains stable, he will able to buy back the same at Rs 80 on settlement.(There is no premium on settlement). So he will earn a profit of 50 paisa x Lot size

As his view is for one month only, he should sell the one month.

Explanation:

Tick Size: It is the minimum move allowed in the price quotations. Exchanges decide the tick sizes on traded contracts as part of contract specification. For eg. -Tick size for Nifty futures is 5 paisa.

Explanation:

As per the rules of SEBI and Stock Exchanges,the notional value of gross open positions at any point in time in the case of all Futures and Options shall not exceed a particular percentage of the liquid networth of a member.

So a member (Mr Ram) who keeps higher liquid assets as security and margin with the stock exchanges will get higher exposure limits.

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.

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 profits if the market / stock is very volatile and it makes a big move – either up or down.

For eg- 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.

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.

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.

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 CALL option can be closed by selling that CALL option.

Explanation:

Protective Put is a 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.

Explanation:

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.

For call option which is in-the-money, intrinsic value is the excess of market price over the exercise price. For put option which is in-the-money, intrinsic value is the excess of exercise price over the market price.

Explanation:

All modern stock exchanges have highly developed online surveillance systems to monitor the volumes / position and prices of all listed products and also check any unusual activity etc. in them.

Explanation:

The formula for Interest Rate Parity is :

Future Rate = Spot Rate X (1 + Interest Rate of Quoted Currency) /

( 1 + Interest Rate of Base Currency)

= 1.74 X ( 1 + 0.01 ) / ( 1 + 0.04 )

= 1.74 X ( 1.01 / 1.04)

= 1.74 x 0.9711

= 1.689

Thus the future rate will be at a discount as Quoted Currency interest rates are less than base currency interest rates.

Explanation:

Volatility measures the magnitude of the change of prices (up or down) of the underlying asset. Higher the volatility, higher is the option premium and vice versa.

Explanation:

For currency futures contract in India, the tick size is 0.25 paise or 0.0025 Rupee

For eg – If USDINR is 56.7500, then a upward movement of one tick will result in a price of 56.7525.

Explanation:

When a person enters a limit SELL order, his order cannot get executed below the limit price. However if the price rises while entering the order, he can sell it at a higher price.

So in the above case, he can sell GBPINR at the limit price of 70.60 or higher if the price rises while entering the order.

Explanation:

Use of a vehicle currency ( like USD ) greatly reduces the number of exchange rates that must be dealt with in a multilateral system.

In a system of 10 currencies, if one currency is selected as the vehicle currency and used for all transactions, there would be a total of nine currency pairs to be dealt with (i.e. one exchange rate for the vehicle currency against each of the others),

If no vehicle currency were used, there would be 45 exchange rates to be dealt with as per below calculations :

The formula is : n ( n – 1) / 2

= 10 ( 10 -1 ) / 2

= 10 ( 9 ) / 2

= 10 x 4.5

= 45

Explanation:

Arbitrageurs make profits by simultaneously entering opposite side transactions in two or more markets ie. buy in one market at a lower price and sell in another at a higher price.

Here, in the OTC Market the Bid Ask price is 47.75 / 48.00. So an arbitrageur will buy at 48.00.

In Futures Market the Bid Ask price is 48.50 / 48.70. So the arbitrageur will sell at 48.50.

Thus he will make an arbitrage profit of Rs 0.50 ( 48.50 – 48.00 )

Explanation:

54.20 and 54.30 are the BID and ASK price. This means there are buyers at 54.20 and sellers at 54.30.

So if the exporter wants to sell, he has to sell them to the buyer at 54.20

Explanation:

Positions during the day are monitored based on the total open interest at the end of the previous day’s trade.

Explanation:

Buying USDINR – USD strengthening against INR

Selling JPYINR – JPY weakening against INR

Conclusion from above two statements – USD strengthening against JPY or JPY weakening against USD.

Explanation:

The mark-to-market gains and losses are settled in cash before the start of trading on T+1 day.

Explanation:

Under the FIFO method, the contract price of the contract that is squared off is determined based on the price of the first contract purchased in the series. This means that the oldest contract in terms of acquisition is considered first when calculating the profit or loss on squaring-up. This method is widely used in financial markets to ensure a consistent and fair approach to determining gains or losses on trades.

Explanation:

An option is said to be at the money if spot price is equal to the strike price.

Explanation:

The exports are higher than monthly loan payments. So only the amount over and above the loan payment is subject to currency risks and should be hedged.

Explanation:

European options can be exercised by the buyer of the option only on the expiration date.

In India, all the currency options in OTC and Exchange traded are of European type.

Explanation:

Calendar Spread (also known as intra-currency pair spread) consists of one long futures and one short futures contract. Both have the same underlying but different maturities.

Explanation:

In a Call Option, the Premium increases with increase in Spot price.

In a Put option, the Premium decreases with an increase in the Spot price.

Explanation:

OTC trades are between two or more parties and the risks are borne by them. There is no centralised risk management authority like the clearing corporation in the futures exchange.

Explanation:

A long currency option position at one maturity and a short option position at a different maturity in the same series, both having the same strike price would be treated as a calendar spread.

Explanation:

FIFO means First In First Out – which means the price of the contracts bought first will be considered first in case of square up.

Mr. Rohan has squared off only 10 contracts. So we should consider the buying price of the first 10 contracts and ignore rest of the data.

First 10 contracts were bought at 80.00 and these were sold on day 3 at 79.90

So 80 – 79.90 = .10 Loss x 10 lots x 1000 (lot size) = Rs 1000 Loss

Explanation:

Banks were allowed to run option book subject to their meeting certain parameters with respect to net worth, profitability, capital adequacy and NPA%.

Explanation:

Aditya has received Rs 10,00,000

Divide this by 50 (USDINR Rate) we get 20,000 USD

The lot size of USDINR contract is 1000

So 20000 / 1000 = 20 Lots

Explanation:

In this question, we are required to calculate the MTM for day 2. So we ignore the buying and selling of day 1.

(Mark to Market margins for brought forward positions: The previous day’s settlement price Less the current day’s settlement price x No. of contracts)

He has bought forward 40 contracts (100 – 60 )
The Settlement price of day 1 was 66.30 and of day 2 was 66.80
We have to consider these two prices to calculate the MTM
66.80 – 66.30 = 0.50 x 40 contracts x 1000 (lot size)
= 20000 positive as there is a notional profit

Explanation:

The trader has bought a PUT and Sold a CALL – In both the cases he has assumed that the USDINR will fall to make a profit.

Trade 1 – Buys a Put option at 0.38. So he has to pay a premium of Rs. 0.38. The RBI reference rate is 66. So there is no Profit or loss due to this as its the same as strike price. However he has lost the premium paid of Rs 0.38 x 1000 (lot size) = Rs 380

Trade 2 – Sell a Call option at Rs. 0.45. So he receives this premium of Rs.0.45. The RBI reference rate is 66 and the strike price is 65.50. So here is makes a loss of Rs. 0.50 (65.50 – 66) due to adverse price movement. The net loss is 0.45 (premium received) – 0.50 = 0.05 x 1000 (lot size) = Rs. 50

Total Loss from Trade 1 ( 380 ) and trade 2 ( 50 ) = Rs 430.

Explanation:

The mark-to-market gains and losses are settled in cash before the start of trading on T+1 day.

Explanation:

INR has appreciated against USD, which means USD has depreciated. So the USDINR rate will fall.

The trader has sold USDINR, so he will profit from the fall.

Tick Size is Rs .0025

100 Ticks X .0025 = 0.25

0.25 X 10 lots X 1000 ( Lot size of USDINR)

= Rs 2500 Profit

Explanation:

RBI-SEBI Standing Technical Committee on Exchange Traded Currency recommends product design, risk management and membership norms for currency futures etc.

Explanation:

A call option would be Out of the Money if the underlying price is lower than the strike price.

The underlying price (current price) ie. 62 is lower than the strike price ie. 63. ( Loss situation)

A put option would be out of the money if the underlying price is higher than the strike price.

A call option would be in the money if the underlying price is higher than the strike price.

A put option would be in the money if the underlying price is lower than the strike price.

Explanation:

When a Trading Member requires the facility of using ‘Pro-account’ through trading terminals from more than one location, such Trading Member shall request the Exchange stating the reason for using the ‘Pro-account’ at multiple locations.

The Exchange may, on a case to case basis after due diligence, consider extending the facility of allowing use of ‘Pro-account’ from more than one location.

Explanation:

Bought 13 lots and sold 6 lots, so net position is of 7 lots X 1000 (lot size) = 7000

Explanation:

In managed float, countries have controls on flow of capital and central bank intervention is a common tool to contain sharp volatility and direction of currency movement.