NISM Series - I Currency Derivatives Cert. - Full-Length Test

Clearing means computing open positions and obligations of clearing members in the trading system. Whereas, settlement means actual pay in or pay out to settle the contract.

The breakeven point for a short put is the strike price of the option minus the premium.
So 66 – 0.40 = 65.60
(In easier terms, when a person sells PUT, he has a bullish view and believes that price will rise. He has bought at 66 and he receives .40 premium so his buying price reduces by .40, i.e., 65.60, which is the break-even price.

The trader buys at 65 and sells at 65.40 (Settlement Price). So the profit is 0.40
0.40 x 40 lots x 1000 (lot size) = Rs 16000 profit

On expiry the spot and future prices tend to merge ie. become same.
So the trader should sell the EURINR future which are at a premium (lets assume it at 83) to spot price (80).
On expiry, the future price will be around 80 and he will square up his position and make a profit (83 – 80 = 3).

ICAI – The Institute of Chartered Accountants of India

The investor invested Rs 390000 in US Stock when the USDINR rate was 65
So he had invested 390000 / 65 = 6000 Dollars in US Stocks.
His investment grew by 25% : 6000 x 25% = 6000 + 1500 = 7500
He is repatriating at USDINR rate of 62 : 7500 x 62 = 465000
Therefore his investment in INR terms have grown from Rs 390000 to Rs 465000
465000 x 100 / 390000 = 119.23
This is an increase of 19.23 %

Buying a call option or selling a put option – both have a similar view ie. appreciation of the underlying.

However in Selling a Put option, the gains are limited to the premium received.

So Mr. Vaibhav must have shorted a Put Option and received the premium. Now even if the USDINR appreciates by a huge extent, his profits will be restricted to the premium received.

If he had gone long on a call option, he would have paid a premium buy his gains would have been much more in co-relation to the rise in USDINR.

The currency futures segment of the Exchange should have a separate Governing Council on which the representation of Trading /Clearing Members of the currency futures segment should not exceed 25%. Further, 50% of the public representatives on the Governing Council of the currency futures segment can be common with the Governing Council of the cash/equity derivatives segments of the Exchange.

A derivative is a product whose value is derived from the value of one or more basic variables, called bases (underlying asset, index, or reference rate).

The underlying asset can be equity, foreign exchange, a commodity, or any other asset. It can be traded on an exchange or OTC.

When a person is bearish, he can either sell a call option or buy a put option. But in the case of selling a call option, his profits will be limited to the extent of the premium received.
So in the above case, where the trader wishes to maximise his profits, buying a Put Option is the best alternative.

Please note :
Buying Call – Bullish view
Selling Call – Bearish / Neutral view
Buying Put – Bearish view
Selling Put – Bullish / Neutral view

Exchange regulations specify codes of conduct related to the currency derivatives segment. All trading members must comply with these. One of the code of conduct is :
– No Trading Member or person associated with the Trading Member shall guarantee a client against a loss in any transactions effected by the Trading Member for such client.

This strategy involves selling Japanese Yen (JPY) against Indian Rupee (INR) and buying US Dollars (USD) against Indian Rupee (INR). Here’s the rationale behind this strategy:
1. Short JPYINR: By selling JPYINR futures contracts, you’re essentially betting that the value of Japanese Yen will decrease relative to Indian Rupee. This aligns with your belief that USDJPY will move from 90 to 95, as a decrease in JPYINR indicates the depreciation of Japanese Yen against Indian Rupee.
2. Long USDINR: Buying USDINR futures contracts means you’re expecting the value of US Dollar to increase compared to Indian Rupee. As you anticipate USDJPY to move from 90 to 95, an increase in USDINR reflects the appreciation of US Dollar against Indian Rupee.
By combining these positions, you’re effectively capturing both aspects of your view on USDJPY: the expected depreciation of Japanese Yen against Indian Rupee and the anticipated appreciation of US Dollar against Indian Rupee. Therefore, this strategy allows you to profit from the expected movement of USDJPY from 90 to 95 within the next one month, despite not having direct access to trade USDJPY in India.

If more than one contract in a series are outstanding at the time of expiry/ squaring off, the contract price of the contract so squared off should be determined using First-in, First-out (FIFO) method for calculating profit/loss on squaring up.

A forward contract is a customized contract between two parties, where settlement takes place on a specific date in the future at today’s pre-agreed price.

Futures is similar to forward except that it is an Exchange-trade product.

The right to buy the asset is called call option and the right to sell the asset is called put option.

This is the minimum net worth required by a company to apply for authorization to become an exchange for currency futures in India, as mandated by the Securities and Exchange Board of India (SEBI). This requirement ensures that the company possesses sufficient financial strength and stability to manage the operations and risks associated with currency futures trading.

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

Monitoring of position limits: Clearing corporation end of day provides Exchange wise position limit applicable to various clients and member for next day.

In exchange traded derivatives, all market participants are protected by the exchange’s risk management framework. The clearing corporation becomes the counterparty to every trade, reducing default risk. Margins, daily settlement, surveillance, and position limits safeguard all participants equally. Therefore, the statement that all market participants are safeguarded is correct.

When you buy an option (either Call or Put), you have to pay a premium – so buying an option is not a zero cash outgo strategy.
When you sell a Put, you have a bullish view and you receive a premium
When you sell a Call, you have a bearish view and you receive a premium
So when there is a bullish view and zero cash outgo strategy, one should sell PUT option.

A sub-broker should enter into a tripartite agreement with his client and with the main broker specifying the scope of rights and obligations of the broker, sub-broker and such client of the sub-broker.

(Bipartite is a two party agreement and a tripartite is a agreement between three parties.)

He will short (sell) 10,000 GBPINR for 70 days future on OTC market, for eg – with a Bank etc. as 70 days maturity is not available on exchange.

Counter Party Risk – The risk to each party of a contract that the counterparty will not live up to its contractual obligations.

In the Money options are profitable options where as Out of the Money options are loss making.
So the premium on In the Money options will be higher the Out of the Money options.
In the money (ITM) option: An option is said to be in the money, if on exercising it, the option buyer gets a positive cash flow.
Out of the money (OTM) option: An option is said to be out of the money, if on exercising it, the option buyer gets a negative cash flow.

Breakeven point for a buyer of Put option = Strike Price – Premium
= 60.00 – 0.45
= 59.55

SEBI has instructed that for every available contract – 3 out of the money (OTM) strike, 3 in the money (ITM) strike and 1 at the money (ATM) strike contracts will be available on the exchange terminal.

FIFO means First In First Out.
So lets see the buying cost of the first 50 lots
[20 x 80] + [15 x 80.25] + [15 x 80.50] = 4011.25
He has squared up 50 lots
The sale price of 50 lots is 80.60 = 4030
Total Profit = 4030 – 4011.25 X 1000 ( Lot size of GBPINR )
= 18750

When INR depreciates against USD, the currency pair USDINR prices go up. For example if USDINR is trading at 60, a fall in INR will lead to a rise in this price to 60.50 …61 etc. So one should buy USDINR.

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.

T : Trade / Cash Date
T + 1 : Tom
T + 2 : Spot
For a currency pair for which spot date is at T+2 and if settlement happens on the trade date, the settlement price is called as “cash” rate and if happens one day after trade date, the price is called as “tom” rate.

The trader buys at 65.40, and the settlement price is 65.60. So he makes a profit of 0.20
He has bought 40 lots, and each lot of EURINR is of 1000.
So his total profit is 0.20 X 40 X 1000 = 8000.

When you short a PUT option, your view is that the price of underlying will rise or remain steady.
For a seller of Put option, the maximum profit is the premium he has received, but his losses are unlimited if the price of the underlying falls.

Option Views :
Long Call – Bullish
Short Call – Bearish / Steady
Long Put – Bearish
Short Put – Bullish / Steady

In India, all the currency options in OTC market / Exchanges are of European type.
European options can be exercised by the buyer of the option only on the expiration date.
American options can be exercised by the buyer of the option on or before the expiration date.

Authorised Dealer Category I Banks

AD Category I Banks are permitted to become trading and clearing members of the currency derivatives market of recognized stock exchanges, on their own account and on behalf of their clients, subject to fulfilling the following minimum prudential requirements:

i) Minimum net worth of Rs. 500 crores. ii) Minimum CRAR of 10 per cent. iii) Net NPA should not exceed 3 per cent. iv) Net profit for last 3 years.

The breakeven point for a short put is the strike price of the option minus the premium.
So 60.50 – 0.40 = 60.10

A call option would be in the money, if underlying price is higher than the strike price.
Similarly a put option would be in the money if underlying price is lower than the strike price.

Mr. Shah has bought a PUT and Sold a CALL – In both the cases he has assumed that the USDINR will fall to make a profit.
On expiry the USDINR has fallen as indicated by the RBI reference rate – so he is definitely into profits.
In first case when he bought PUT for 0.55, he has paid a premium of 0.55. The strike price is 45.50 and RBI refernce rate is 44.75. So a profit of 0.75. Deducting the premium paid ( 0.75 – 0.55 ) the profit is 0.20
In the second case when he sold a CALL option, he has received a premium of 0.71. This will be his profit as USDINR has gone done.
So the total profit is 0.20 + 0.71 = 0.91

Exchanges have to offer three serial monthly contracts followed by three quarterly contracts of the cycle March / June / September / December.

The symbol for Swiss Franc is CHF.

The intrinsic value of an option is the difference between spot price and the strike price.
For an ‘At The Money’ option, the intrinsic value is zero and for an ‘In the Money’ option, the intrinsic value is always greater than zero.

On day 1 – The client buys 15 lots and sells 10 lots the same day.
So brokerage charged by broker A (who charges only on one leg) will be 15 lots X Rs 20 = Rs 300. No brokerage on sell transaction.
Brokerage charged by broker B ( who charges on both legs ) will be 15 lots x Rs 15 + 10 lots X Rs 15 = Rs 375
After 4 days – The Client sells 5 lots
So brokerage charged by broker A will be 5 lots X Rs 20 = Rs 100
Brokerage charged by broker B will be 5 lots X Rs 15 = Rs 75

Total Brokerge : Broker A 300 + 100 = Rs 400
Broker B 375 + 75 = Rs 450

A recognized stock exchange having nationwide terminals or a new exchange recognized by SEBI may set up currency futures segment after obtaining SEBI’s approval.
The exchange shall have a balance sheet networth of at least Rs. 100 crores

The Settlement date is the last working day of the month (subject to holiday) at 12 noon.

The initial security deposit paid by a member is considered as his initial margin for the purpose of allowable exposure limits.
Initially, every member is allowed to take exposures up to the level permissible on the basis of the initial deposit.

A Broker has to issue contract notes every trading day to his clients as well as clients of his sub brokers.

As per the SEBI’s Code of Conduct for Brokers – A stock-broker shall issue without delay to his client a contract note for all transactions in the format specified by the stock exchange.

The closing price for a futures contract is calculated as the last half an hour weighted average price of the contract.

However if a futures contract is not traded on a day or not traded during the last half hour, a ‘theoretical settlement price’ is computed as may be decided by the relevant authority.

The importer pays higher spot price in cash market but gains on long futures position. Spot purchase cost is Rs 84.10 multiplied by USD 500000. Futures gain is difference between 84.08 and 83.40 multiplied by USD 500000. Net outflow becomes approximately Rs 4,17,00,000, showing how hedging reduces exchange rate risk.

Offer side cross rate uses offer of both legs because buyer of euro must buy dollars first and then euro. Therefore EURINR offer equals 1.1245 multiplied by 83.2100. This gives approximately 93.56 to 93.63 depending on rounding convention. Closest valid exam answer is 93.63.

Seller of futures loses when settlement price rises above sale price. Difference is Rs 0.35 per dollar. Multiply by contract size of USD 1000 gives Rs 350 loss. Futures positions are settled daily through mark to market mechanism, reducing accumulation of unpaid obligations.

Arbitragers seek risk controlled profit from temporary price inconsistencies across markets or instruments. They may simultaneously buy in one market and sell in another. Importers and exporters mainly hedge exposure, while tourists transact for consumption needs rather than structured market opportunities.

Call intrinsic value equals spot minus strike when spot exceeds strike. Here intrinsic value is Rs 84.20 minus Rs 83.00 which equals Rs 1.20. Premium includes intrinsic value plus time value. Since option is in the money, buyer has immediate exercise value.

Managed float means exchange rate generally responds to market demand and supply, but authorities may intervene to reduce excessive volatility or disorderly moves. It differs from hard pegs and from clean float where intervention is absent or minimal. India is commonly described this way.

Without vehicle currency, combinations rise sharply. With one selected vehicle currency, each remaining currency is quoted against that vehicle. Therefore for ten currencies total required rates become nine only. This simplifies operations, improves liquidity concentration, and reduces information requirements.

Exporter will receive dollars later and convert into rupees. If rupee appreciates, USDINR may fall, reducing rupee receipts. Selling USDINR futures locks a higher conversion level and offsets adverse fall in dollar value. This is a classic receivable hedge.

Vega estimates how much option premium changes when implied volatility changes by one unit. Higher expected volatility usually increases option value because probability of favorable movement rises. Delta tracks spot sensitivity, theta time decay, and gamma change in delta.

In market making quotes, first number is bid and second is offer. Bid is the rate at which dealer buys base currency from customer. Since USD is base currency in USDINR pair, bank buys dollars at Rs 83.1050 and sells at Rs 83.1100.

Under interest rate parity, higher domestic interest relative to foreign tends to place foreign currency futures above spot for direct quote pairs like USDINR. Carrying domestic funds has higher opportunity cost, so future delivery of foreign currency commands premium.

Global foreign exchange developed as decentralized dealer network where banks and institutions transact bilaterally or through electronic platforms. Though exchange traded currency derivatives exist, spot and many forwards or swaps remain largely over the counter in structure.

Selling EURINR – view is weakening of EUR against INR
Buying JPYINR – view is strengthening of JPY against INR
Taking a collective view – EUR weakening against JPY

When foreign interest rate exceeds domestic rate, carrying foreign currency has relatively lower forward premium in direct quote terms, often causing futures to trade below spot. Interest rate parity links spot, interest differentials, and forward or futures pricing.

Currency futures are standardized regarding contract size, expiry cycle, tick size, and settlement procedures. They trade on regulated exchanges with clearing support. Forwards are usually customized privately between counterparties for specific amounts and maturities.

Call option on USDINR gives right to buy dollars at strike price. This gains when market rises above strike. Therefore buyer generally expects dollar appreciation or seeks protection against future rise in import payment cost.

Option buyer acquires a right to buy or sell underlying at agreed strike, not a compulsory obligation. Futures create binding obligations on both sides subject to closing out before expiry. This asymmetry explains premium payment in options.

Offer for buying yen uses USDINR offer and USDJPY bid or standard dealing convention depending route. Approximate exam method gives 100 multiplied by 83.02 divided by 148.50 which is about 55.89. Always follow market convention for quoted units.

Financial Benchmarks India Private Limited publishes important benchmark reference rates and forward premia related benchmarks based on prescribed methodologies. Such benchmarks assist valuation, treasury operations, and market transparency for participants.

Intrinsic value at expiry is spot minus strike equal to Rs 0.20. Buyer paid premium Rs 0.35. Net result equals 0.20 minus 0.35, producing Rs 0.15 loss per dollar. Positive intrinsic value does not always guarantee overall profit.

Margins act as performance security collected from market participants. Daily revaluation and margin collection help absorb losses promptly, reducing probability that one participant defaults and harms the broader market settlement chain.

Higher USDINR means more rupees are required to buy one dollar. Hence dollar strengthened relative to rupee, while rupee weakened relative to dollar. Currency appreciation and depreciation are always relative concepts between paired currencies.

In liquid markets dealers can hedge positions quickly and face lower risk of holding unwanted inventory. Strong competition among market makers also compresses bid offer spreads, improving pricing efficiency for customers and institutions.

Major pairs generally include most actively traded currencies with deep liquidity, often involving US dollar and other reserve currencies. EURUSD is globally one of the most traded pairs. Emerging market combinations are not usually classified as majors.

In pair notation first currency is base currency and second is quote currency. USDINR means one unit of US dollar priced in Indian rupees. Therefore dollar is base currency and rupee is quote currency.

Same day settlement in foreign exchange is commonly called cash or ready transaction. Tom refers to next business day settlement, while standard spot often refers to second business day settlement subject to holiday conventions.

Exporter fearing fall in foreign currency may buy put option to secure minimum conversion level while retaining benefit if currency rises. Unlike fixed futures hedge, option preserves upside after payment of premium.

Market makers continuously quote bid and offer prices, standing ready to buy and sell subject to limits. Their activity supports liquidity and price discovery. Ordinary users like tourists usually accept quotes rather than provide them.

As expiry approaches, time value in futures basis declines and futures price converges with spot price through arbitrage and settlement mechanics. Persistent divergence would create near riskless trading opportunities for market participants.

Exotic pairs usually combine a major currency with currency of an emerging or less traded economy. USDTRY pairs US dollar with Turkish lira. Major pairs such as EURUSD or USDJPY have deeper liquidity and tighter spreads.

Delta approximates first order sensitivity of option premium to small change in underlying price. Call delta 0.60 suggests premium may rise around Rs 0.60 for Rs 1 increase, assuming other variables remain constant.

Hedging aims to reduce adverse financial impact from uncertain future exchange movements. It stabilizes cash flows, budgeting, and margins, though it may sacrifice some favorable outcomes. Hedging does not guarantee profit or remove all business risks.

Currency futures pricing commonly reflects no arbitrage relationship connecting spot rate, domestic interest rate, foreign interest rate, and time to maturity. This is often summarized through interest rate parity or cost of carry framework.