NISM Series - VIII Equity Derivatives Cert. Mock Test - 1/50 NISM Series – VIII Equity Derivatives Cert. Mock Test – 1 1 / 50The relationship between the spot price and the future price is known as ________. a) Risk premium b) Cost of Carry c) Dividend d) Payout difference Explanation:Cost of Carry is the relationship between futures prices and spot prices. For equity derivatives, carrying cost is the interest paid to finance the purchase less (minus) dividend earned.2 / 50Longer the time to maturity of a PUT option, higher will be its ____________. a) Technical and Fundamental value b) Intrinsic value c) Time value d) Arbitrage value Explanation:Time value of the option depends upon how much time is remaining for the option to expire. Longer the time to maturity, higher will be the time value.The effect of time to expiration on both call and put options is similar to that of volatility on option premiums. Generally, longer the maturity of the option greater is the uncertainty and hence the higher premiums. If all other factors affecting an option’s price remain same, the time value portion of an option’s premium will decrease with the passage of time.3 / 50If everything else remains constant and Stock P is more volatile than Stock Q, the call option on ______ will be priced higher, given that the prices of both stocks are the same at Rs. 500. a) Stock P b) Stock Q c) Both calls will be equally priced d) Inadequate information Explanation:More the volatility in a stock, higher will be its price of its call and put option as compared to less volatile stocks of the same price.Vega is the measure of the sensitivity of an option price to changes in market volatility. It is the change of an option premium for a given change in the underlying volatility.4 / 50Identify the accurate statement regarding a short position in a PUT option. a) Short position in a put option can be closed out by executing a short position in a call option with the same exercise date and exercise price b) Short position in a put option can be closed out by executing a long position in a put option with the same exercise date and exercise price c) Short position in a put option can be closed out by executing a long position in a put option with any exercise date and exercise price d) Short position in a put option can be closed out by executing a long position in a call option with the same exercise date and exercise price Explanation:A short position in a Put Option can be closed out (squared up) only by buying the same Put Option of the same exercise date and exercise (strike) price.5 / 50Which of the following is not encompassed in the Indian equity derivatives market? a) Individual stock options b) Options on equity market indices c) Individual stock futures d) Interest rate futures Explanation:Although NSE and BSE allows trading in interest rate futures but it is not a part of equity derivatives.6 / 50If a holiday falls on the last Thursday, what will be the last trading day for a futures series? a) The previous working day b) Two days after c) The next working day d) The first day of the next month Explanation:Expiration Day: This is the day on which a derivative contract ceases to exist. It is the last trading day of the contract. Generally, it is the last Thursday of the expiry. If the last Thursday is a trading holiday, the contracts expire on the previous trading day.7 / 50What tax is applicable to transactions conducted on a recognized Indian stock exchange? a) Derivatives Transaction Tax b) Stock Subversion Tax c) Securities Transaction Tax d) Securities Trading Tax Explanation:Securities Transaction Tax (STT) is levied on every purchase and sale of securities that are listed on the Indian stock exchanges. STT is levied on transactions involving equity, derivatives and equity oriented mutual funds.8 / 50Option premium is the price paid by the _______. a) Option buyer and option seller to a third party b) Option buyer to option seller c) Option seller to option buyer d) Option buyer and option seller to the exchange Explanation:Option Premium is the price which the option buyer pays to the option seller.9 / 50A ‘Closing buy transaction’ is a buy transaction that will have the effect of offsetting a ______. a) Short position b) Long position c) High position d) Cross position Explanation:Creating a Short Position means selling the asset on an exchange with a view to buy it back when the price falls.So a Closing Buy transaction will be used to buy back / offset the short position created.10 / 50Which of these is an order with a time stipulation? a) Limit Order b) Market Order c) Good Till Cancelled Order d) Stop Loss order Explanation:Good Till Cancel (GTC) is a type of order that enables client to place buying and selling orders with specifying time interval for which instruction of request remains valid. The maximum validity of a GTC order is 365 days.11 / 50Mr. Subu, who has a long position in a stock, can cover his position by selling ____. a) Any index stock of equal quantity b) The same stock and same quantity c) Any 'A' group stock of equal quantity d) Any security of equal quantity Explanation:To square up / cover a long position, the same quantity of the same stock has to be sold.12 / 50For extraordinary dividends exceeding 5% of the market value of the underlying security, the amount of dividend is _____ the strike price of options on the stock. a) Added to b) Divided by c) Multiplied to d) Subtracted from Explanation:In case of declaration of “extra-ordinary” dividend by any company, the total dividend amount (special and / or ordinary) would be reduced from all the strike prices of the option contracts on that stock. The revised strike prices would be applicable from the ex-dividend date specified by the exchange.13 / 50Initial Margin can be paid by ________ . a) Bank guarantee b) Acceptable securities c) Bank transfer of funds d) All of the above Explanation:The amount one needs to deposit in the margin account at the time of entering into a futures contract is known as the initial margin.This can be paid by Cash, Bank Guarantee, Fixed Deposit Receipts and approved securities etc.14 / 50Which of the following is true for an ‘In-the-money’ option? a) 'In-the-money' option cannot be profitably exercised by the holder immediately b) 'In-the-money' has a negative intrinsic value c) 'In-the-money' option has zero time value d) 'In-the-money' has a positive intrinsic value Explanation:In-the-money (ITM) option: This option would give the option holder a positive cash flow, if it were exercised immediately.The intrinsic value of an option refers to the amount by which the option is in-themoney 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.15 / 50A CALL OPTION will provide the buyer with _______. a) Obligation to buy the underlying asset b) Obligation to sell the underlying asset c) Right to buy the underlying asset d) Right to sell the underlying asset Explanation:A call option gives the buyer the right but not the obligation to buy from the seller an underlying asset at the prevailing market price on or before the expiry date.16 / 50True or False: In the derivatives exchange, the net worth requirement for a clearing member is less than that of a non-clearing member. a) False b) True Explanation:In a derivative exchange, the networth requirement for a clearing member is higher than that of a non-clearing member.17 / 50The New York stock exchange has two important indices – Dow Jones (DJIA) and Standard and Poor 500 (S&P 500). The DJIA is a _______ index where as the S&P 500 is a ______ index. a) Broad , Narrow b) Fully Diversified, Fully Concentrated c) Narrow , Broad d) Very Liquid , Very Illiquid Explanation:The Dow Jones Industrial Average (DJIA) a stock market index of 30 prominent companies listed on stock exchanges in the United States.The Standard and Poor’s 500, or simply the S&P 500, is a stock market index tracking the stock performance of 500 large companies listed on stock exchanges in the United States.Therefore, Dow Jones can be considered as narrow index as it covers only 30 companies where as S&P is a broad index as it covers 500 companies.18 / 50Identify the accurate statement for an ‘In-the-money’ Call Option. a) Exercise price would be equal to the market price b) Strike price will be zero c) Strike price will be lower than the market price d) Strike price will be higher than the market price Explanation:In-the-money (ITM) option: This option would give the option holder a positive cash flow, if it were exercised immediately.A call option is said to be ITM, when market price is higher than strike price.(A put option is said to be ITM when market price is lower than strike price)19 / 50A clearing member must deposit liquid assets with the Clearing Corporation, but these liquid assets cannot entirely consist of _________. a) T Bills (Treasury Bills) b) Equity Shares c) Fixed Deposits d) Cash Explanation:Clearing member is required to provide liquid assets which adequately cover various margins and liquid Net-worth requirements. The total liquid assets comprise of at least 50% of the cash component and the rest is non-cash component – This means 50% to 100% can be the cash component. Non-cash component cannot be more than 50%.All collateral deposits are segregated into cash component and non-cash component. Cash component means cash, bank guarantee, fixed deposit receipts, T-bills and dated government securities. Non-cash component means all other forms of collateral deposits like deposit of approved demat equity securities.20 / 50What is the gain/loss for a trader who sold an ABC futures contract (contract multiplier 50) at 2500 and bought it back at 2700? a) A loss of Rs. 15,000 b) A gain of Rs. 15,000 c) A loss of Rs. 10,000 d) A gain of Rs. 10,000 Explanation:You had sold ABC futures believing that its price will fall down, but it has risen – so there will be a loss.2500 – 2700 = -200 Loss-200 x 50 shares = – Rs 1000021 / 50Which of the following prices is approximately closest to the three-month future maturity, given a spot price (market price) of Rs 200 and an interest rate of 12% per annum? a) 224 b) 206 c) 200 d) 203 Explanation:Price of a future contract is generally the spot price plus interest for the time period.Yearly Interest Rate is 12%. Full year’s interest = 12% of 200 ie. Rs 24 (200 x 12 / 100)So for 3 months the cost of interest is Rs 6. ( 24/12 x 3)Therefore the 3 month future contract will have an price of appx. Rs 206. (200 + 6)22 / 50The strategy in which a trader sells a lower strike price CALL option and simultaneously buys a higher strike price CALL option, both for the same scrip and with the same expiry date, is known as _______. a) Bullish Spread b) Butterfly c) Bearish Spread d) Long term Investment Explanation:A bear call spread is a limited profit, limited risk option strategy that can be used when the options trader is moderately bearish on the underlying security.It is entered by buying call options of a certain strike price and selling the same number of call options of lower strike price (in the money) on the same underlying security with the same expiration month.23 / 50From the choices below, when is the April index futures contract scheduled to be introduced on NSE? a) On the 1st trading day after last Friday in January b) On the 1st trading day after last Thursday in January c) On the 1st trading day after last Friday in March d) On the 1st trading day after last Thursday in March 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.24 / 50Concluding a long position in a CALL option is possible by initiating a short position in a PUT option. a) True b) 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 CALL option can be closed by selling that CALL option.25 / 50Among the options listed below, which one would necessitate margin requirements? a) Seller of CALL Option b) Buyer of PUT Option c) Seller of PUT Option d) Both 1 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.26 / 50A stock exchange employs ON-LINE SURVEILLANCE capability to monitor the _________. a) Volumes b) Prices c) Positions d) All of the above Explanation:All modern stock exchanges have highly developed online surveillance sytems to monitor the volumes / position and prices of all listed products and also check any unusual activity etc. in them.27 / 50Initial margin is computed based on _______. a) As per the The Black & Scholes Model b) Fixed at 25% for most of the scrips and 35% for volatile scrips c) Value-At-Risk (VAR) based margining. d) Average price movement in the last 5 working days Explanation:Initial margin requirements are based on 99% value at risk over a one day time horizon.28 / 50______ is a transaction that generates profit by taking advantage of a price disparity in a product across two distinct markets. a) Hedging b) Trading c) Speculation d) Arbitrage Explanation:Arbitrage means buying a security in one market while simultaneously selling the same security in a different market, to benefit from price differential.29 / 50_______ represents an expense for market participants but is not specified in the contract note. a) SEBI turnover fees b) Securities Transaction Tax c) Impact Cost d) Exchange transaction charges Explanation:Impact cost is the cost that a buyer or seller of stocks incurs while executing a transaction due to the prevailing liquidity condition on the counter. Lower the liquidity, higher will be the impact cost.The impact cost is not reflected in the contract notes.30 / 50‘SCORES’ is the name given to ________ . a) SEBI’s web-based compliant redressal system b) Securities Collateral Records System c) Exchange’s risk management and margin system d) Suspicious transaction reporting system Explanation:SEBI’s web-based complaints redressal system is called SCORES (Sebi COmplaints REdress System).SCORES is a centralized grievance management system with tracking mechanism to know the latest updates and time taken for complaint resolution.31 / 50Who benefits from a high impact cost? a) Only arbitrageurs b) Neither buyers nor sellers c) Only buyers d) Only sellers Your answer is IncorrectYour answer is correctExplanation:Impact cost is the cost that the buyer or seller of stocks incur while executing a transaction due to prevailing liquidity conditions in that counter.A high impact cost will increase the purchasing price for the buyer and decrease the selling price for the seller.So a high impact cost is neither beneficial to the buyer nor the seller.32 / 50________ is the measure of how much the option premium changes for a one-unit increase in volatility. a) Rho b) Delta c) Vega d) Theta Your answer is IncorrectYour answer is correctExplanation:Vega (ν) is a measure of the sensitivity of an option price to changes in market volatility. It is the change of an option premium for a given change in the underlying volatility.33 / 50The initial margin for derivatives is determined considering how much the underlying market tends to change. Typically, _______ a) Higher the volatility, higher the initial margin b) Lower the volatility, higher the initial margin c) Higher the volatility, lower the initial margin d) None of the above Explanation:When the markets are very volatile, it could results in losses to the traders. So to safe guard the trading member and the trader, higher initial margin are levied on when volatility is high.34 / 50In a derivatives exchange, the net worth requirement for a clearing member is higher than that of a non-clearing member. Is this statement True or False? a) True b) False Your answer is IncorrectYour answer is correctExplanation:In a derivative exchange, the networth requirement for a clearing member is higher than that of a non-clearing member.35 / 50The risk that cannot be reduced through diversification of a portfolio is called _________. a) Operational Risk b) Systematic Risk c) Credit Risk d) Unsystematic Risk Explanation:An investor can diversify his portfolio and eliminate major part of price risk i.e. the diversifiable/unsystematic risk but what is left is the non-diversifiable portion or the market risk-called Systematic risk.Systematic risk can be caused due to unfavourable reasons such as act of nature like a natural disaster, changes in government policy etc.36 / 50Can you close a long position in a Put option by taking a short position in a Call option with the same exercise date and exercise price? a) Yes b) No Explanation:A long position in a Put Option can be closed out (squared up) only by selling the same Put Option.37 / 50After the start of the futures contract, if the price of the underlying asset goes up, then ________. a) A long position becomes unprofitable b) Basically. price change in underlying asset has no effect on long or short positions in futures c) A long position becomes profitable d) A short position becomes profitable Explanation:When the price of the underlying asset rises in the spot market, its price in the futures market will also rise. So, those who have purchased the futures (long postion) will make a profit.38 / 50There are many products in the market that give high returns in a risk-free manner – State whether True or False. a) False b) True Explanation:Returns are related to the risk taken and hence there cannot be a product in the market that gives high return in risk free manner.Investors should be careful of opportunities that promise spectacular profits or “guaranteed” returns. The deal sounds too good to resist. An individual may claim that unrealistic returns can be realized from “Low-Risk Investment Opportunities”, but one has to keep in mind no investment is risk-free.39 / 50What will be the Delta for a Far Out-of-the-money option? a) Near -1 b) Near 0 c) Near 2 d) Near 1 Your answer is IncorrectYour answer is correctExplanation:Delta for Out of the Money Call and Put option approaches zero as it nears expiry.Delta for In the Money Call option approaches 1 and delta for In the Money Put option approaches -1 as it nears expiry.40 / 50The term “mark-to-market” means _________. a) the every day revaluation of open positions by the exchanges to reflect profits and losses in the market b) the current / spot index price c) process by which a portfolio manager checks the daily profits / losses d) intimation from the broker to a client for additional funds Your answer is IncorrectYour answer is correctExplanation:Mark to Market (MTM) is a process by which margins are adjusted on the basis of daily price changes in the markets for underlying assets.The clearing member who suffers a loss is required to pay the MTM loss amount which is in turn passed on to the clearing member who has made a MTM profit.41 / 50In Option Spreads, there is a combination of options constructed in such a way that there is limited profit or limited loss – True or False? a) False b) True Your answer is IncorrectYour answer is correctExplanation:Option Spreads involve combining options on the same underlying and of same type (call/ put) but with different strikes and maturities. These are limited profit and limited loss positions.42 / 50If the price volatility of the underlying stock is high, then the Put option will ______. a) have comparatively higher premium b) have zero premium c) have comparatively lower premium d) volatility does not have any effect on the Put options Your answer is IncorrectYour answer is correctExplanation:Volatility is the magnitude of movement in the underlying asset’s price, either up or down. It affects both call and put options in the same way. Higher the volatility of the underlying stock, higher the premium because there is a greater possibility that the option will move in-the-money during the life of the contract.Higher volatility = Higher premium, Lower volatility = Lower premium (for both call and put options).43 / 50It’s not common to have derivatives contracts without any expiration date – True or False? a) True b) False Your answer is IncorrectYour answer is correctExplanation:Most derivatives contract have an expiration date.44 / 50When a dealer is conducting trades in both their account and for clients, these two types of trades have to be completely segregated – True or False? a) True b) False Explanation:The trades done by dealers are in the ‘PRO’ account ie. Proprietary account and the trades done by Clients are in the ‘CLI’ account.‘Proprietary Trading’ is when a member trades on exchange on its own behalf. As directed by SEBI and in pursuance of byelaws members are advised to specify the nature of the order in terms of order being a ‘Client order’ or ‘Proprietary order’.45 / 50Whom does the Clearing Member need to consult to set limits on the trading members clearing through him? a) No consultation is required with anyone as the Clearing Member can set the limits of his trading members on his own b) Clearing Corporation c) The respective Stock Exchange d) SEBI Your answer is IncorrectYour answer is correctExplanation:A trading terminal helps the Clearing Members to monitor the open positions of all the Trading Members clearing and settling through him. A Clearing Member may set limits for a Trading Member clearing and settling through him.Clearing corporation assists the Clearing Member to monitor the intraday limits set up by a Clearing Member and whenever a Trading Member exceed the limits, it stops that particular Trading Member from further trading.46 / 50Mr. Arvind is very optimistic about the market, but he believes that some specific companies in his portfolio will not perform well in the future. What strategy should he adopt? a) Sell Index futures and Buy specific companies shares b) Sell Index futures and Sell specific companies shares c) Buy Index futures and Sell specific companies shares d) Do nothing as markets are uncertain Explanation:Mr. Arvind should sell the shares of those specific companies and buy index futures. By this he will profit when the index rises and avoid losses on those specific companies if his view proves to be correct.47 / 50_______ refers to the maximum exposure, in terms of the number of options and futures contracts, that an investor can hold on one side of the market. a) Outstanding Limit b) Upper Limit c) Market Limit d) Position Limit Your answer is IncorrectYour answer is correctExplanation:Position limits are the maximum exposure levels which the entire market can go up to and each Clearing Member or investor can go up to. Position limits for the entire market and Clearing Members and investors are defined by SEBI.48 / 50How do you close a short position in a futures market? a) By executing a purchase of the same futures contracts b) By entering into a suitable forward contract c) By buying a Call Option d) By executing a sale of the same futures contracts Your answer is IncorrectYour answer is correctExplanation:A short future contract ie. a sale position can be squared up by buying the same contract in futures market and in no other way.49 / 50When exercising a call option on an index, the option holder receives from the option writer a cash amount equal to the excess of the spot price (at the time of exercise) over the strike price of the call option – True or False? a) False b) True Your answer is IncorrectYour answer is correctExplanation:When a person buys a Call Option of an index, he is expecting the index to rise. On exercise, if the spot price of the index is over and above the strike price at which the buyer had bought the Call, he will receive the difference between the spot price and strike price.50 / 50What is the purpose of hedging? a) It minimises business losses b) It maximises business profits c) It produces a more clearer outcome d) Hedging can be used only in currency markets and not in equity markets Your answer is IncorrectYour answer is correctExplanation:Hedging produces a more clearer outcome. The classic example is the farmer who sells futures contracts to lock into a price for delivering a crop on a future date. The buyer might be a food-processing company, which wishes to fix a price for taking delivery of the crop in the future.Another case is that of a company due to receive a payment in a foreign currency on a future date. It enters into a forward transaction with a bank agreeing to sell the foreign currency and receive a predetermined quantity of domestic currency.Your score is 0% Restart quiz Exit
