Nism Viii Test 1

NISM Series VIII Equity Derivatives Practice Test 1
Q 1. A market index is very important for its

use ___________.
in portfolio management
as a benchmark of portfolio performance
as a barometer for market behavior
All of the above

Correct!
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
Correct!
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
Correct!
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

Correct!
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 11th instance onwards - 0.07% per day +
Rs.70,000/- ( for 2nd to 10th instance) + Rs.10,000/- per instance from 11th instance
onwards.
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

Correct!
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
Correct!
Explanation: When you sell a Put option you believe 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 its position - True or
False ?
True
False
Correct!
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

Correct!
Q 9. Which of these PUT's are In the Money ?

Spot 300 ; Strike Price 300
None of the above

Correct!
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 its value from the prices, or index of
prices, of underlying securities.
A
Both A and B
Niether A or B
Correct!
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
Beta of below 1 cannot be hedged

Correct!
Explanation: SBI has a beta of 0.9 means that if Nifty falls by 100, the SBI will fall by 90 ie.
10% less. So wee need to hedge 10% less of NIfty, ie 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

Correct!
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

Correct!
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

Correct!
Explanation: On the expiry day, if the client does not square up his position, then its
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

Correct!
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
Correct!
Explanation: European Option is an an option that can only be exercised at the end of its
life, at its 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

Correct!
Explanation: As per the rules in the Indian Stock markets, if the open position of a trader is
not squared up till maturity ie. last Thrusday 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 ie. last Thrusday 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
Correct!
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

Correct!
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

Correct!
Explanation: Mr. Manoj bought a PUT option so he had a view that 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

Correct!
Explanation: As per SEBI 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
Correct!
Explanation: When the Strike Price is below the Spot Price, the Call Option is 'In the Money'
ie. 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
multiplier 50) 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 futures contract at 5700
Buying 1 May Nifty futures contract at 5700
Buying 1 May Nifty futures contract at 5500
Selling 1 May Nifty futures contract at 5500

Correct!
Explanation: Mr Deshmukh is short ie. 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 Deshmukh buys it to
square up his position, he will make a profit of Rs 5000.
Q 24. **By using Financial derivatives one can

engage in _________.
Hedging
Arbitraging
Speculation
All of the above

Correct!
Explanation: Modern traders and investors also use financial derivatives for Arbitrage and
Speculation, apart from hedgeing.
Q 25. **If an trader does an calender 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
Correct!
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, lets assume a trader has gone long in
index options in current month and short in index options in third month. Incase 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 open positions?
14
6
Correct!
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 its 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 a simillar 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
Correct!
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
Correct!
Q 29. **The spot price of Grasim Industries 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

Correct!
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
Correct!
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
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NISM Series VIII Equity Derivatives Practice Test 1

Q 1. A market index is very important for its

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

Q 4. What penalty is levied for first instance

0.07% per day + Rs.5,000/- per instance

0.07% per day + Rs.20,000/-

None of the above

The Spot Price

The volatility in underlying instruments

The strike price

Q 6. You sold a Put option on a share. The

Q 8. Futures differs from forwards in the sense

both parties are bound to give/take delivery

positions are marked-to-market everyday

contracts are custom designed

Q 9. Which of these PUT's are In the Money ?

Spot 300 ; Strike Price 280

Spot 300 ; Strike Price 320

None of the above

Q 11. The beta of SBI is 0.9. If a trader has a

Sell Nifty of 330000

Sell Nifty of 300000

Beta of below 1 cannot be hedged

through Ministry of Finance

through association of members

Q 13. An investor has bought 100 SBI shares at

Buy SBI Call options of strike price 2000

Buy SBI Put options at strike price 2000

Sell SBI Put options at strike price 2000

Q 14. **An trader purchases three contracts of

He will receive nothing as he has not squared up his position

None of the above

Q 15. Irrespective of the type of option, the

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,

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

Q 18. What is the intrinsic value of a call option

Both the buyer and the seller

Only the buyer

Only the Seller

Q 20. **Mr Manoj buys a put option on PQR

To exercise the option

Another solvent member

Investor Protection Fund a/c.

The Stock Exchange

Q 22. The Spot Price of ABC Stock is Rs. 347.

Buying 1 May Nifty futures contract at 5700

Buying 1 May Nifty futures contract at 5500

Selling 1 May Nifty futures contract at 5500

Q 24. **By using Financial derivatives one can

All of the above

Q 26. Mr. Nayar has purchased 8 contracts of