NISM Series VIII Equity
Derivatives Mock Test DemoIFMC Institute

Q 1. A market index is very important for its use ___________.

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 ?

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.

Q 4. What penalty is levied for first instance margin / limit violation ?

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 ?

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?

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 ?

Q 8. Futures differs from forwards in the sense that ________.

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

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.

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 ?

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

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.

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 ?

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 _______ .

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 ?

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 ?

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.

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 -

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 _______.

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 ___________ .

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?

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 ?

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 _________.

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 ?

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 (non-spread) open positions?

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 ______.

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 ___________.

Q 29. **The spot price of Grasim Industries Ltd share is Rs 2900, the call option of Strike Price Rs 2800 is _____ .

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 ?

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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