Nism 8 - Equity Derivatives - Practice Test 3
Nism 8 - Equity Derivatives - Practice Test 3
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TEST DETAILS – The NISM EQUITY DERIVATIVES CERTIFICATION EXAM is a 100 mark exam with 60% as
passing marks. In all 100 questions will be asked with 0.25% negative marking for Wrong Answers. The
time duration is 2 hours.
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NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 3
Question 1 A long position in a call option can be closed out by taking a long position in a put
option with identical exercise date and exercise price - State True or False ?
(a) TRUE
(b) FALSE
Question 2 Intrinsic value is always positive for in-the-money options and zero for out-of-the money
options - State True or False ?
(a) TRUE
(b) FALSE
Answer In-the-money options have positive intrinsic value whereas at-the-money and out-of-the-
Explanation money options have zero intrinsic value. The intrinsic value of an option can never be
negative.
NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 3
Question 3 For a derivative exchange, the networth requirement for a clearing member is always
less than that for a non clearing member - State True or False ?
(a) TRUE
(b) FALSE
Question 4 All the 50 stocks of NSE Nifty index are equally weighed while calculating the index -
State True or False ?
(a) TRUE
(b) FALSE
Question 5 If futures price is higher than spot price of an underlying asset, this is known as _____ .
(a) Maximization
(b) Normalization
(c) Backwardation
(d) Contango
(a) Its the value weighted average of the beta’s of the constituent securities in that portfolio
(b) Its the same as the beta of the stock with the highest market capitalization
(c) Its the sum of the betas the constituent securities in that portfolio
(d) Its the simple average of the beta’s of the constituent securities in that portfolio
Correct Answer 6 Its the value weighted average of the beta’s of the constituent securities in that portfolio
Answer Beta of a portfolio is calculated as weighted average of betas of individual stocks in the
Explanation portfolio based on their investment proportion.
NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 3
Question 7 In a derivative segment, the initial margin is collected from the clearing member on a
net basis ie. after netting all buy and sell positions of all clients together - State True or
False ?
(a) TRUE
(b) FALSE
Question 8 What happens to the unmatched portion of the order in an Immediate or cancel (IOC)
order ?
Answer In the derivatives segment , Clients' positions cannot be netted off against each other while
Explanation calculating initial margin. Margin for each client has to be paid separately as per his
outstanding trades / position.
Question 11 Suppose you are a trading member and have bought 14 contracts of April series index
futures and sold 7 contracts of April series index futures on your own account. What
will be your exposure on these transactions ?
(d) The Stock Exchange can decide to either to gross up or net out the exposure depending on the
past record of the trading member
Question 12 When there is a ‘Closing buy transaction’, this will have the effect of partly or fully
offsetting ________ .
Question 13 Which Option gives the holder a right to buy the underlying asset on or before a
particular date for a certain price ?
Question 14 The main proof of whether a futures transaction is for speculation or hedging is based
on whether there already exists a related commercial position which is exposed to risk
of loss due to price movement - State True or False ?
(a) TRUE
(b) FALSE
A Call Option gives the holder a right to buy the underlying asset - So the answer is American Call
Option.
(European option: The owner of such option can exercise his right only on the expiry date/day of the
contract. In India, Index options are European.)
Question 16 The beta of a stock is 0.7 and you have a buy position of Rs 3,00,000 in it. Which of the
below options will give you a complete hedge ?
Answer To get a complete hedge against your buy position , you will have to sell Nifty.
Explanation 0.7 x Rs 3,00,000 = Rs 2,10,000.
NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 3
Question 17 What is the intrinsic value of a call option if the spot price is Rs 300 and the strike price
is Rs 250 ?
(a) zero
(b) 50
(c) 650
Correct Answer 17 50
Answer Intrinsic Value of an In the money call option is the Spot Price - Strike Price.
Explanation
Answer IN THE MONEY - A call option with a strike price that is lower than the market price of the
Explanation underlying asset, or a put option with a strike price that is higher than the market price of the
underlying asset. In the money means that your stock option is worth money and you can turn
around and sell or exercise it.
For example, consider a stock that is trading at Rs 100. For such a stock, call options with
strike prices below Rs 100 would be In the money calls ( ie Rs 80, Rs 90 calls) while put
options with strike prices above Rs 100 (Rs 110 , Rs 120 calls etc.)would be In the money
puts.
For easy understanding, those calls or puts which are profitable are In the Money.
NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 3
Question 20 Mr R wants to sell 17 contracts of January series at Rs.4550 and Mr S wants to sell 20
contracts of February series at Rs. 4500. Lot size is 50. The Initial Margin is fixed at
9%. How much Initial Margin is required to be collected from both these investors by
the broker?
(a) Rs 3,48,075
(b) Rs 4,05,000
(c) Rs 5,87,500
(d) Rs 7,53,075
Question 21 The Spot price ie. the market price of a share is Rs 200 and the interest rate is 12%.
Which of the below price is closest to 3 months future maturity ?
(a) 206
(b) 200
(c) 203
(d) 224
Question 22 If a person buys a share in one market and the simultaneously sells in a different
market to benefit from differentials is known as_________.
(a) Log trading
(b) Arbitrage
(c) Speculation
(d) Jobbing
Answer Yearly Interest Rate is 12%. Full year's interest = 12% of 200 ie. Rs 24
Explanation So for 3 months the cost of interest is Rs 6.
Therefore the 3 month future contract will have an price of appx. Rs 206.
Answer Arbitrage means the simultaneous purchase and sale of an asset in order to profit from a
Explanation difference in the price.
It is a trade that profits by exploiting price differences of identical or similar financial
instruments, on different markets.
For eample- If Reliance is quoted on NSE at Rs 900 and on BSE there is a buyer at Rs 903,
then the arbitrageur will buy on NSE and sell on BSE and Rs 3 (less brokerage etc.) will be is
profit.
Arbitrage exists as a result of market inefficiencies; it provides a mechanism to ensure prices
do not deviate substantially from fair value for long periods of time.
NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 3
Question 23 Can clients position be netted off against each other while calculating initial Margin on
the derivatives segment.
(a) No
(b) Yes
Correct Answer 23 No
Answer Each clients open position is taken separately for calculating the initial margin. Positions of
Explanation two or more clients cannot be netted off against each other for calculation of initial margin.
For eg - If Mr A has bought 10 contracts’ of Nifty and Mr B has sold 4 contracts of Nifty,
then the broker has to pay the initial margin on 14 contracts and not 6 contracts.
Question 25 In an equity scheme, the Mutual Fund can hedge its equity exposure by selling stock
index futures - True or False?
(a) TRUE
(b) FALSE
Question 26 All the orders entered on the Trading System of a Derivative Exchange are at Prices
exclusive of brokerage. True or False ?
(a) FALSE
(b) TRUE
Answer As per the recommendations of L.C. Gupta committee, mutual funds are allowed to hedge its
Explanation equity exposure in derivatives segment - subject to terms and conditions.
Answer The prices are exclusive ie. with out any brokerage. Brokerage is added later and is reflected
Explanation in the contract note.
NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 3
Question 27 Ms. Rita sold a put option of strike price Rs. 90 and she received a premium of Rs. 6
from the option buyer. Theoretically, what can be the maximum loss on this trade ?
(a) 90
(b) 84
(c) 96
(d) 0
Question 28 If the liquid assets maintained by clearing member Mr. Ram are higher than that
clearing member Mr. Shyam, which of the below options is/are true ?
(a) There is no need to maintain liquid assets
(b) Both Mr. Ram and Mr. Shyam have the same level of exposure
(c) Mr Ram has a higher exposure level than Mr. Shyam
(d) Mr Shyam has a higher exposure level than Mr. Ram
Correct Answer 27 84
Answer Theoretically a share can fall to Rs 0. So the maximum loss can be Rs 90. But Ms. Rita has
Explanation received Rs 6 as option premium so her maximum loss will be Rs 90 - Rs 6 = Rs 84.
Correct Answer 28 Mr Ram has a higher exposure level than Mr. Shyam
Answer As per the rules of SEBI and Stock Exchanges, the notional value of gross open positions at
Explanation 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.
NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 3
Question 30 You have bought a CALL of SBI of Strike price of Rs 2000 of January. To close the
position, you will buy a PUT of same strike price of January. True or False ?
(a) TRUE
(b) FALSE
Answer An exchange traded option can only be traded till the last date of expiry ie. its maturity. After
Explanation that it will not be available for trading.
For eg - If 27th June is the last Thursday of the month ie. the maturity, all options of June
month will cease to exist as soon as the market closes on 27th June.
Answer When you buy a CALL option, to close this position you will have to sell a CALL option of
Explanation same strike price and expiry.
NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 3
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