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NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION

EXAM – PRACTICE TEST NO. 9

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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. 9

PRACTICE TEST NO. 9

Question 1 An European option can be exercised only on expiry date - State True or False ?

(a) TRUE

(b) FALSE

Question 2 Clearing member Ram has 6 trading members who are all in Mumbai and Clearing
member Shyam has 6 trading members who are all outside Mumbai. Both of them have
deposited same amount of liquid assets with the clearing corporation. Which amongst the
following statement is True ?

(a) Clearing Member Ram will have a higher exposure limit than Clearing Member Shyam

(b) Clearing Member Shyam will have a higher exposure limit than Clearing Member Ram

(c) Both Ram and Shyam will have the equal exposure limits

(d) None of the above

Correct Answer 1 TRUE


Answer European Option is an option that can only be exercised at the end of its life, at its maturity /
Explanation expiry and not before that.
An American option can be exercised any time.

Correct Answer 2 Both Ram and Shyam will have the equal exposure limits
Answer As per Dr. L. C. Gupta Committee recommendations: Members’ exposure should be linked to
Explanation the amount of liquid assets maintained by them with the clearing corporation.
There is no mention of any geographical limitations.
NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 9

Question 3 The potential exposure is calculated by the clearing corporation ______ .

(a) on the last trading day of the contract month

(b) on the last trading day of the week

(c) at the end of the trading day

(d) on real time basis

Question 4 If the far month futures prices are less than near month futures prices, this is known as
________ .

(a) Delta Hedging

(b) Contango

(c) Basis

(d) Backwardation

Correct Answer 3 on real time basis


Answer Clearing corporation’s on-line position monitoring system monitors a CM’s open position on a
Explanation real-time basis.
Clearing corporation monitors the CMs for Initial Margin violation, Exposure margin violation,
while TMs are monitored for Initial Margin violation and position limit violation.

Correct Answer 4 Backwardation


Answer If futures price are lower than spot price of an asset(or far month futures is less thannear month
Explanation futures), market participants may expect the spot price to come down in future. This expectedly
falling market is called “Backwardation market”.

If futures price is higher than spot price of an underlying asset, market participants may expect
the spot price to go up in near future. This expectedly rising market is called “Contango
market”.
NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 9

Question 5 A trader sells a future contract and prices rises. The trader will ______ if he squares up
the position.

(a) make a profit

(b) make a loss

(c) Insufficient data

(d) None of the above

Question 6 Mr. A is a risk averse investor. He would prefer secure investments like fixed deposits
and other debt instruments and not market oriented investments - State True or False ?

(a) TRUE

(b) FALSE

Correct Answer 5 make a loss


Answer For e.g. - He sells at Rs 100 and prices rises to Rs 110. If he squares up, he shall make a loss of
Explanation Rs 10.

Correct Answer 6 TRUE


Answer A risk-averse investor would prefer investments that are more secure and thus would have
Explanation higher portfolio allocations to debt and fixed income instruments.
On the other hand an investor who is less risk averse would like to have greater exposure to
equity and other risky investments.
NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 9

Question 7 An Equity based Mutual Fund can sell Index Futures to hedge its position - True or False
?

(a) True

(b) False

Question 8 Option premium depends on ___________ .

(a) volatility of the underlying


(b) current price and the strike price
(c) interest rates in the economy and the time to expiry
(d) All of the above

Correct Answer 7 True

Answer Derivatives like futures & options are used by mutual funds for hedging their portfolio to
Explanation manage the risk.

For example, if the fund manager foresees a downturn in the stocks held in his portfolio, he can
hedge the same by selling (stock/index futures) in the derivatives segment.

Correct Answer 8 All of the above


NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 9

Question 9 Among the following options, in which future contract, the contract cannot be used as a
means to acquire the underlying asset ?

(a) Copper

(b) Gold

(c) Individual securities

(d) Stock index

Question 10 If the price of the underlying stock of a PUT option is very volatile, _________ .

(a) the premium will comparatively be lower

(b) the premium will comparatively be higher

(c) the premium will be zero

(d) No effect on option premium

Correct Answer 9 Stock index

Correct Answer 10 the premium will comparatively be higher


Answer Vega, which measure of the sensitivity of an option price to changes in market volatility is
Explanation positive for a long call and a long put.

An increase in the volatility of the underlying increases the expected payout from a buy option,
whether it is a call or a put.
NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 9

Question 11 A trader is long on ABC stock April futures at 3100. He shall make a loss if the futures
price moves to _________ .
(a) 3300

(b) 3200

(c) 3400

(d) 3000

Question 12 ________ are eligible to clear trades in Index Options.

(a) All trading members of a recognized stock exchange

(b) All trading members and their sub brokers

(c) Only members who are registered as clearing members with the derivative exchange

(d) All Public sector banks

Correct Answer 11 3000


Answer A long position (purchase) will result in a loss if prices go down from the purchase price.
Explanation

Correct Answer 12 Only members who are registered as clearing members with the derivative exchange
NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 9

Question 13 If an investor is exposed to a price risk in a stock, by hedging he would be able to


__________ .
(a) make the outcome more profitable

(b) make the outcome as per SEBI and Stock market regulations

(c) make the outcome more certain

(d) make the outcome more volatile

Question 14 Writing a covered call is __________ .

(a) More risky than writing a naked call

(b) Less risky than writing a naked call

(c) As risky as writing a naked call

(d) Covered call cannot be written in Indian markets

Correct Answer 13 make the outcome more certain


Answer Hedging does not increases the profit but controls the losses. This makes the outcome more
Explanation certain.
Hedging involves having two opposite positions. Loss in one will be countered by a profit in
the other. So the outcome is more certain.

Correct Answer 14 Less risky than writing a naked call


Answer In a naked call, the trader has to take a view on the market and accordingly go long or short.
Explanation
The covered call strategy is used to generate extra income from existing holdings in the cash
market.
Therefore, the naked call strategy is much riskier.
NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 9

Question 15 The Risk Return profile for a Future contract is symmetric while that of an Option
contract is asymmetric - State True or False ?

(a) TRUE

(b) FALSE

Question 16 Derivatives can have _________ as an underlying.

(a) a bond

(b) another derivative

(c) stock index

(d) All of the above

Correct Answer 15 TRUE


Answer Asymmetric basically means not identical on both sides.
Explanation
When one trades in Options, the gains when the share moves in one direction is significantly
different from the losses when the share moves in the opposite direction.

For eg - If one buys a call option and the share prices go down the loss will be limited ie.
restricted to the premium paid. But if the share prices move up, the profits can be
huge/unlimited. This is known a asymmetric return.

On the contrary in futures or cash market, the returns are symmetric ie. equal value of profits or
loss is possible.

Correct Answer 16 All of the above


Answer The most common underlying assets include stocks, indices, commodities, bonds, currencies
Explanation etc., but they can also be other derivatives, which adds another layer of complexity to proper
valuation.
NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 9

Question 17 The daily Mark to Market gain or loss is realized _________ .

(a) in the equity spot market

(b) in the futures market

(c) in Swap trading

(d) in forwards market

Question 18 When a call option on an index is exercised, the call option holder receives from the
option writer an amount equal to excess of spot price over the strike price of that call
option - State True or False ?

(a) TRUE

(b) FALSE

Correct Answer 17 in the futures market

Correct Answer 18 TRUE


Answer The positive difference between a call options strike price and the market price is the gross
Explanation profit of the call option buyer which the option writer has to pay on exercise.
NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 9

Question 19 It is recommended but not compulsory for the trading members to have dealers and sales
personal in the derivatives market who have passed a certification programme approved
by SEBI - State True or False ?

(a) TRUE

(b) FALSE

Question 20 There is only CASH settlement for Nifty futures contract - State True or False ?

(a) TRUE

(b) FALSE

Correct Answer 19 FALSE


Answer It is mandatory that trading members are required to have qualified approved user and sales
Explanation person who have passed a certification programme approved by SEBI.
Each dealer should pass SEBI approved certification exams.

Correct Answer 20 TRUE


NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 9

Question 21 Margins in the derivative segment has to be collected from all clients, including Financial
Institutions and FIIs - State True or False ?
(a) TRUE

(b) FALSE

Question 22 Investors who are called Bulls are those investors who believe the market or stock will fall
- State True or False ?

(a) TRUE

(b) FALSE

Correct Answer 21 TRUE

Correct Answer 22 FALSE


Answer Bulls believe that market / stock will rise.
Explanation
Bears believe that market / stock will fall.
NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 9

Question 23 A Mutual Fund floats a new fund offer of a 100% equity scheme. Till the time it invests
this cash in equities, the fund can take equity exposure by buying stock index futures -
State True or False ?

(a) TRUE

(b) FALSE

Question 24 A portfolio with 200 stocks is only half as risky as another portfolio with 100 stocks -
State True or False ?

(a) TRUE

(b) FALSE

Correct Answer 23 TRUE


Answer FIIs & MF’s can take exposure in equity index derivatives subject to the following limits:
Explanation Long positions in index derivatives (long futures, long calls and short puts) not exceeding (in
notional value) the FII’s / MF’s holding of cash, government securities, T-Bills and similar
instruments.
Short positions in index derivatives (short futures, short calls and long puts) not exceeding (in
notional value) the FII’s / MF’s holding of stocks.

Correct Answer 24 TRUE


Answer Higher the number of shares in a portfolio, lower is the risk.
Explanation
NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 9

Question 25 A writer / seller of a deep out of the money CALL option is ________ .

(a) Bullish - receiver of premium

(b) Bullish - payer of premium

(c) Bearish- receiver of premium

(d) Bearish - payer of premium

Question 26 The net worth requirements of Clearing Members and Trading Members is the same for
the derivatives exchange - State True or False ?

(a) TRUE

(b) FALSE

Correct Answer 25 Bearish- receiver of premium


Answer A seller of call option is always bearish. It does not matter if the option is In the money or Out
Explanation of the money.
All sellers ie. of Call or Put options will receive the premium.

Correct Answer 26 FALSE


Answer The Net Worth requirements of Clearing Members is higher than Trading Members.
Explanation
NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 9

Question 27 You have created a Short Position on futures contract. This can be squared up by
_________ .

(a) by executing a purchase of a Call option of the same security

(b) by executing a forward contract

(c) by executing a purchase of the same futures contract

(d) by executing a sale of the same futures contract

Question 28 A separate client account has to be maintained to keep the money and securities deposited
by clients - State True or False ?

(a) TRUE

(b) FALSE

Correct Answer 27 by executing a purchase of the same futures contract


Answer A short future contract can be squared up by buying the same contract and in no other way.
Explanation

Correct Answer 28 TRUE


Answer The trading members own money and securities cannot be mixed up with the clients money
Explanation and securities.
NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 9

Question 29 One can use Index Futures for hedging to eliminate or reduce the ________ .

(a) Unsystematic Risk

(b) Systematic Risk

(c) Sector specific Risk

(d) Operational Risk

Question 30 If a Trading member defaults in the derivative segment, he can still continue the trading
business in the cash segment. - True or False ?

(a) FALSE

(b) TRUE

Correct Answer 29 Systematic Risk


Answer An investor can diversify his portfolio and eliminate major part of price risk i.e. the
Explanation diversifiable/unsystematic risk but what is left is the non-diversifiable portion or the market
risk-called systematic risk.
This systematic risk can be reduced using index based derivatives like Index Futures.

Correct Answer 30 FALSE


Answer A default by a member in the derivatives segment will be treated as default in all segments of
Explanation that exchange and as default on all exchanges where he is a member.
NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 9

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NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 9