Test Paper – 6

Q1. Mr. Sam is a equity fund manager and he is bearish on the stock market. How will he use this view to create a hedge?
1. He will sell all his stocks
2. He will decrease the NAV of his fun
3. He will sell index futures
4. He will buy index futures

Q2. _____ is a deal that produces profit by exploiting a price difference in a product in two different markets.
1. Hedging
2. Trading
3. Speculation
4. Arbitrage

Q3. The option which gives the holder a right to SELL the underlying asset on or before a particular date for a certain price, is called
as
1. American Put option
2. European Call option
3. European Put option
4. American Call option

Q4.A trader takes a short position in call option, but does not take any offsetting position in the underlying stock. What is this
strategy known as ?
1. Protective Put strategy
2. Writing a naked call
3. Writing a covered call
4. Butterfly strategy

Q5. If the price of far month futures is less than the price of near month futures, it is called as
1. Reverse Hedging
2. Contango
3. Basis
4. Backwardation

Q6. Before you take a position in a futures contract, the Exchange calls for _____ to cover any loss that your position may incur.
1. Initial Margin
2. Mark-to-market Margin
3. Ad-hoc Margin
4. Call Margin

Q7. The Exercise price of an option is same as its position limit - State whether True or False?
1. True
2. False

Q8. Can a Equity oriented mutual fund hedge its equity exposure by selling index futures?
1. Yes
2. No

Q9. When the margins are kept on the lower side, it will attract more players to join the derivatives market - State True or False?
1. True
2. False

Q10. Professional clearing member clears the trades of his associate Trading Member only - State True or False?
1. True
2. False

Q11. Future contracts are not symmetrical with respect to rights & obligations of the parties involved - State True or False?
1. True
2. False

Q12. An Index Option is

1. a derivative product
2. settled in cash
3. rarelv traded
4. rarely traded on the Indian stock exchanges
5. Both 1 and 2
Q13. As per the SEBI Act, the board members of Securities Exchange Board of India are appointed by
1. The Stock Exchanges
2. The Central Government
3. The High Court of Mumbai
4. Securities Appellate Tribunal

Q14. The rate of change in option premium for a unit change in price of the underlying asset is known as Delta - State True or False?
1. False
2. True

Q15. Client A has purchased 10 contracts of December series and sold 7 contracts of January series of the NSE Nifty futures. How
many lots will get categorized as regular (non-spread) open positions?
1. з
2. 7
3. 10
4. 17

Q16. State True or False - Scarcity of underlying commodity will generally cause a rise in its futures price.
1. True
2. False

Q17. Functions of a Derivative Market include

1. Improving price discovery based on actual valuations and expectations
2. Shift of speculative trades from unorganized market to organized market
3. Both 1 and 2
4. None of the above

Q18. The expiry day for June series Index Futures on BSE would be
1. Last Thursday in June
2. Last Thursday in July
3. Last Thursday in August
4. Last Thursday in September

Q19. When a call option on an index is exercised, the option holder will receive from the option writer, cash amount equal to excess
of spot price (at the time of exercise) over the strike price of the call option - State True or False?
1. True
2. False

Q20. At which price can a trader place a bid or offer for a scrip?
1. At a price which is within the daily circuit filter limits
2. At a price which the trader wishes
3. At a price negotiated between the exchange and the member
4. At a price which the trader deems fit

Q21. A fall in the price of Wipro stock increases the value of the Wipro call option - State True or False?
1. True
2. False

Q22. Mr. Sunil places a stop loss sell order on ABC stock with a trigger price of Rs. 450. The current market price of ABC stock is Rs
470. The order will be released for execution
1. As soon as the market price of ABC touches Rs. 470
2. As soon as the market price of ABC touches Rs. 450
3. As soon as the order is placed in the system
4. If similar orders are available in the order book at Rs. 450

Q23. Non Index Option contracts can be settled

1. in cash or settled by delivery depending on the terms of the contract
2. in cash or settled by delivery depending on the choice of the buyer
3. in cash or settled by delivery depending on the choice of the seller
4. None of the above

Q24.If the clearing / trading member fails to pay the dues, the clearing corporation can disable the clearing / trading members from
trading - State True or False?
1. True
2. False
Q25. Who appoints the board members of the Securities Exchange Board of India under the SEBI Act?
1. Maharashtra Government as SEBI is situated in Mumbai
2. The President of India
3. The Central Government
4. The Stock Exchanges

Q26. You sold one ABC stock futures contract at Rs.268 and the lot size is 1,500. What is your profit (+ or loss (-), if you purchase the
contract back at Rs.274?
1. +9000
2. +18000
3. -9000
4. -18000

Q27. Institutional investors pay lower margins than the individual investors for derivatives trading - State True or False ?
1. True
2. False

Q28. A person who provides two way quotes for various stocks is known as
1. Arbitrageur
2. Speculator
3. Hedger
4. Market Maker

Q29. ____can write an option in the Indian stock market.

1. Common individuals
2. Market makers
3. Foreign Financial Institutions (FIl)
4. All of the above

Q30. In case of forward contracts, the rules regarding the minimum amount by which the price would change and the price limits are
specified by an authority - State True or False?
1. True
2. False

Q31. Foreign Exchange can be a part of liquid assets to be maintained by Clearing Members with the clearing corporation - State
True or False?
1. True
2. False

Q32. The volatility estimation methodology is known only to the Clearing Corporation and not to others - State True or False?
1. True
2. False

Q33. If the futures price is rising but open interest is declining, it indicates
1. Short Covering
2. Long positions are being squared up
3. Flat trend
4. Very Volatile trend

Q34. _________is an order with a Time Condition.

1. Stop-Loss order
2. Good till cancelled order
3. Market order
4. limit order

Q35. Miss Tanisha has gone short on October Futures on ABC stock at 2300. She will make a profit if futures price move to
1. 2250
2. 2350
3. 2325
4. 2450

Q36. What does Value-at-risk measures?

1. value of a volatile portfolio
2. Risk level of a financial portfolio
3. Value of illiquid shares portfolio
4. Index PE value
Q37. 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?
1. 14
2. 8
3. 2
4. 6

Q38. Who can clear trades in index options?

1. AlI AMFI and IRDA members
2. Members of a stock exchange
3. Members and sub brokers of the stock exchange
4. Clearing members registered in the derivatives segment.

Q39. Cost of carry model means price of futures is equal to

1. Spot price + Cost of Carry
2. Spot Price
3. Cost of Carry
4. Spot price - Cost of Carry

Q40. As per SEBI rules, a stock broker can be suspended from the derivatives segment if
1. he violates the conditions of registration
2. he is suspended by the stock exchange
3. he fails to pay fees
4. Any of above

Q41. Initial margin collection is monitored by the

1. The Stock Exchange
2. The Clearing Corporation
3. NSDL or CDSL
4. SEBI

Q42. Mr Gautam has sold a put option with strike of Rs.650 at a premium of Rs.60. What is the maximum gain per share that he may
have on expiry of this positon?
1. 650
2. 590
3. 60
4. 0

Q43. Can clients position be netted off against each other while calculating initial Margin on the derivatives segment.
1. No
2. Yes

Q44. If a person buys a share in one market and the simultaneously sells in a different market to benefit from differentials is known
as
1. Long trading
2. Arbitrage
3. Speculation
4. Jobbing

Q45. Three Call series of same strike price of State Bank of India stock-June, Julv and August are quoted. Which will have the lowest
option premium?
1. Same premium for all
2. June
3. July
4. August

Q46. If a trader does a calendar spread in index futures and the near leg of the calendar spread expires, the Further leg becomes a
regular open position. True or False
1. True
2. False

Q47. Are Broker-Members allowed on the Clearing Council of the Clearing Corporation of the derivatives segment?
1. Yes
2. No
Q48. Margins in futures trading are applicable to -
1. Only Institutional players.
2. Both the buyer and the seller
3. Only the buyer
4. Only the Seller

Q49. 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?
1. Rs 3,48,075
2. Rs 4.05.000
3. Rs 5,87.500
4. Rs 7.53.075

Q50. If the price of a stock is volatile, then the option premium would be relatively
1. Lower
2. Higher
3. No effect of volatility
4. Zero
Answers

1. He will sell index futures

Explanation:
Mr. Sam is a fund manager which means his fund already has a portfolio of stock. He thinks that the stock market can fall so he will
sell index futures to create a hedge. In case the market falls, he will have a loss on his stocks but will earn on his index futures
position.

2. 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.

3. American Put option

Explanation:
American option: The owner of such option can exercise his right at any time on or before the expiry date/day of the contract.
A Put Option gives the holder the right to sell the underlying asset on or before a particular date for a certain price
(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)

4. Writing a naked call

Explanation:
Naked position in options market simply means a long or short position in any option contract without having any position in the
underlying asset. When one sells (short) a call it is also known as 'writing'. So the above strategy is - Writing a naked call option.

5. Backwardation
Explanation:
It futures price is lower than spot price of an asset or if the far month future prices are lower than current month futures prices. it is
called "Backwardation market".

6. Initial Margin
Explanation:
The amount one needs to deposit in the margin account at the time of entering a futures contract is known as the initial margin

7. False
Explanation:
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. Strike price or Exercise price is the price for which the underlying security may be purchased or sold by the option holder.

8. True
Explanation:
Yes, a mutual fund can sell index futures for hedging purposes. For eg. - If a fund manager of an equity mutual fund feels that the
stock markets can fall in the near future, he can hedge his position by selling Nifty/ Sensex futures.

9. True
Explanation:
The Clearing Corporation generally keeps the margins for derivatives trading on the higher side as the risk of losses are high and it
wants only financially strong traders to trade in the market. If the margins are kept on a lower side, many more traders will start
trading in the derivatives market.

10. False
Explanation:
Professional clearing member clears the trades of his associate Trading Member and Institutional clients.

11. False
Explanation:
Option contracts are not symmetrical as the buyers and sellers have different obligations and risk factors. The buyer has limited risk
whereas seller of an option has unlimited risk. On the other hand, obligations and returns in Futures are symmetrical for both buyer
and sellers. Both gain or lose in equal proportion as per the price movements.

12. Both 1 and 2

Explanation:
Index option is a derivative product derived from indices like Nifty, Bank Nifty, Sensex etc.

13. The Central Government

Explanation:
SEBI consists of a Board of Directors who are appointed by the Union Government of India.

14. True
Explanation:
Delta measures the sensitivity of the option value to a given small change in the price of the underlying asset.

15. 3
Explanation:
Client A has bought and sold the same underlying ie. NSE Nifty futures. So his risk is limited to the net position which will be his open
position. Here Client A has bought 10 lots and sold 7 lots, so his open position is 3 lots.

16. False

17. Both 1 and 2

18. Last Thursday in June

19. True
Explanation:
A buyer of a Call Option in an index is bullish. 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 difference between the spot price and strike price. (The buyer had also paid the
premium while buying the Call. So, his actual profit will be the difference between spot and strike price less the premium paid)

20. At a price which is within the daily circuit filter limits

Explanation:
The buy or sell price cannot be any price which the trader deems fit. It has to be within the daily circuit filter limits set by the
exchange

21. False
Explanation:
In normal market, price of a call option rises with a rise in the underlying stock price and the premium falls if the price of the
underlying stock falls. So, if the price of Wipro falls, the value of Wipro call option will also fall.

22. . As soon as the market price of ABC touches Rs. 450

Explanation:
A stop-loss order gets activated when the trigger price is reached and enters the market as a market order or as a limit order.
In the above question, the trigger price is Rs. 450. So this order will get released in the system for execution as soon as the price of
Rs. 450 is reached.

23. . in cash or settled by delivery depending on the terms of the contract

Explanation:
Final exercise settlement is effected for all in-the-money option contracts on the last trading day of an option contract. Long
positions at in-the money strike prices are assigned to short positions in option contracts with the same series at the client level on a
random basis. For option contracts that are to be cash settled, it is done by debit/credit of relevant clearing accounts of relevant
clearing members with the respective clearing bank towards the exercise settlement value for each unit of the option contract and
other option contracts are settled through delivery. Open positions in options shall cease to exist after exercise or on expiration day,
as the case may be.

24. . True
Explanation:
The Clearing Corporation has powers to levy additional margins, special margins, define maximum exposure limits and disable
brokers from trading.

25. The Central Government

Explanation:
SEBI consists of a Board of Directors who are appointed by the Union Government of India

26. -9000
Explanation:
When you sell a stock future contract you make a profit if the share price falls or you make a loss if the price rises and you buy back
the contract. In this case, ABC stock futures has risen by Rs. 6 (274 - 268). So there will be a loss
Rs. 6 x 1500 (Lot size) = Loss of R$ 9000

27. False
Explanation:
The margin requirement is same for both individual investors and institutional investors.
 28. Market Maker
Explanation:
A market maker or liquidity provider is a company or an individual that quotes both a buy and a sell price in a financial instrument
hoping to make a profit on the bid-offer spread.

29. All of the above

Explanation:
All of the above can write (sell) options in Indian stock market.

30. . False
Explanation:
In a Forward Contract, there is no such authority. Forward contract is agreement between two parties to buy/sell an underlying
asset and no other authority like a Stock Exchange or SEBI is involved.

31. False
Explanation:
Liquid assets can comprise of Cash, Bank Guarantees, Govt. Securities etc. but not foreign exchange.

32. False
Explanation:
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

33. Short covering

Explanation:
If the futures price is rising but open interest is declining, it indicates short-covering. It usually indicates that existing short positions
are being squared up.

34. Good till cancelled 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.

35. 2250
Explanation:
A short futures position will be profitable if the price falls below the sale price. In the above question, the sale price is Rs 2300.
Therefore, when the futures price falls to Rs 2250, there will be profits.

36. Risk level of a financial portfolio

Explanation:
Value at Risk calculates the expected maximum loss, which may be incurred by a portfolio over a given period of time and specified
confidence level.

37. 2
Explanation:
Various future contract position in the same underlying (even at various expiry dates ) are netted off before arriving at open position.
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 similar loss) and only the open position will have the risks and margins will be collected from these open
positions.

38. Clearing members registered in the derivatives segment.

Explanation:
Clearing and settlement activities in the F&0 segment are undertaken by Clearing Corporation with the help of Clearing Members
and Clearing Banks. Exercise settlement in respect of admitted deals in index option contracts are cash settled by debit/credit of the
clearing accounts of the relevant clearing members with the respective clearing bank. Index option contracts, which have been
exercised, shall be assigned and allocated to clearing members at the client level with the same series.

39. Spot price + Cost of carry

Explanation:
Cost of Carry is the relationship between futures prices and spot prices. For stock derivatives, carrying cost is the interest paid to
finance the purchase. For example, assume the share of XYZ Ltd is trading at Rs. 200 in the cash market. A person wishes to buy the
share, but does not have money. In that case he would have to borrow Rs. 200 at the rate of, say, 12% per annum. So 1% ie. Rs 2 ( 1%
of Rs 200) is the per month interest cost. and this Rs 2 is the cost of carry. The future price (ideally) at the beginning of month will be
Spot Price + Cost of Carry ie. Rs 200 + Rs 2 = Rs 202.

40. Any of the above

Explanation:
A penalty or suspension of registration of a stock - broker under the SEBI (Stock Broker & Sub - Broker) Regulations, 1992 can be
ordered if:
• The stock broker violates the provisions of the Act
• The stock broker does not follow the code of conduct
• The stock broker fails to resolve the complaints of the investors
• The stock broker indulges in manipulating, or price rigging or cornering of the market
• The stock broker's financial position deteriorates substantially
• The stock broker fails to pay fees
• The stock broker violates the conditions of registration
• The stock broker is suspended by the stock exchange

41. The Clearing Corporation

42. 60
Explanation:
The maximum a seller of an option (either CALL or PUT can gain is the premium he receives. In this case Mr. Gautam is receiving Rs
60 per share as premium and that can be his maximum profit.

43. No
Explanation:
Each clients open position is taken separately for calculating the initial margin. Positions of 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.

44. Arbitrage
Explanation:
Arbitrage means the simultaneous purchase and sale of an asset in order to profit from a difference in the price.
It is a trade that profits by exploiting price differences of identical or similar financial instruments, on different markets.
For example- If BI is quoted on NSE at R 200 and on BSE there is a buyer at Rs 203, 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.

45. June
Explanation:
The series closest to current date will have the lowest premium due to low time value of money (so lower interest costs ).

46. True
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. In case 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.

47. No
Explanation:
No, broker members are not allowed on the Clearing Council of the Clearing Corporation of the derivatives segment.

48. Both the buyer and the seller

Explanation:
In a futures market margins are payable by both the parties

49. Rs 7,53.075
Explanation:
The Broker has to collect.
From Mr. R: 17 x 4550 x 50 x 9% = Rs 3,48,075
From Mr. S: 20 x 4500 x 50 x 9% = R$ 4,05,000
Therefore, the total margin to be collected is 348075 + 405000 = Rs 7,53,075

50. Higher
Explanation:
Higher volatility means higher risk and higher risk means one has to pay a higher premium