Revision Test-1

1. A client can use cross margining across Cash and Derivatives segment- True or False?
• True
• False
Explanation: Cross margining is available across Cash and Derivatives segment and is
available to all categories of market participants.
A client can use the margin he has paid in any segment provided he has signed on the
necessary declarations in the account opening forms etc.

2. When a client default in making payment in respect of Daily Settlement, the action taken
is ____________
• the client is given 2 days to clear the payments
• the contract is closed out
• the broker pays the money and the client refunds to him in 7 working days
• the client can give bank guarantee in 2 working days to avoid the contract being closed
out.
Explanation: When a client defaults in making payment in respect of Daily Settlement, the
contract is closed out.

3. At the year-end, any balance in the "Deposit for Mark-to-Market Margin Account"
should be shown as a deposit under the head "Current Assets"- True or False?
• True
• False

4. Put option gives the buyer a right to _______ the underlying asset.
• Sell
• Buy
• Speculate
• None of the above
Explanation: Option, which gives buyer a right to buy the underlying asset, is called Call option
and the option which gives buyer a right to sell the underlying asset, is called Put option.

5. If all things remain constant throughout the contract period, the option price will always
_________ in price by expiry.
• Fall
• Rise
• Either Rise or Fall
• None of the Above
Explanation: Even if the price of the underlying remains constant, the option price will fall due
to Time Decay. This is the advantage of Time Decay is used by the Option Sellers.
6. The Non-Cash Component of Liquid Assets which are given as a form of margin can
include Equity Shares which are physical form - True or False?
• False
• True
Explanation: Non-Cash Component can include Equity Shares as per Capital Market Segment
which are in demat form (and not in physical form), as specified by clearing corporation from
time to time deposited with approved custodians

7. If the Initial Margin is changed then it will apply only to fresh contracts and not to
previous outstanding contracts - True or False?
• True
• False
Explanation: Initial Margin, if changed, will apply to all outstanding contracts and not only to
fresh contracts.

8. Impact cost is low when the liquidity in the system is poor.

• True
• False
Explanation: Impact cost is said to be low when large orders can be executed without moving
the prices in a big way. So, when volumes/ liquidity will be high the impact cost will be low.

9. The advantage of time decay usually goes to _________

• Option Buyers
• Option Sellers
• Long Term Investors
• Short Term Investors
Explanation: If all things remain constant throughout the contract period, the option price
will always fall in price by expiry due to time decay.
Thus, option sellers are at a fundamental advantage as compared to option buyers as there
is an inherent tendency in the price to go down.

10. Churning means ____________

• A specialized arbitrage between Futures and Options
• Excessive unwarranted trading by brokers/agents for generating commissions
• Delta Hedging using Rho and Theta
• Specialized Portfolio Management
Explanation: Churning refers to when securities professionals making unnecessary and
excessive trades in customer accounts for the sole purpose of generating commissions.

11. When different Clearing Members clear for client/entities in Cash and Derivatives
segments they are required to enter into necessary agreements for availing cross margining
benefit - True or False?
• True
• False
Explanation: One of the features of the cross margining available on exchanges is than when
different Clearing Members clear for client/entities in Cash and Derivatives segments they are
required to enter into necessary agreements for availing cross margining benefit.

12. To facilitate Foreign Institutional Investors, SEBI has allowed them to make weekly
payments of Mark to Market Margin due to their huge volumes of trading – True or False?
• True
• False
Explanation: A SEBI registered FIls and its sub-account are required to pay initial margins,
exposure margins and mark to market settlements in the derivatives market as required by
any other investor i.e., daily.

13. As a special provision for NRI’s, the Mark to Market Margin payable them can be done
on consolidated weekly basis — True or False?
• False
• True
Explanation: All types of investors have to make daily payments of Mark to Market margins

14. SEBI's centralized web-based complaints redress system which provides online access
24 x 7 is called __________
• SERA
• SEBI COMPSYS
• SWCOMP
• SCORES
Explanation: SEBI Complaints Redress System - SCORES

15. STT is applicable on all _________ transactions for both futures and option contracts.
• Buy
• Sell
• Both Buy and Sell
• No STT on Futures Trading
Explanation: Securities Transaction Tax (STT) is paid only on the sale side of F&O transactions.

16. A Manager/ Dealer in the Cash market with a registered Trading Member, can also
become a Manager/ Dealer in the Derivatives segment without any additional formalities
— True or False
• True
• False
Explanation: Apart from other formalities, he will also have to clear the Derivatives Exam.

17. As per the regulations, the minimum contract value of a futures contract shall not be
less than Rs. 1 Lakh - True or False?
• True
• False
Explanation: The minimum contract value shall not be less than Rs. 5 Lakhs.

18. Accounting for open options as on the balance sheet date is shown under the "Equity
Index/Stock Option Premium Account" — True or False?
• True
• False
Explanation: Accounting for open options as on the balance sheet date:
- The "Equity Index/Stock Option Premium Account" should be shown under the "head
‘Current Asset' or ‘Current Liabilities’, as the case may be.
- In case of multiple options, entries recommended above may be made in one “Equity Index/
Stock Option Premium Account”, in respect of options of all stocks. The balance of this
composite account should be shown under the head "Current Assets' or "Current Liabilities",
as the case may be.

19. In the Arbitration procedure, the arbitrator conducts the arbitration proceeding and
passes the award normally within a period of ________ months from the date of initial
hearing.
• one
• two
• three
• four

20. The option premium is decided by ________

• SEBI
• Stock Exchanges
• By buyers and sellers
• By Stock Brokers
Explanation: SEBI and Stock Exchanges decide the rules and provide the platform for trading.
The option prices are decided by the buyers and sellers based on the spot price, time value,
volatility and many other factors.

21. Equities can also be traded through Professional Clearing Members.

• True
• False
Explanation: Professional clearing member clears the trades of his associate Trading Member
and institutional clients. He need not be a member of an exchange.

22. ETFs is basket of securities that trade like individual stock on an exchange- True or
False?
• True
• False
Explanation: Exchange Traded Funds (ETFs)is basket of securities that trade like individual
stock on an exchange. They have number of advantages over other mutual funds as they can
be bought and sold on the exchange.
Since, ETFs are traded on exchanges intraday transaction is also possible.

23. An option which would give a negative cashflow to its holder if it were exercised
immediately is known as ____________
• At the money option
• In the money option
• Out of the money option
• None of the above
Explanation: Out of the Money option is a loss-making option and would give the holder a
negative cash flow if it were exercised immediately. A call option is said to be OTM, when spot
price is lower than strike price. And a put option is said to be OTM when spot price is higher
than strike price.
For e.g. If the spot price of a stock is Rs 100, then the Call Option of strike price of Rs 105 is
Out of the Money.

24. On what occasion form the below, the derivative segment of the stock market has to
report to SEBI?
• Occasions when the 90% Value at Risk (VaR) limit has been violated
• Occasions when the 96.5% Value at Risk (VaR) limit has been violated
• Occasions when the 95% Value at Risk (VaR) limit has been violated
• Occasions when the 99% Value at Risk (VaR) limit has been violated
Explanation: Some of the reports which a derivatives segment of a Stock Exchange has to
provide to SEBI are:
- Occasions when the 99% Value at Risk limit has been violated
- Defaults by broker-members
- Daily market activity report
- Daily market report

25. As an option moves more In the Money, the absolute value of Delta will ________
• Increase
• Decrease
• Remain same
• None of the above
Explanation: Delta for call option buyer is positive. This means that the value of the contract
increases as the share price rises.

26. Ms. Patil sold four futures contracts of Bata India Ltd at Rs 1000 (lot size 250 shares).
What is her profit or loss if she purchases back the contracts at Rs 986?
• Rs 3500
• Rs 9500
• Rs 14000
• Rs 16000
Explanation: Ms. Patil sold Bata India shares at Rs 1000 and bought back at Rs 986. So, she
made a profit of Rs 14 per share.
Total quantity sold - 250 x 4 lots = 1000
So total profit is Rs 14 x 1000 = Rs 14000.

27. If the price of Infosys stock rises, the call option premium will also rise.
• True
• False
Explanation: Arise in spot prices will lead a rise in the intrinsic value and so the option
premium will rise.

28. _________ measures change in delta with respect to change in price of the underlying
asset.
• Vega
• Rho
• Gamma
• Theta
Explanation: Gamma measures change in delta with respect to change in price of the
underlying asset.
Gamma = Change in an option delta/ Unit change in price of underlying asset
Gamma signifies the speed with which an option will go either in-the-money or out-of-the-
money due to a change in price of the underlying asset.
When the option is deep in or out of the money, gamma is small. When the option is near or
at the money, gamma is at its largest.

29. Diversification is used to control Systematic Risks - True or False?

• True
• False
Explanation: Systematic risks are risks which are associated with movement of entire market
due to economic / political and other factors. These cannot be controlled by diversifying one’s
portfolio as the entire portfolio will fall in case of a negative news.
The Systematic risks can be controlled by hedging in the F&O section.

30. Ms. Geeta goes long in a PUT option of a higher strike price and shorts another PUT
option of a lower strike price, of the same scrip and same expiry. This strategy is called
_______
• Bullish Spread
• Bearish Spread
• Calendar spread
• Straddle
Explanation: Bearish Spread - The trader is bearish on the market and so goes long in one put
option by paying a premium. Further, to reduce her cost, she shorts another low strike put
and receives a premium.
31. The initial margin in derivatives is fixed depending on the volatility of the stock. True /
False?
• False
• True
Explanation: If the stock is very volatile it could result in losses to the trader in a short period
of time. So, to safe guard the trading member and the trader, higher initial margin is levied
on volatile stocks.

32. The daily settlement of all open positions in futures contract is called __________
• Exercising of the futures contract
• Mark to Mark settlement
• VaR settlement
• None of the above
Explanation: In futures market, the contracts have maturity of several months. So, to safe
guard against substantial rise /fall in the prices, profits and losses are settled on day-to-day
basis —called mark to market settlement.
The exchange collects these margins from the loss-making traders and pays to the gainers on
day-to-day basis.

33. Margins are collected on a _________

• 3-hour basis
• Daily basis
• T+2, so on a two-day basis
• Weekly basis, Monday to Friday

34. Index futures is _____

• An OTC product
• A Cash market security
• A derivative product
• A call or put option
Explanation: The future price of an index is derived from the spot / cash price. So, Index Future
is a derivative product.

35. NSE Nifty consists of ___________ stocks.

• 25
• 30
• 50
• 60

36. When you buy a put option on a stock you are owning, this strategy is called __________
• Straddle
• writing a covered call
• calendar spread
• protective put
Explanation: Protective Put is a management strategy risk-management strategy that
investors can use to guard against the loss of unrealized gains.
The put option acts like an insurance policy - it costs money, which reduces the investor's
potential gains from owning the security, but it also reduces his risk of losing money
if the security declines in value.

37. A trader buys a call and a put option of same strike price and same expiry. This is called
as __________
• Butterfly
• Short Straddle
• Long Straddle
• Calendar Spread
Explanation: To do along straddle strategy one has to buy a call and a put option of the same
strike price and expiry. Together, they produce a position which will lead to profits if the
market/ stock is very volatile and it makes a big move- either up or down.
For e.g.- A person buys a Rs 200call at Rs 30 and a Rs 200 put at Rs 20 of a stock. If the stock
rises significantly the call will rise greatly but his put will fall by maximum Rs 20. So, he makes
a good profit. If the stock falls significantly, he loses his call money buy gains greatly in the
put option as it rises.
Thus, the Long Straddle is used when a trader expects a big move in the stock - in any direction
is ok.

38. Vega is __________

• the change in option price given a one percentage point change in the risk-free interest
rate
• a measure of the sensitivity of an option price to changes in market volatility
• the change in option price given a one-day decrease in time to expiration
• speed with which an option moves with respect to price of the underlying asset

39. If a trader buys a put option with a higher strike price and sells a put option with a lower
strike price, both of the same underlying then this strategy is called __________
• Bullish Spread
• Bearish Spread
• Straddle
• Butterfly spread
Explanation: Bearish Vertical Spread using puts - The trader is bearish on the market and so
goes long in one put option by paying a premium. Further, to reduce his cost, he shorts
another low strike put and receives a premium.

40. A derivative contract made directly over telephone by two parties is called futures
contract - True or False?
• True
• False
Explanation: Such contracts are called Forward or OTC contracts.
41. Important element(s) of risk management is (are) _________
• Monitoring capital adequacy requirements of members
• Regular evaluation of trading members positions
• Collection of Margins
• All of the above

42. A calendar spread will attract ________ margin.

• Zero
• Higher
• Lower
• None of the above
Explanation: Calendar spread position is a combination of two positions in futures on the
same underlying - long on one maturity contract and short on a different maturity contract.
Calendar spreads carry only basis risk and no market risk i.e., no risk even if market rises or
falls by a big amount- hence lower margins are adequate.

43. Risk which are Non-Systematic can be reduced by diversifying one’s portfolio.
• True
• False
Explanation: Specific risk or unsystematic risk is the component of price risk that is unique to
particular events of the company and/or industry. This risk is inseparable from investing in
the securities. This risk could be reduced to a certain extent by diversifying the portfolio.

44. Ask price is the price at which __________

• Buyer is willing to buy
• Seller is willing to sell
• Arbitrageur is willing to negotiate
• Hedger is willing to buy
Explanation: Bid price is the price buyer is willing to pay and Ask price is the price seller is
willing to sell.
For e.g. If the share price of Reliance Industry is Rs. 1800 - 1801, then the bid price is Rs 1800
and ask price is Rs 1801.

45. With a fall in interest rates, the premium on CALL Options will ________
• Rise
• Fall
• No Effect
• None of the above
Explanation: When the interest rates fall, the cost of carry also falls, thus reducing the
premium on call options.
On the other hand, the premium on put options will rise with a fall in interest rates.
46. When a stock which is part of the index has a stock split, it does not have an impact on
the index.
• True
• False
Explanation: Stock Split has an effect on Options, Strike Price etc. but has no impact on the
index as such.

47. A Call Option is said to be OUT OF THE MONEY, ____________

• when spot/ market price is higher than strike price
• when spot/ market price is lower than strike price
• when spot/ market price is equal to strike price
• strike price is zero
Explanation: A call option is said to be OTM, when spot price is lower than strike price - For
e.g. - Market Price of XYZ stock is 200 and the trader has a bought a call option of strike price
220, so he is in a loss.
A put option is said to be OTM when spot price is higher than strike price.

48. If a company declares a dividend, what will be the effect on the pricing of call options?
• Call option price will rise
• Call option price will fall
• No effect on option pricing
• None of the above
Explanation: Dividend are receivable only for shares which are bought in the cash market. No
dividend is receivable on F&O positions.
So, when the stock becomes ex-dividend in cash market, the price generally falls to the extent
of dividend paid. This fall will be reflected in the Call option premium in advance.
So, when a dividend is declared, the Call option premium falls and Put option premium rises.

49. You have a short position in LPQ Stock futures at Rs 350 (one lot size is 500 shares) and
you have made a profit of Rs 28000. To do this you will have to _________
• Sell one lot at Rs 406
• Sell one lot at Rs 294
• Buy one lot at 406
• Buy one lot at Rs 294
Explanation: Profit = Rs 28000, Lot size = 500, So per share profit = 28000/500 = Rs 56
Since he has a short position, he will be in a profit if the share falls and he buys at a lower
price.
So, the price has to fall by Rs 56 from Rs 350 = Rs 294

50. In case of futures, the initial margin is paid only by the sellers.
• True
• False
Explanation: In case of futures, the initial margin is paid by both buyers and sellers.
In case of Options, the initial margin is paid only by the sellers.
51. Hedging would ensure that your profits are always on the higher side compared to an
unhedged position - State True or False?
• True
• False
Explanation: Hedging controls your losses but also controls your profits. It does not ensure
higher profits.
An open position can give you more profits or more losses.

52. An equity index option like NIFTY OPTION is a __________

• Treasury instrument
• Debt instrument
• Derivative Product
• Cash market product
Explanation: Nifty options are derived from the NSE index i.e., Nifty and so it’s a derivative
product.

53. What is a covered call?

• It’s a strategy to sell calls at various strike prices to profit from the premium received
• It’s used to generate extra income from existing holdings in the cash market
• It’s a strategy of buying a call and sell its future for hedging
• It’s done by buying a call and put of the same strike price
Explanation: Covered Call strategy is used to generate extra income from existing holdings in
the cash market. If an investor has bought shares and intends to hold them for some time,
then he would like to earn some income on that asset, without selling it, thereby reducing his
cost of acquisition.
So, he sells a call option of that stock and benefits from the premium received.

54. Covered calls carry greater risk than Naked Calls — True or False?
• True
• False
Explanation: In a naked call, the trader has to take a view on the market and accordingly go
long or short.
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.

55. A common individual investor cannot write an option.

• True
• False
Explanation: Writing an option means selling an option. Any person can write an option after
he has fulfilled the necessary formalities like client registration, margin payments etc.
56. In futures contract, the clearing house / clearing corporation practically becomes the
counterparty for all transactions - State True or False?
• True
• False
Explanation: Clearing Corporation is responsible for clearing and settlement of all trades
executed on the F&O Segment of the Exchange.
Clearing Corporation acts as a legal counterparty to all trades on this segment and also
guarantees their financial settlement.

57. Of the below options, which is more difficult to manipulate?

• Individual Stocks
• IT sector stocks
• Stock Index
• All of the above
Explanation: A stock index contains a basket of high market cap stocks. So, it’s very difficult
to manipulate it when compared to individual stocks.

58. The option seller has an obligation and since his losses can be unlimited, he can be a
potential risk for the stability of the system. Therefore, he has to pay ________
• Extra Premium
• Special Loss Charges
• Margins
• All of the above
Explanation: The buyer of an option pays the premium upfront and that’s his maximum loss
- so there is no margin collected from him.
On the other hand, the seller of an option has huge / unlimited losses which can cause risk to
the market’s stability - so margins are collected from him.

59. The Derivative markets mostly comprises of _________

• Long term investors
• Hedgers
• Speculators
• Both 2 and 3
Explanation: Long term investors buy stocks in Cash market for delivery. Hedgers and
Speculators are active in the derivative markets.

60. OTC derivative market is less regulated market because these transactions occur in
private among qualified counterparties, who are supposed to be capable enough to take
care of themselves. True or False
• False
• True
Explanation: In an OTC market, no exchange is involved.
61. A trader buys a June XYZ stock futures contract at Rs 242. After a few days the price of
XYZ futures was Rs 269. What will be your profit / loss if you square up your position? (The
market lot of XYZ share is 1000)
• -20000
• -27000
• 20000
• 27000
Explanation: Purchase Price - Rs 242
Sale Price -Rs 269
So, profit of Rs 27 x 1000 lot = Rs 27000.

62. An Over-the-Counter Option is __________

• A private contract
• Standardized
• Governed by the rules of stock exchange
• All of the above
Explanation: Options traded on the over-the-counter market, where participants can choose
the characteristics of the options traded. This trading is between two private parties and no
exchange is involved. The flexibility of these options is attractive to many. With OTC options,
both hedgers and speculators can benefit from avoiding the restrictions that normal
standardized exchanges place on options. The flexibility allows participants to achieve their
desired position more precisely and cost-effectively.
OTC market is not a physical market place but a collection of broker-dealers scattered across
the country. Trading is done through negotiated bidding process over a network of telephone
or electronic media that link thousands of intermediaries. OTC derivative markets have
witnessed a substantial growth over the past few years, very much contributed by the recent
developments in information technology. The OTC derivative markets have banks, financial
institutions and sophisticated market participants like hedge funds, corporations and high
net-worth individuals.

63. If the tick size of a scrip is 5 paise and the spot price of that scrip is Rs. 70, what will be
the next upward tick?
• 69.95
• 70.005
• 70.05
• 70.50
Explanation: Tick size is the minimum move allowed in the price quotations. So, a 5 paise tick
size will lead to an upward tick of .05.

64. Clearing Corporation acts as a legal counterparty to all trades on F&O segment and also
guarantees their financial settlement. True / False.
• True
• False
Explanation: Clearing Corporation or the Clearing House is responsible for clearing and
settlement fall trades executed on the F&O Segment of the Exchange.
Clearing Corporation acts as a legal counterparty to all trades on this segment and also
guarantees their financial settlement.
The Clearing and Settlement process comprises of three main activities, viz., Clearing,
Settlement and Risk Management.

65. The net worth of a trading member does not include _________
• Intangible Assets
• Prepaid expenses
• Bad Deliveries
• All of the above
Explanation: As per the L.C. Gupta committee report the net worth of the member shall be
computed as follows:
Capital + Free reserves - Less non-allowable assets which are:
o Fixed assets
o Pledged securities
Member’s card
o Non-allowable securities (unlisted securities)
o Bad deliveries
Doubtful debts and advances
Prepaid expenses
o Intangible assets
30% marketable securities

66. A trader Mr. Raj wants to sell 10 contracts of June series at Rs.5200 and a trader Mr.
Rahul wants to buy 5 contracts of July series at Rs. 5250. Lot size is 50 for both these
contracts. The Initial Margin is fixed at 10%. They both have their accounts with the same
broker. How much Initial Margin is required to be collected from both these investors by
the broker?
• Rs 2,60,000
• Rs 1,31,250
• Rs 3,91,250
• Rs 1,28,750
Explanation: Payment of Initial Margin by a broker cannot be netted against two or more
clients. So, he will have to pay the margin for the open position of each of his clients.
So, margin payable for Mr. Raj is: 10 x 5200 x 50 at 10% = Rs 2,60,000
Margin payable for Mr. Rahul is: 5 x 5250 x 50 at 10% = Rs 1,31,250
Total = Rs 3,91,250.
67. Mr A had bought300 shares of XYZ and wants to protect himself if the price falls. Which
of the below options will be preferred by him?
• Place a limit sell order
• Place a limit buy order
• Place a limit stop loss order
• Place an IOC i.e., Immediate or Cancel order
Explanation: The facility of STOP LOSS helps the user to determine what is the maximum loss
he can make on a trade. Accordingly, a STOP LOSS order is entered in the system. This order
is only released if the trigger price is reached.
For e.g.- If one has bought a share at Rs 300 and his stoploss price is Rs 280 and trigger price
is Rs 281, then the order will be released in the system when the price falls to 281 and the
shares will be sold till Rs 280.

68. A risky trader / speculator believes that the future price of ABC company will fall and
being a smart trader, he will ___________
• buy ABC futures now and sell them later when it falls
• wait till the price of ABC futures and cash market price become same
• sell ABC futures now and buy them later when the price falls
• will do nothing as he had suffered a loss in his previous trade

69. The spot price of LKK share is Rs 300, the put option of Strike Price Rs 280 is ________
• In the money
• Out of the money
• At the money
• None of the above
Explanation: Out of the Money Option - A call option with a strike price that is higher than
the market price of the underlying asset, or a put option with a strike price that is lower than
the market price of the underlying asset. An out of the money option has no intrinsic value,
but only possesses time value.
As in the above example, LKK is trading at Rs 300. For such a stock, call options with strike
prices above Rs 300 would be out of the money calls, while put options with strike prices below
Rs 300 would be out of the money puts. Out of the money options are significantly cheaper
than in the money or at the money options.

70. The Brokers of an exchange can be a part of the Governing Board of the derivatives
segment.
• False
• True
Explanation: As per the L.C. Gupta Committee recommendations - No broker members should
be allowed to sit on the Governing Board of the Clearing Corporation.
71. If price of a futures contract increases, the margin account of the seller of this futures
contract is debited for the loss.
• True
• False
Explanation: When the price increases the seller of the future contract will have losses and
these losses will be debited on a daily basis to the margin account of the seller.

72. Derivatives market helps in transfer of various risks from those who are exposed to risk
but have low risk appetite to participants with high-risk appetite. True or False?
• False
• True
Explanation: Derivatives were first invented as a Hedging tool so that people who wanted to
play safe can use them to transfer the risk by hedging.

73. A clearing member is required to bring in an additional incremental deposit of

__________ to the clearing corporation for each additional TM he undertakes to clear and
settle deals.
• Rs.5 lakhs
• Rs.10 lakhs
• Rs.15 lakhs
• Rs.20 lakhs
Explanation: A clearing member is required to bring in an additional incremental deposit of
Rs.10 lakhs to clearing corporation for each additional TM (Trading Member), in case the
Clearing Member undertakes to clear and settle deals for other TMs.

74. The minimum Net worth requirement for a clearing member of Capital Market Segment
and F&O segment is __________
• Rs 50 lakhs
• Rs 100 lakhs
• Rs 250 lakhs
• Rs 300 lakhs

75. When trading in futures contract, the terms of the contract are decided mutually by the
trading parties.
• False
• True
Explanation: The terms are mutually decided by the parties in FORWARD contract.
In future contracts the terms are standardised by the exchange.
76. Rho is ___________
• is the change in option price given a one percentage point change in the risk-free
interest rate
• the change in option price given a one-day decrease in time to expiration
• speed with which an option moves with respect to price of the underlying asset
• a measure of the sensitivity of an option price to changes in market volatility
Explanation: Rho = change in INTEREST rate.

77. Derivative clearing members are required to maintain a net worth of minimum Rs 4
crores.
• True
• False
Explanation: The minimum net worth for Clearing members of the derivatives clearing
corporation/house shall be Rs.300 Lakhs (Rs 3 crores). The net worth of the member shall be
computed as follows:
- Capital + Free reserves
- Less non-allowable assets which are:
o Fixed assets
o Pledged securities
Member’s card
Non-allowable securities (unlisted securities)
Bad deliveries
Doubtful debts and advances
o Prepaid expenses
o Intangible assets
30% marketable securities

78. A call option is said to be _________ when spot price is higher than strike price.
• At the money
• Out of the money
• In the money
• European
Explanation: A call option with a strike price that is lower than the market price of the
underlying asset, or a put option with a strike price that is higher than the market price of the
underlying asset.
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 (i.e., 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.

79. A long position in a January future contract can be reversed by a short position in that
stock futures of February month — True / False?
• False
• True
Explanation: A position in futures can be reversed by squaring up in the same month and not
in a different month. So, in the above case the position can be reversed by selling the stock
future in January month.

80. When a person sells a put option, he has ______

• Bullish view
• Bearish view
• Mixed view
• Long term view

81. You have sold a put option of a strike price of Rs 370 for Rs 38. What is the maximum
gain you can have on expiry of this position?
• Unlimited
• Rs 370
• Rs 38
• Rs 332
Explanation: The maximum gain for a seller of PUT option is the premium he receives. In this
case he has sold the put option at Rs 38 and received this premium, so that is his maximum
gain.

82. Calendar spreads carry only ________ risk.

• speculative
• market
• basis
• interest
Explanation: Basis means the difference between Spot Price and Future Price or difference
between two future prices of the same underlying.
Basis risk is the chance that the basis will have strengthened or weakened from the time the
hedge is implemented to the time when the hedge is removed- i.e., the risk that the two future
prices will not fluctuate identically.

83. You have sold a CALL option on a stock at Rs. 16 per call with strike price of Rs. 170. If
on exercise date, stock price is Rs. 196, ignoring transaction cost, you will choose
__________
• to exercise the option
• not to exercise the option
• may or may not exercise the option depending on the company's background
• none of the above
Explanation: An option seller can't choose to exercise an option. Seller has only obligation
and no right.

84. Non-Systematic risks can be reduced by diversifying one’s portfolio — True or False?
• True
• False
Explanation: Specific risk or unsystematic risk is the component of price risk that is unique to
particular events of the company and/or industry.
This risk is inseparable from investing in the securities. This risk could be reduced to a certain
extent by diversifying the portfolio.

85. In the Option segment, if you buy a CALL at a premium of Rs 35 at the Strike Price of Rs
400, lot is of 200 shares, then the maximum possible loss is ____________
• Unlimited
• Rs 400
• Rs 7000
• Rs 73000
Explanation: The maximum loss for a buyer of an option is the premium they pay.
In the above case the premium paid is Rs 35 x 200 shares = Rs 7000.

86. Longer the time to expiry/maturity of a call option, higher will be the time value.
• False
• True
Explanation: Time value of the option depends upon how much time is remaining for the
option to expire.
Longer the maturity of the option greater is the uncertainty and hence the higher premiums.

87. Mr. Shah purchased two futures contracts of Ambuja Cements Ltd at Rs. 180 (lot size
2000 shares). What will be his profit or loss if he sells them at Rs 187?
• Rs 14000
• Rs 28000
• Rs 20000
• Rs 27500
Explanation: Mr Shah bought at Rs 180 and sold at Rs 187, so he made a profit of Rs 7.
Lot size is Rs 2000 and he has purchased 2 lots, so 4000 shares x Rs 7 profit = Rs 28,000

88. The Ask price is always greater than the Bid price.
• False
• True
Explanation: Bid - Ask: The bid price is the buyer’s price and Ask is the seller’s price. So, the
seller’s price is always higher than the buyer’s price.

89. An Out of the Money option will have __________

• More than intrinsic value
• Zero intrinsic value
• Negative intrinsic value
• None of the above
Explanation: Intrinsic value in options is the in-the-money portion of the option's premium.
For example, if a call options strike price is Rs15 and the underlying stock's market price is at
Rs 25, then the intrinsic value of the call option is Rs 10.
Option premium consists of two components- intrinsic value and time value. For an option,
intrinsic value refers to the amount by which option is in the money i.e., the amount an option
buyer will realize, before adjusting for premium paid, if he exercises the option instantly.
Therefore, only in-the-money options have intrinsic value whereas at-the-money and out-of-
the-money options have zero intrinsic value. The intrinsic value of an option can never be
negative.

90. It is recommended but not compulsory that all Stock Exchanges of India have a uniform
settlement cycle. True or False?
• False
• True
Explanation: Uniform settlement cycle across all exchanges is recommended but the
exchanges can fix their settlement cycle as per their wish and what suits them best.

91. A wheat exporter has entered into a contract to supply wheat after two months. He
will be buying that wheat soon. But he is afraid that a sudden rise in wheat prices may
erode his profits. What should he do?
• He should sell wheat futures
• He should buy wheat futures
• He should visit the farmers to see the possibility of wheat prices increasing or
decreasing
• He can import wheat and export them at a later date
Explanation: By buying wheat futures he has locked in his buying price.
When he wishes to take actually export, he can sell in the futures market and buy in the spot
market as the prices will be almost same.

92. The minimum price movement in a scrip is called BASIS.

• True
• False
Explanation: The minimum price movement in a scrip is called TICK. It is minimum move
allowed in the price quotations. Exchanges decide the tick sizes on traded contracts as part of
contract specification.
The difference between the spot price and the futures price is called basis.

93. Mr A buys an August futures contract of ICICI Bank at Rs 500. On the last Thursday of
the month i.e., expiry, the last traded price in August futures is Rs 512 and the closing price
in cash spot market is Rs 510. What is the profit / loss of Mr if his position is sq-up by the
exchange? Market lot of ICICI Bank is 250.
• Rs 3000
• Rs 2500
• Rs -3000
• Rs -2500
Explanation: As Mr A has not squared up his position, the exchange will do it and the same is
done at the CASH MARKET CLOSING PRICE.
So, Buying Price - Rs 500
Sq Up price - Rs 510
Profit of Rs 10 x 250 lot= Rs 2500

94. ________ is the change in option price given a one percentage point change in the risk-
free interest rate.
• Delta
• Rho
• Vega
• Gamma
Explanation: The rate at which the price of a derivative changes relative to a change in the
rate of interest. Rho measures the sensitivity of an option or options portfolio to a change in
interest rate.
For example, if an option has a rho of 10.36 then for every percentage-point increase in
interest rates, the value of the option increases 10.36%.
Rho = Change in an option premium/ Change in cost of funding the underlying

95. In India the future contracts are available for _________

• All scrips listed on NSE
• A few selected stocks
• All scrips above the price of Rs 100
• All stocks with a market cap of Rs 300 crore or more.
Explanation: Selection of scrips which can be traded in F&O is as per certain guidelines and
so only a selected few scrips which qualify can be traded on the futures market.

96. A cotton exporter has entered into a contract to supply cotton after three months. He
will be buying that cotton soon. But he is afraid that a sudden rise in cotton prices may
erode his profits. What should he do?
• He can import cotton and export them at a later date
• He should cancel the contract as cotton prices are very volatile
• He should buy cotton futures
• He should sell cotton futures
Explanation: By buying cotton futures he has locked in his buying price.
When he wishes to take actually export, he can sell in the futures market and buy in the spot
market as the prices will be almost same.

97. What is the main reason for which hedgers enter the futures market?
• to profit from price fluctuations
• to make long term investments
• to protect against any price uncertainties
• to make big profits
Explanation: Hedging means making an investment to reduce the risk of adverse price
movements in an asset. Normally, a hedge consists of taking an offsetting position in a related
security, such as a futures contract.
An example of a hedge would be if you owned a stock, then sold a futures contract stating
that you will sell your stock at a set price, therefore avoiding market fluctuations.
Investors use this strategy when they are unsure of what the market will do.

98. An Investor Mr Shah wants to buy 8 contracts of January series at Rs 740 and an investor
Mr Patel wants to sell 5 contracts of February series at Rs 754. Initial Margin is fixed at 6%.
How much initial margin has to be collected from them? Market lot is 250.
• Rs 56,550
• Rs 88,800
• Rs 1,45,350
• Rs 1,87,600
Explanation: Margin to be collected from Mr Shah: Rs 740 X 8 contracts X 250 (Market lot) at
6%
= Rs 1480000 x 6% = Rs 88,800
Margin to be collected from Mr Patel: Rs 754 X 5 contracts X 250 (Market lot) at 6%
= Rs 942500 x 6% = Rs 56,550
So, the total margin: 88,800 + 56,550 = Rs 1,45,350

99. A commodity future exchange ___________

• trades in cash and future commodities
• trades only in future of commodities
• trades in commodities which it owns
• trades in commodities which it does not own

100. Value-at-risk calculations are done on the basis of ________

• best possible market conditions
• ideal market conditions
• volatility
• 90% risk parameter