Practice Paper 1

Question 1. ICICI Bank stock call and put option’ belongs to which of the following categories?

(a) Cash market product

(b) Derivative product

(c) Money market product

(d) Debt product

Correct Answer - Derivative product

(Call and Put options on any stock are derivatives products.)

Question 2. Whom does the Clearing Member need to consult for setting limits on the trading
members clearing through him?

(a) Clearing Corporation

(b) SEBI

(c) The respective Stock Exchange

(d) No consultation is required with anyone as the Clearing Member can set the limits of his trading
members on his own

Correct Answer - No consultation is required with anyone as the Clearing Member can set the limits
of his trading members on his own

(A trading terminal helps the Clearing Members to monitor the open positions of all the Trading
Members clearing and settling through him. A Clearing Member may set limits for a Trading Member
clearing and settling through him. Clearing corporation assists the Clearing Member to monitor the
intraday limits set up by a Clearing Member and whenever a Trading Member exceed the limits, it
stops that particular Trading Member from further trading.)

Question 3. If the price of far month futures is less than the price of near month futures, it is called
as..

(a) Reverse Hedging

(b) Contango

(c) Basis

(d) Backwardation
Correct Answer - Backwardation

If 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”.

Question 4. What does a seller of Put Option expect?

(a) An increase in the price of the underlying

(b) No change in the price of the underlying

(c) A decrease in the price of the underlying

(d) Both 1 and 2

Correct Answer - Both 1 and 2

A seller of put option expects the price to rise.

Even if the price remains stable, the seller earns the option premium.

(Note - Buyer of Put option is bearish and a seller of Put option is bullish / neutral)

Question 5. What does a beta of more than 1 mean ?

(a) It means that the expected percentage change in stock price will be twice the percentage change
in index

(b) It means that the expected percentage change in stock price will be less percentage change in
index

(c) It means that the expected percentage change in stock price will be more than the percentage
change in index

(d) It means that the expected percentage change in stock price equals the percentage change in
index

Correct Answer - It means that the expected percentage change in stock price will be more than the
percentage change in index

Beta measures the sensitivity of a stock / portfolio vis-a-vis index movement over a period of time,
on the basis of historical prices.

If Beta of a stock is 1, it means that a % change in the index will lead to equal % change in the stock
price.
Suppose a stock has a beta equal to 2. This means that historically a security has moved 20% when
the index moved 10%.

Question 6. You sold a call option on a share. The strike price of the Call was Rs 250 and you
received a premium of Rs 16 from the option buyer. What can be the maximum loss on this
position?

(a) Unlimited

(b) Zero

(c) Rs. 250

(d) Rs. 234

Correct Answer - Unlimited

When you sell a Call Option, you believe that the price will fall.

If the price rises, you start making losses. Prices can rise theoretically to unlimited levels, so the
losses can be unlimited.

Question 7. Clearing Corporation of an Exchange guarantees performance of exchange traded

contracts - State whether True or False?

(a) TRUE

(b) FALSE

Correct Answer - TRUE

Clearing Corporation acts as a legal counterparty to all trades on this segment and also guarantees
their financial settlement.

Question 8. In the derivatives segment, who has to pay the margins as specified by the Clearing
Corporation?

(a) Clients

(b) Arbitrageurs

(c) Financial Institutions

(d) All of the above

Correct Answer - All of the above

All those who trade in the derivatives segment have to pay margins without exception.

Question 9. When a dealer is doing trades in his own account and also doing trades for their clients
then these two trades have to be completely segregated - State True or False?

(a) TRUE

(b) FALSE

Correct Answer - TRUE

The trades done by the broker in his own account, by the dealer in his own account and the trades of
the clients have to be totally segregated.

Question 10. When a person enters into a forward contract, the loss that can occur on the position is

(a) known

(b) Unknown

Correct Answer - unknown

When a person enters into a forward or a futures contract, his profits or losses are uncertain as it
depends on the movement of prices.

(Only in the case of buying an option, the losses are fixed ie. premium paid)

Question 11. As per the SEBI Act, the board members of Securities Exchange Board of India are
appointed by .

(a) The Stock Exchanges

(b) The Central Government

(c) The High Court of Mumbai

(d) Securities Appellate Tribunal

Correct Answer - The Central Government

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

Question 12. Can a long position in a Put option can be closed out by taking a short position in a call
option with identical exercise date and exercise price ?

(a) Yes
(b) No

Correct Answer – No

A long position in a Put Option can be closed out (squared up) only by selling the same Put Option.

Question 13. In the case of futures contract, the profits or losses are received / paid only on maturity
- State whether True or False?

(a) TRUE

(b) FALSE

Correct Answer - FALSE

In futures contract, the profits / losses are received / paid as and when the contract is closed
(squared up) by the trader or on maturity, which ever is earlier.

Question 14 . Mr. Ashu has bought 100 shares of ABC at Rs 980 per share. He expects the price to up
but wants to protect himself if price falls. He does not want to lose more than Rs. 1000 on this long
position in ABC. What should Mr. Ashu do?

(a) Place a stop loss order for 100 shares of ABC at Rs 990 per share

(b) Place a stop loss order for 100 shares of ABC at Rs 970 per share

(c) Place a limit buy order for 100 shares of ABC at Rs 990 per share

(d) Place a limit sell order for 100 shares of ABC at Rs 970 per share

Correct Answer - Place a stop loss order for 100 shares of ABC at Rs 970 per share

Mr. Ashu will lose Rs 1000 if the ABC share will fall by Rs 10 as he has 100 shares and a 10 rupee fall
will lead to Rs 1000 loss. He has bought at Rs 980. So he will put the stop loss order at Rs 970 (980 -
10).

Question 15. 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
Correct Answer - TRUE

In-the-money options have positive 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.

Question 16. The minimum Networth for clearing members of the derivatives clearing
corporation/house shall be .

(a) Rs. 1 crore

(b) Rs 5 crore

(c) Rs 10 crore

(d) None of the above

Correct Answer - None of the above

The minimum Net-worth for clearing members of the derivatives

clearing corporation/house shall be Rs.300 Lakhs (Rs 3 cr).

Question 17. 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

Correct Answer - FALSE

A long position in a CALL option can be closed out by taking a short position in the same CALL option
with same exercise date and exercise price.

Question 18. If futures price is higher than spot price of an underlying asset, this is known as .

(a) Maximization

(b) Normalization

(c) Backwardation

(d) Contango
Correct Answer - Contango

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”.

Similarly, if futures price are lower than spot price of an asset, market participants may expect the
spot price to come down in future. This expectedly falling market is called

“Backwardation market”.

Question 19.On the derivatives exchange, a trading cum clearing member has a client who has
purchased and sold 600 and 350 contracts respectively in the August series of PQR futures (contract
multiplier 50). The trading cum clearing member has purchased and sold 300 and 850 contracts
respectively on his own account in the same August series of PQR futures. What is the outstanding
liability (open position) of the member towards Clearing corporation in the number of contacts ?

(a) 300

(b) 800

(c) 250

(d) 550

Correct Answer - 800

The open position of a client and the clearing member cannot be netted off.

Open position of client is 600 - 350 = 250 purchase contracts.

Open position of Clearing member is 300 - 850 = 550 sale contracts.

Total outstanding position of the clearing member towards the Clearing Corporation is 250

+ 550 = 800 contracts.

Question 20. Mr. Ashish is a portfolio manager and he is bullish on the market. What should be his
course of action ?

(a) He should sell index futures

(b) He should sell index call option

(c) He should buy index futures

(d) He should sell his complete portfolio

Correct Answer - He should buy index futures Buying index futures such as Nifty futures will help him
reap good profits if his view of bullish markets prove correct.

Question 21. Can one sell assets in futures market even if he does not own any such assets ?
(a) Yes

(b) No

Correct Answer - Yes

One can sell futures / options etc. even if he does not own the underlying asset.

Question 22. State True or False - The mark-to-market of index futures is daily valuation of open
positions as per the current market prices.

(a) TRUE

(b) FALSE

Correct Answer - TRUE

In futures market, while contracts have maturity of several months, profits and losses are settled on
day-to-day basis – called mark to market (MTM) settlement. The exchange collects these margins
(MTM margins) from the loss making participants and pays to the gainers on day-to-day basis.

Question 23. If on the auction day, there are no sellers for a particular short delivery, what will the
Clearing Corporation do regarding the outstanding transaction ?

(a) The transaction is cancelled

(b) One more auction is held the next day

(c) The transaction is annulled

(d) The transaction is closed out

Correct Answer -The transaction is closed out If no shares are received in an auction, the transaction
is closed out at a particular price. The Close out will be at the highest price prevailing in the exchange
from the day of trading till the auction day or 20% above the official closing price on the auction day,
whichever is higher.

Question 24. In respect of Margin account - What will be done if the prices of future contract
increases ?

(a) The margin account of the seller of futures will be debited for the notional loss

(b) The margin account of the buyer of futures will be credited for the notional gain

(c) Both 1 and 2

(d) Neither 1 nor 2

Correct Answer - Both 1 and 2

The buyer of futures will have a notional gain and so his margin account will be credited by the
notional gain amount.

The seller of futures will have a notional loss if the price rises and his margin account will be debited
by the notional loss amount.

Question 25. When there is a ‘Closing buy transaction’, this will have the effect of partly or fully
Offsetting. .

(a) A cross position

(b) A short position

(c) A high position

(d) A long position

Correct Answer - A short position

Creating a Short Position means selling the asset on an exchange with a view to buy it back when the
price falls. So a Closing Buy transaction will be used to buy back / offset the short position created.

Question 26. An ideal index should contain shares

(a) More than 50

(b) As many as possible

(c) As few as possible

(d) As per the objective of the index

Correct Answer - As per the objective of the index Stocks in the index are chosen based on certain
pre-determined qualitative and quantitative parameters, laid down by the Index Construction
Managers.

Question 27. Which of these CALL options are Out of The Money (OTM) ?

(a) The spot price is Rs 350 and strike price is Rs 330

(b) The spot price is Rs 350 and strike price is Rs 370

(c) The spot price is Rs 350 and strike price is Rs 350

(d) Depends on the Delta of the option

Correct Answer - The spot price is Rs 350 and strike price is Rs 370

A call option is out of the money when the strike price is higher than the spot/cash price of the
underlying.

Question 28. A farmer agrees to sell 100 tonnes of sugarcane to a factory after 2 month at a specific
price. What is this type of contract known as?

(a) Swapation

(b) Future Contract

(c) Forward Contract

(d) None of the above

Correct Answer - Forward Contract

A contract which is between two or more persons as per their agreed terms and in which no Stock
Exchange or any other Exchange is involved is a Forward contract.

Question 29. Mr Rohit has bought 8 lots of contracts of June BSE Sensex futures and sold 6 lots of
contracts of July BSE sensex futures. What is his regular - non spread open position ?

(a) 14 lots

(b) 2 lots

(c) 8 lots

(d) 6 lots

Correct Answer - 2 lots

Mr Rohit has bought and sold the same underlying ie. BSE Sensex futures. So his risk is limited to the
net position which will be his open position. Here he has bought 8 lots and sold 6 lots, so his open
position is 2 lots.

Question 30. An European option can be exercised only on expiry date - State True or False ?

(a) TRUE

(b) FALSE
Correct Answer - TRUE

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.

Question 31. Are eligible to clear trades in Index Options.

(a) All trading members of a recognised 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 - Only members who are registered as clearing members with the derivative
exchange

Question 32. Among the given options, which one can be the principal driver of the movement of
stock index ?

(a) Inflation

(b) Price movement in underlying shares

(c) Interest Rates

(d) Currency Rates

Correct Answer - Price movement in underlying shares

A stock index is made up of a basket of shares. For eg. Nifty is made up of 50 shares. So price
movements in these 50 shares will be the principal driver of the movement in Nifty stock index.

Question 33. High level of initial margins deter brokers and clients from trading in the derivatives
market - State True or False ?

(a) TRUE

(b) FALSE

Correct Answer - TRUE

Risk involved in trading in derivatives are higher as compared to spot market due to bigger trading
lot sizes. Margin levels in derivatives are kept at a higher level so that brokers and clients who do not
have adequate finances, do not trade in this market as they do not have the risk bearing financial
capacity.
Question 34. 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 - FALSE

Bulls believe that market / stock will rise.

Bears believe that market / stock will fall.

Question 35. When a futures contract is entered, .

(a) no margin is exchanged between the buyer and seller

(b) only the buyer pays the margin to the seller

(c) only the seller pays margin to buyer

(d) the buyer and seller pay margins to each other

Correct Answer - no margin is exchanged between the buyer and seller

In a futures contract, the margin is payable by both buyer and seller to the Clearing Corporation and
not to each other. So among the four given options, option 1 is the most appropriate.

Question 36. 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

Correct Answer - FALSE

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

Question 37. Derivatives can have as an underlying.

(a) a bond
(b) another derivative

(c) stock index

(d) All of the above

Correct Answer - All of the above

The most common underlying assets include stocks, indices, commodities, bonds, currencies etc.,
but they can also be other derivatives, which adds another layer of complexity to proper valuation.

Question 38. The liquid assets which are to be deposited by the clearing member can be in the form
of

(a) Only cash

(b) Only cash and approved securities

(c) Cash, Bank Guarantees, Equity Securities and other Cash Equivalents

(d) None of the above

Correct Answer - Cash, Bank Guarantees, Equity Securities and other Cash Equivalents Liquid Assets
can be in the form of Cash, Cash Equivalents (Government Securities, Fixed Deposits, Treasury Bills,
Bank Guarantees, and Investment Grade Debt Securities) and Equity Securities.

Question 39. On exercise of the option, the seller/writer will pay the adverse difference, between
the final settlement price as on the exercise/ expiry date and the strike price. Such payment will be
recognised as a ?

(a) Profit

(b) Loss

(c) Debt

(d) None of the above

Correct Answer - Loss

Adverse difference means the transaction has resulted in a adverse way i.e. a Loss. On exercise of
the option, the seller/writer will pay the adverse difference, between the final settlement price as on
the exercise/ expiry date and the strike price. Such payment will be recognised as a LOSS.

Question 40. 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 ?

(a) Selling 1 May Nifty futures contract at 5700

(b) Buying 1 May Nifty futures contract at 5700

(c) Buying 1 May Nifty futures contract at 5500

(d) Selling 1 May Nifty futures contract at 5500

Correct Answer - Buying 1 May Nifty futures contract at 5500

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.

Question 41. 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?

(a) 206

(b) 196

(c) 49

(d) NIL

Correct Answer - 196

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

Question 42. A person has bought an option so cannot lose more than the option premium paid.

(a) False for all types of options

(b) True only for American options

(c) True only for European options

(d) True for all types of options

Correct Answer - True for all types of options

A buyer of an OPTION pays the premium and that is the maximum loss and its true for all types of
options. (On the other hand a seller of an option receives the premium and thats his maximum
profit. The loss can be unlimited)

Question 43. Three Call series of same strike price of State Bank of India stock-June, July and August
are quoted. Which will have the lowest option premium ?

(a) Same premium for all

(b) June

(c) July

(d) August

Correct Answer - June

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

Question 44. The Clearing Corporation can transfer a defaulting members client's position to

(a) Liability a/c.

(b) Another solvent member

(c) Investor Protection Fund a/c.

(d) The Stock Exchange

Correct Answer - Another solvent member

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.

Question 45. 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?

(a) 14

(b) 8

(c) 2

(d) 6
Correct Answer - 2

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 simillar
loss) and only the open position will have the risks and margins will be collected from these open
positions.

Question 46. measures the sensitivity of the option value to a given small change in the price of the
underlying asset.

(a) Delta

(b) Theta

(c) Rho

(d) Vega

Correct Answer - Delta

The most important of the ‘Greeks’ is the option’s is “Delta”. This measures the sensitivity of the
option value to a given small change in the price of the underlying asset. It may also be seen as the
speed with which an option moves with respect to price of the underlying asset. Delta = Change in
option premium/ Unit change in price of the underlying asset. Delta for call option buyer is positive.
This means that the value of the contract increases as the share price rises. For example, with
respect to call options, a delta of 0.6 means that for every Rs.1 the underlying stock increases, the
call option will increase by Rs 0.60

Put option deltas, on the other hand, will be negative, because as the underlying security increases,
the value of the option will decrease. So a put option with a delta of -0.6 will decrease by Rs.0.60 for
every Rs 1 the underlying increases in price.

The knowledge of delta is of vital importance for option traders because this parameter is heavily
used in margining and risk management strategies.

Question 47. Of the below mentioned options, which would attract margins ?

(a) Buyer of PUT Option

(b) Seller of CALL Option

(c) Seller of PUT Option

(d) Both 2 and 3

Correct Answer - Both 2 and 3

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.

Question 48. Mr. Singh purchases a call option on a stock at Rs. 10 per call with strike price of Rs.
140. If on exercise date, stock price is Rs. 168 , ignoring transaction cost, Mr. Singh will choose

(a) To exercise the option

(b) Not to exercise the option

(c) May or may not depending on the balance he has in his bank account

(d) May or may not depending on the recommendation of experts

Correct Answer - To exercise the option

Mr Singh has purchased a CALL and on the expiry day he is in a profitable postion as the price of the
stock has risen and the spot price is above the strike price. So he will exercise his option.

Question 49. You have bought a CALL of ITC Ltd. of Strike price of Rs 200 of January. To close the
position, you will SELL a PUT of same strike price of January. True or False ?

(a) FALSE

(b) TRUE

Correct Answer - FALSE

If you have bought a CALL option, then to close the position you will have to sell a CALL option Rs
200 strike price.

Question 50. Mr Prashant has bought one lot of ABC futures for Rs 75 (lot size 2000) expecting that
this share will go up. But he also wants to protect himself against any loss of more than Rs 3000.
What should he do ?

(a) Put a stop loss sell order at Rs 74

(b) Put a stop loss sell order at Rs 73.5

(c) Place a buy order for 2000 shares of ABC at Rs.76.50 per

(d) None of the above

Correct Answer - Put a stop loss sell order at Rs 73.5

Mr. Prashant has bought one lot ie. 2000 shares and does not want to have a loss of more than Rs
3000. So 3000 / 2000 = Rs 1.50. So per share he should not lose more than Rs 1.50.

His buying price is Rs 75. So 75 - 1.50 = 73.50 will be his stop loss price price.

When the share falls to Rs 73.50 , he will stand to lose Rs 3000.

Practice Paper 2

1. In case of a member’s default, the Clearing Corporation cannot transfer clients positions to
another member or close out all open positions of defaulting member, without prior approval from
SEBI State True or False?

(a) TRUE

(b) FALSE

Correct Answer: FALSE

Answer Explanation: 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. A report is
then sent to SEBI regarding this.

2. There are many products in the market which give high returns in a risk free manner State
whether True or False?

(a) TRUE

(b) FALSE

Correct Answer: FALSE

Answer Explanation: Returns are related to the risk taken and hence there cannot be a
product in the market that gives high returns in a risk free manner.

3. A long or short position in a futures contract can be closed by initiating a reverse trade State True
or False?

(a) TRUE
 (b) FALSE

Correct Answer: TRUE

Answer Explanation: A closing transaction is one that reduces or eliminates an existing

position by an appropriate offsetting purchase or sale. This is also known as “squaring off” your
position.

4. It is common to have derivatives contracts without any expiration date State whether True or
False?

(a) TRUE

(b) FALSE

Correct Answer: FALSE

Answer Explanation: Most derivatives contracts have an expiration date.

5. Fixed deposits and Bank guarantees are NOT permitted to be offered by Clearing Members to the
Clearing Corporation as part of liquid assets State whether True or False?

(a) TRUE

(b) FALSE

Correct Answer: FALSE

Answer Explanation: Clearing members are required to provide liquid assets which
adequately cover various margins and liquid net worth requirements. They may deposit liquid assets
in the form of cash, bank guarantees, fixed deposit receipts, approved securities, and any other form
of collateral as may be prescribed from time to time.

6. The term mark to market means:

(a) process by which a portfolio manager checks the daily profits/losses

(b) the current/spot index price

(c) intimation from the broker to a client for additional funds

(d) the everyday revaluation of open positions by the exchanges to reflect profits and losses in the
market
 Correct Answer: (d) the everyday revaluation of open positions by the exchanges to reflect profits
and losses in the market

Answer Explanation: Mark to Market (MTM) is a process by which margins are adjusted on
the basis of daily price changes in the markets for underlying assets.

7. What means the maximum exposures in terms of the number of options and futures contracts
that an investor can hold on one side of the market?

(a) Outstanding Limit

(b) Market Limit

(c) Position Limit

(d) Upper Limit

Correct Answer: (c) Position Limit

Answer 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. Position limits for the
entire market and Clearing Members and investors are defined by SEBI.

8. The mark to market margin debits for stock futures are done on a daily basis but the mark to
market margin credits are done on a weekly basis State whether True or False?

(a) TRUE

(b) FALSE

Correct Answer: FALSE

Answer Explanation: In the futures and options market, profits and losses (Debits and
Credits) are settled on a day to day basis — called mark to market (MTM) settlement.

9. The initial margin is always equal to the mark to market margin State True or False?

(a) TRUE

(b) FALSE

Correct Answer: FALSE

Answer Explanation: Mark to Market is a process by which margins are adjusted on the basis
of daily price changes in the markets for underlying assets. Initial margin is usually fixed depending
on the price volatility. Higher the volatility, higher the initial margin.
10. Mr. Arvind is very bullish on the market. However, he feels some specific companies which he
has in his portfolio will not perform well in future. What strategy should he adopt?

(a) Sell Index futures and Sell specific companies shares

(b) Buy Index futures and Sell specific companies shares

(c) Sell Index futures and Buy specific companies shares

(d) Do nothing as markets are uncertain

Correct Answer: (b) Buy Index futures and Sell specific companies shares

Answer Explanation: Mr. Arvind should sell the shares of those specific companies and buy
index futures. By this, he will profit when the index rises and avoid losses on those specific
companies if his view proves to be correct.

11. Even if you do not own the underlying stock, you can sell the stock option for that stock State
whether True or False?

(a) TRUE

(b) FALSE

Correct Answer: TRUE

Answer Explanation: Although Futures and Options were introduced as hedging tools, there
is no pre condition that one has to own the stock to trade in futures and options. One can easily buy
and sell options without owning the underlying stock.

12. The longer the time to maturity of the PUT option, the higher will be the time value State
whether True or False?

(a) TRUE

(b) FALSE

Correct Answer: TRUE

Answer Explanation: Time value of the option depends upon how much time is remaining
for the option to expire. Longer the time to maturity, higher will be the time value.

13. A trader sells a futures contract and the price rises. The trader will:

(a) make a loss

(b) make a profit

 Correct Answer: (a) make a loss

Answer Explanation: The trader has sold the future contract which means he believes that
the prices will fall. So he will make a loss if the price rises.

14. On the day you take a position in a futures contract, the Exchange calls for to cover any loss that
your position may incur:

(a) Initial Margin

(b) Mark to market Margin

(c) Ad hoc Margin

(d) Call Margin

Correct Answer: (a) Initial Margin

Answer 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.

15. What happens to the unmatched portion of the order in an Immediate or cancel (IOC) order?

(a) It will be added to the order book as a limit order

(b) It will be executed on the next trading day

(c) It will be executed in the next one hour

(d) It will be cancelled

Correct Answer: (d) It will be cancelled

Answer Explanation: Immediate or cancel (IOC): User is allowed to buy/sell a contract as

soon as the order is released into the trading system. An unmatched order will be immediately
cancelled. Partial order match is possible in this order, and the unmatched portion of the order is
cancelled immediately.

16. The option premium is affected by the difference in the exercise price and the spot price State
True or False?

(a) TRUE

(b) FALSE
 Correct Answer: TRUE

Answer Explanation: The price difference between the exercise price (strike price) and the
spot price (market price) is always reflected in the option premium pricing. Generally, as the gap
increases, the premium increases and vice versa.

17. In stock markets, Beta is a statistical measure of the sensitivity of the movement of a share price
to the movement of prevailing interest rates State True or False?

(a) TRUE

(b) FALSE

Correct Answer: FALSE

Answer Explanation: Beta measures the sensitivity of a stock/portfolio vis a vis index
movement over a period of time, based on historical prices.

18. When we trade in Commodities in a future exchange, it involves buying and selling:

(a) forward contracts on commodities

(b) actual commodities

(c) future contracts on commodities

(d) commodity stocks

Correct Answer: (c) future contracts on commodities

Answer Explanation: On a future exchange, one can only deal in futures contracts of the
underlying asset in this case, commodities.

19. When you sell a PUT option, you expect:

(a) a decrease in the price of the underlying asset

(b) an increase in the price of the underlying asset

(c) No change in the price of the underlying asset

(d) Both 2 and 3

Correct Answer: (d) Both 2 and 3

Answer Explanation: When you sell a PUT option, you receive the premium. Your view here is
bullish, i.e., the price should rise. Even if the price does not rise and remains the same, you still make
a profit, i.e., the premium you have received is your profit. So, a seller of a Put option can make a
profit when the price rises or even remains the same.
20. Each investor who wishes to trade in the derivatives segment is required to satisfy minimum net
worth conditions State True or False?

(a) TRUE

(b) FALSE

Correct Answer: TRUE

Answer Explanation: As per SEBI rules, in order to understand the risk profile of a client who
wishes to trade in derivatives, the broker must seek to obtain and verify specific categories of
information about its customers, including their net worth, annual income, and investment
experience and knowledge.

21. What does an Option give the buyer?

(a) The right but not the obligation

(b) The obligation but not the right

(c) Gives both the right and obligation

(d) Neither the right nor the obligation

Correct Answer: (a) The right but not the obligation

Answer Explanation: A call option gives the buyer the right but not the obligation to buy from
the seller an underlying asset at the prevailing market price on or before the expiry date.

22. As the strike price increases, the premium on Call Options will decrease. State True or False?

(a) TRUE

(b) FALSE

Correct Answer: TRUE

Answer Explanation: If all other factors remain constant but the strike price of an option
increases, the intrinsic value of the call option will decrease, and hence its value will also decrease.

23. If the Trading Member reaches his position limit, he will

 (a) Be allowed to take new positions for his clients but not in his proprietary account

(b) Not be able to reverse/square up his positions

(c) Not be able to open new positions

(d) Be allowed to take only 5% additional exposure

Correct Answer: (c) Not be able to open new positions

Answer Explanation: If the Trading Member reaches his position limit, he will not be able to
enter any fresh transactions that increase his exposure. He will only be allowed to enter transactions
that reduce his exposure, so new positions will not be permitted, but squaring up will be allowed.

24. What is the role of speculators in the market?

(a) They stabilize the markets

(b) They reduce their risks by speculating

(c) They maintain the Dollar Rupee price parity

(d) They add to the liquidity in the futures market

Correct Answer: (d) They add to the liquidity in the futures market

Answer Explanation: Speculators constantly buy and sell, creating good liquidity in the market.

25. Which of the following options will result in the creation of a BEAR SPREAD?

(a) Selling one call at a lower strike and buying another call at a higher strike price

(b) Buying one put and buying one call at the same strike

(c) Selling one call and buying two puts at the same strike

(d) None of the above

Correct Answer: (a) Selling one call at a lower strike and buying another call at a higher strike price

Answer Explanation: A bear spread can be created by selling a low strike call and buying a high
strike call or by selling a low strike put and buying a high strike put.

26. Is it true that a buyer of a CALL OPTION cannot lose more than the option premium paid?

(a) True only for European options

(b) True only for American options

 (c) True for all types of options

(d) False for all types of options

Correct Answer: (c) True for all types of options

Answer Explanation: The maximum loss for the buyer of any option is the premium paid.

27. What is the difference between Spot Price and Future Price known as?

(a) Impact cost

(b) Basis

(c) Rho

(d) Swap

Correct Answer: (b) Basis

Answer Explanation: The basis is the difference between the spot price and the future price of a
commodity or financial instrument.

28. 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

(d) None of the above

Correct Answer: (b) 50

Answer Explanation: The intrinsic value of an in the money call option is the spot price minus
the strike price. In this case, it is Rs 300 Rs 250 = Rs 50.

29. Which exchange first started trading in financial futures?

(a) Chicago Board Options Exchange

(b) Chicago Mercantile Exchange

(c) Chicago Board of Trade

(d) London International Financial Futures and Options Exchange

 Correct Answer: (b) Chicago Mercantile Exchange

Answer Explanation: In 1972, the Chicago Mercantile Exchange introduced the International
Monetary Market (IMM), which allowed trading in currency futures.

30. You have created a short position on a futures contract. This can be squared up by

(a) Executing a purchase of a call option of the same security

(b) Executing a forward contract

(c) Executing a purchase of the same futures contract

(d) Executing a sale of the same futures contract

Correct Answer: (c) Executing a purchase of the same futures contract

Answer Explanation: A short futures contract can be squared up by buying the same contract in
the futures market, and in no other way.

31. 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 calls cannot be written in Indian markets

Correct Answer: (b) Less risky than writing a naked call

Answer Explanation: The covered call strategy is used to generate extra income from existing
holdings in the cash market. Therefore, the naked call strategy, where the trader has no underlying
asset, is much riskier.

32. What happens when the price of the underlying rises after a futures contract is initiated?

(a) Price changes in the underlying will not affect the price of futures

(b) The short position will become profitable

(c) The long position will become profitable

(d) The long position will become unprofitable

 Correct Answer: (c) The long position will become profitable

Answer Explanation: A long futures position becomes profitable when the price of the
underlying asset rises, as the futures price will also increase.

33. 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. No SEBI approval is required for
this action State True or False?

(a) TRUE

(b) FALSE

Correct Answer: TRUE

Answer 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. A report is then sent to SEBI regarding this.

34. 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

Correct Answer: (c) Bearish receiver of premium

Answer Explanation: A seller of a call option is always bearish. It does not matter if the option is
in the money or out of the money. All sellers, whether of call or put options, will receive the
premium.

35. 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

Correct Answer: TRUE

 Answer Explanation: When one trades in options, the gains when the share moves in one
direction are significantly different from the losses when the share moves in the opposite direction,
making the return profile asymmetric. In contrast, futures contracts have symmetric risk return
profiles, where the potential profits and losses are equal in value.

36. 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: FALSE

Answer Explanation: Risk is not directly halved by doubling the number of stocks. Diversification
does reduce risk, but the relationship is not strictly linear. A well diversified portfolio can reduce
unsystematic risk, but systematic risk remains.

37. 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: TRUE

Answer Explanation: A risk averse investor would prefer investments that are more secure and
thus would have higher portfolio allocations to debt and fixed income instruments. An investor who
is less risk averse would prefer greater exposure to equity and other risky investments.

38. 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

Correct Answer: (b) Systematic Risk

Answer Explanation: An investor can diversify their portfolio to eliminate major parts of price risk,
i.e., the diversifiable or unsystematic risk. However, what remains is the non diversifiable portion or
the market risk, known as systematic risk. This systematic risk can be reduced using index based
derivatives like Index Futures.

39. Which of the following is not an application of indices?

(a) Venture capital funds

(b) Index Funds

(c) Index Derivatives

(d) Exchange Traded Funds

Correct Answer: (a) Venture capital funds

Answer Explanation: Traditionally, indices were used as a measure to understand the overall
direction of the stock market. However, a few applications of indices have emerged in the
investment field, such as Index Funds, Index Derivatives, and Exchange Traded Funds (ETFs). Venture
capital funds do not use indices as a part of their investment strategy.

40. The strategy in which a 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

(a) Butterfly spread

(b) Bearish spread

(c) Calendar spread

(d) Bullish spread

Correct Answer: (d) Bullish spread

Answer Explanation: A bull spread is created when the underlying view on the market is positive, but
the trader would also like to reduce their cost on position. The trader takes a long call position with a
lower strike price and sells a call option with a higher strike price. The cost of the lower strike call is
higher than the premium earned by selling the higher strike call, resulting in a net cash outflow.
Gains beyond the strike price of the short call are negated by losses on the short call, limiting the
potential profit but reducing initial costs.

41. In an equity scheme, the Mutual Fund can hedge its equity exposure by selling stock index
futures True or False?

(a) TRUE

(b) FALSE
Correct Answer: (a) TRUE

Answer Explanation: As per the recommendations of the L.C. Gupta committee, mutual funds are
allowed to hedge their equity exposure in the derivatives segment, subject to terms and conditions.

42. Who monitors the collection of Initial margin and allows exposure to members based on that?

(a) The Stock Exchange

(b) The Clearing Corporation

(c) NSDL or CDSL

(d) SEBI

Correct Answer: (b) The Clearing Corporation

43. Losses due to Operational risks include losses due to

(a) State Government policies

(b) Income tax regulations

(c) Inadequate disaster planning

(d) Excessive management control

Correct Answer: (c) Inadequate disaster planning

Answer Explanation: Operational risk is defined as the risk incurred by an organization's internal
activities. Losses due to fraud, inadequate documentation, inadequate disaster management, and
improper execution are all considered operational risks.

44. Value at risk is calculated

(a) for a specific time frame

(b) at a specific confidence level

(c) only when stocks are very volatile

(d) Both 1 and 2

Correct Answer: (d) Both 1 and 2

Answer Explanation: The clearing corporation computes and collects the Initial margins based on a
99% value at risk over a one day time horizon. Value at risk provides the expected maximum loss
that may be incurred by a portfolio over a given period and at a specified confidence level.

45. Trade Guarantee Fund (TGF) is maintained for

(a) Protecting the interests of investors

(b) Inculcating confidence in the minds of investors and brokers

(c) Guaranteeing the settlement of trades

(d) All of the above

Correct Answer: (d) All of the above

46. As per the recommendations of the L.C. Gupta Committee, CROSS MARGINING (which takes into
account the combined position in the cash and derivative market) is currently not permitted.

(a) FALSE

(b) TRUE

Correct Answer: (b) TRUE

Answer Explanation: According to the recommendations of the L.C. Gupta Committee, cross
margining (linking overall cash and derivative positions for margining) is not permitted.

47. An option buyer pays the option premium to the option seller.

(a) TRUE

(b) FALSE

Correct Answer: (a) TRUE

48. You have bought a CALL of SBI of Strike price of Rs 200 of January. To close the position, you will
buy a PUT of same strike price of January. True or False?

(a) TRUE

(b) FALSE

Correct Answer: (b) FALSE

Answer Explanation: When you buy a CALL option, to close this position, you will have to sell a CALL
option of the same strike price and expiry.

49. The spot price of Grasim Industries Ltd share is Rs 900, the call option of Strike Price Rs 850 is

(a) At the money

(b) Out of the money

(c) In the money

(d) None of the above

Correct Answer: (c) In the money

Answer Explanation: In call options, when the spot price is higher than the strike price, the call
option is considered "in the money."

50. In the Option segment, if you sell a CALL at a premium of Rs 45 at the Strike Price of Rs 400, lt is
of 200 shares, then the maximum possible profit is

(a) Rs 9000

(b) Rs 18000

(c) Rs 80000

(d) Unlimited

Correct Answer: (a) Rs 9000

Answer Explanation: In the Options market, the maximum profit a seller of an option can make is the
premium they receive. In this case, the premium received is Rs 45 x 200 shares = Rs 9000.

PRACTICE PAPER 3

1. Mr. Ganesh thinks that the markets will go down, so he sells 10 lots of index futures at
3500. His predictions come true and the index falls, and Mr. Ganesh buys back the
futures contract at 3410. What is the profit Mr. Ganesh has made if one lot of index is
of 50?
(a) 35000
(b) 45000
(c) 55000
(d) 65000

Correct Answer (b) 45000

Explanation - Mr. Ganesh had sold at Rs 3500 and bought back at Rs 3410. So he made a
profit of Rs 90.
Total Quantity sold = 10 lots x 50 (lot size) = 500
Total Profit = Rs 90 x 500 = Rs 45,000

2 . _________ is not a derivatives market product.

(a) Preference Share
(b) Futures
(c) Swaps
(d) Options

Correct Answer (a) Preference Share

Explanation - Futures, Forwards, Options, Swaps, etc., are all products in the derivative
market. Preference share is not a derivative product.

3 . A trader sells a PQR stock Put contract of Rs 200 strike for Rs 50. The lot size is 1500.
What is the profit/loss if he buys the Put back at Rs 28?
(a) 28500
(b) -28500
(c) 33000
(d) -33000

Correct Answer (c) 33000

Explanation - The trader has sold the put option at Rs 50 and bought it back at a lower price
of Rs 28. So he makes a profit of Rs 22 (50 - 28). Rs 22 X 1500 (Lot size) = Rs 33000 profit
4. Counterparty risk can also be called as
(a) Credit Risk
(b) Default Risk
(c) Both 1 and 2
(d) Speculative Risk

Correct Answer (c) Both 1 and 2

Explanation - Counterparty risk is the risk of an economic loss from the failure of a
counterparty to fulfill its contractual obligation. This risk is also called default risk or credit
risk.

5. To whom is a high impact cost beneficial?

(a) Only buyers
(b) Only sellers
(c) Neither buyers nor sellers
(d) Only arbitrageurs

Correct Answer (c) Neither buyers nor sellers

Explanation - Impact cost is the cost that the buyer or seller of stocks incur while executing
a transaction due to prevailing liquidity conditions in that counter. A high impact cost will
increase the purchasing price for the buyer and decrease the selling price for the seller. So a
high impact cost is neither beneficial to the buyer nor the seller.

6. A call option gives the buyer the right to buy the underlying at market price - State True
or False?
(a) TRUE
(b) FALSE

Correct Answer (b) FALSE

Explanation - A call option gives the buyer the right to buy the underlying at a set price i.e.,
the strike price, and not the market price.
7. When it is said that there is cash settlement of an index futures contract, it means that
the contract is settled in cash with no delivery of the underlying - State whether True or
False?
(a) TRUE
(b) FALSE

Correct Answer (a) TRUE

Explanation - Index futures are always cash settled. Individual securities can be cash settled
or by delivery.

8. When the margins are kept on the lower side, it will attract more players to join the
market - State True or False?
(a) TRUE
(b) FALSE

Correct Answer (a) TRUE

Explanation - The Clearing Corporation generally keeps the margins for derivatives trading
on the higher side as the risk of losses is 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.

9. _______ is a deal that produces profit by exploiting a price difference in a product in two
different markets.
(a) Hedging
(b) Trading
(c) Speculation
(d) Arbitrage

Correct Answer (d) Arbitrage

Explanation - Arbitrage means buying a security in one market while simultaneously selling
the same security in a different market, to benefit from the price differential.
10. How can you close a short position in a futures market?
(a) By buying a Call Option
(b) By entering into a suitable forward contract
(c) By executing a purchase of the same futures contracts
(d) By executing a sale of the same futures contracts

Correct Answer (c) By executing a purchase of the same futures contracts

Explanation - A short future contract i.e., a sale position can be squared up by buying the
same contract in the futures market and in no other way.

11. Arbitrage is basically earning a risk-free profit by simultaneous buying and selling
replicating assets in two or more different markets - State True or False?
(a) TRUE
(b) FALSE

Correct Answer (a) TRUE

Explanation - Arbitrage is a deal that produces profit by exploiting a price difference in a
product in two different markets. Arbitrage originates when a trader purchases an asset
cheaply in one location and simultaneously arranges to sell it at a higher price in another
location.

12. An Index Option is____________

(a) a derivative product
(b) settled in cash
(c) rarely traded on the Indian stock exchanges
(d) Both 1 and 2

Correct Answer (d) Both 1 and 2

Explanation - Index option is a derivative product derived from indices like Nifty, Bank Nifty,
Sensex, etc. Index options are settled only in cash.
 13. Clearing Member Mr. Prabhu focuses mainly on proprietary trading, while Clearing
Member Mr. Mehta does not do any proprietary trades and does trades only for clients. If
both have deposited the same amount of assets with the Clearing Corporation, which of the
following statements is true?
(a) Mr. Prabhu enjoys a lower exposure limit than Mr. Mehta
(b) Mr. Prabhu enjoys a higher exposure limit than Mr. Mehta
(c) Both of them enjoy the same exposure limits

Correct Answer (b) Mr. Prabhu enjoys a higher exposure limit than Mr. Mehta
Explanation - Proprietary positions are calculated on a net basis (buy less sell) for each
contract, while client positions are calculated by summing together net positions of each
individual client. Margins are required to be paid up-front on a gross basis at an individual
client level for client positions and on a net basis for proprietary positions. Therefore, Mr.
Prabhu, who does only proprietary trades, will get higher exposure as his positions are
calculated on a net basis.

14. After the initiation of the futures contract, the price of the underlying asset has risen.
In this situation,

(a) Basically, price change in underlying asset has no effect on long or short positions in
futures
(b) A long position becomes unprofitable
(c) A short position becomes profitable
(d) A long position becomes profitable

Correct Answer (d) A long position becomes profitable

Explanation - When the price of the underlying asset rises in the spot market, its price in the
futures market will also rise. So, those who have purchased the futures (long position) will
make a profit.

15. If the price volatility of the underlying stock is high then the Put option will
(a) have zero premium
(b) have comparatively lower premium
(c) have comparatively higher premium
(d) Volatility does not have any effect on the Put options

Correct Answer (c) have comparatively higher premium

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 because there is a greater possibility that the option
will move in-the-money during the life of the contract. Higher volatility = Higher premium,
Lower volatility = Lower premium (for both call and put options).

16. Why are margins collected in the derivative segment?

(a) To earn revenue for the clearing corporation
(b) To minimize the number of investors entering the derivatives market
(c) To have friction in the market to facilitate arbitrage
(d) To minimize the risk of default by all parties involved

Correct Answer (d) To minimize the risk of default by all parties involved
Explanation - As the exchange guarantees the settlement of all the trades, to protect itself
against default by either counterparty, it charges various margins from brokers. Brokers in
turn charge margins from their customers.

17. What is an Index Option?

(a) It's a derivative product
(b) It's essentially settled in cash
(c) Index options are not allowed in Indian markets
(d) Both 1 and 2

Correct Answer (d) Both 1 and 2

Explanation - Index option is a derivative product derived from indices like Nifty, Bank Nifty,
Sensex, etc. Index options are settled only in cash.
18. Can a broker take any amount of exposure once he has satisfied the minimum net
worth and minimum deposit with the exchange in the form of liquid assets?
(a) Yes
(b) No

Correct Answer (b) No

Answer Explanation - The amount of exposure depends on the value of the assets / liquid
assets deposited with the exchange. More the deposits - more the exposure he can get.

19. A person who provides two-way quotes for various stocks is known as:
(a) Arbitrageur
(b) Speculator
(c) Hedger
(d) Market Maker

Correct Answer (d) Market Maker

Answer 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.

20. A mutual fund manager is bearish on the market and wishes to reduce its exposure to
equities from 50% to 40%, without selling any of his equity holdings. Can he sell index
futures for it?
(a) Yes, he can sell index futures
(b) No, Mutual funds are not allowed to sell index futures

Correct Answer (a) Yes, he can sell index futures

Answer Explanation - FII and Mutual funds can buy/sell in futures subject to certain limits.

21. In the derivative segment, once initial margin requirement is fixed, it cannot be changed
by the exchange, during the lifetime of the futures contract - State True or False?
(a) TRUE
(b) FALSE

Correct Answer (b) FALSE

Answer Explanation - The initial margin is dependent on price movement of the underlying
asset. So the Initial Margin levels are dynamic and recalculated continuously based on
volatility levels.

22. When a PUT option on an index is exercised, the option holder receives from the option
writer:
(a) A cash amount that is equal to the excess of spot price over exercise price
(b) A cash amount that is equal to the excess of exercise price over spot price
(c) A cash amount that is equal to spot price
(d) No amount

Correct Answer (b) A cash amount that is equal to the excess of exercise price over spot
price
Answer Explanation - An option will only be exercised when its In the Money (Profitable). A
put option is In the Money when the Exercise price is higher than the spot price. So the
excess of exercise price over the spot price will be receivable by the option holder.

23. 'Netting' is the process by which a future contract is terminated by a transaction that is
equal and opposite to the original transaction - State True or False
(a) TRUE
(b) FALSE

Correct Answer (b) FALSE

Answer Explanation - 'OFF SETTING' is the process by which a future contract is terminated
by a transaction that is equal and opposite to the original transaction.

24. What is an Index Future?

(a) Its a synthetic option
(b) Its a cash market product
(c) Its a derivative product
(d) Its an option

Correct Answer (c) Its a derivative product

Answer Explanation - The future price of an index is derived from the spot / cash price. So
Index Future is a derivative product.

25. What does Beta of 1 mean?

(a) It means that the expected percentage in stock price will be more than the percentage
change in index
(b) It means that the expected percentage in stock price will be twice the percentage
change in index
(c) It means that the expected percentage in stock price will be less than the percentage
change in index
(d) It means that the expected percentage in stock price will be equal to the percentage
change in index

Correct Answer (d) It means that the expected percentage in stock price will be equal to
the percentage change in index
Answer Explanation - Beta measures the sensitivity of a stock / portfolio vis-a-vis index. If
Beta of a stock is 1, it means that a % change in the index will lead to equal % change in the
stock price.

26. Loss on derivative transactions can be set off against any other income during the year.
In case the same cannot be set off, it can be carried forward to subsequent assessment year
and set off against any other income of the subsequent year. Such losses can be carried
forward for a period of assessment years.
(a) 4
(b) 8
(c) 12
(d) 16
Correct Answer (b) 8
Answer Explanation - Loss incurred on derivatives transactions which are carried out in a
recognized stock exchange can be carried forward for a period of 8 assessment years.

27. Which tax is applicable for equity transactions done on a recognized stock exchange?
(a) Securities Trading Tax
(b) Equity Trading and Service Tax
(c) Derivatives Transaction Tax
(d) Securities Transaction Tax

Correct Answer (d) Securities Transaction Tax

Answer Explanation - Trading member has to pay securities transaction tax (STT) on the
transaction executed on the recognized stock exchange.

28. 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

Correct Answer (d) Stock index

Answer Explanation - There is no single underlying asset in a Stock Index. It's a combination
of many stocks which make an index. So there is no asset as a stock index as such.

29. 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

Correct Answer (b) in the futures market

30. The features of Futures are quiet similar to:

(a) Options
(b) Swaps
(c) Debentures
(d) Forwards

Correct Answer (d) Forwards

Answer Explanation - A futures contract is similar to a forward, except that the deal is made
through an organized and regulated exchange rather than being negotiated directly
between two parties. We may say that futures are exchange traded forward contracts.

31. 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 (d) Backwardation

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

32. Cross margining between cash and derivative segments of an exchange helps reduce the
overall margin level applicable to investors and traders - State True or False?
(a) TRUE
(b) FALSE
Correct Answer (a) TRUE
Answer Explanation - Cross margining is available across Cash and Derivatives segment. If a
trader has credit balance in his trading account in the cash segment, he can use it to margin
his derivative trading, thus reducing his overall margin level.

33. 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 (b) FALSE

Answer Explanation - The Net Worth requirements of Clearing Members is higher than
Trading Members.

34. An index option is a __________________.

(a) Debt instrument
(b) Derivative product
(c) Cash market product
(d) Money market instrument
Correct Answer : B

35. The purchase of a share in one market and the simultaneous sale in a different market to
benefit from price differentials is known as ____________.
(a) Mortgage
(b) Arbitrage
(c) Hedging
(d) Speculation
Correct Answer : B

36. Financial derivatives provide the facility for __________.

(a) Trading
(b) Hedging
(c) Arbitraging
(d) All of the above
Correct Answer : D

37. Operational risks include losses due to ____________.

(a) Inadequate disaster planning
(b) Too much of management control
(c) Income tax regulations
(d) Government policies
Correct Answer : A

38. Impact cost is low when the liquidity in the system is poor.
(a) True
(b) False
Correct Answer : B

39. You sold one XYZ Stock Futures contract at Rs. 278 and the lot size is 1,200. What is
your profit (+) or loss (-), if you purchase the contract back at Rs. 265?
(a) 16,600
(b) 15,600
(c) -15,600
(d) -16,600
Correct Answer : B

40. You have taken a short position of one contract in June XYZ futures (contract multiplier
50) at a price of Rs. 3,400. When you closed this position after a few days, you realized that
you made a profit of Rs. 10,000. Which of the following closing actions would have enabled
you to generate this profit? (You may ignore brokerage costs.)
(a) Selling 1 June XYZ futures contract at 3600
(b) Buying 1 June XYZ futures contract at 3600
(c) Buying 1 June XYZ futures contract at 3200
(d) Selling 1 June XYZ futures contract at 3200
Correct Answer : C

41. Which of the following is closest to the forward price of a share, if Cash Price = Rs.750,
Forward Contract Maturity = 6 months from date, Market Interest rate = 12%?
(a) 772.5
(b) 795
(c) 840
(d) 940.8
Correct Answer : B

42. If you have sold a XYZ futures contract (contract multiplier 50) at 3100 and bought it
back at 3300, what is your gain/loss?
(a) A loss of Rs. 10,000
(b) A gain of Rs. 10,000
(c) A loss of Rs. 5,000
(d) A gain of Rs. 5,000
Correct Answer : A

43. A calendar spread contract in index futures attracts ___________.

(a) Same margin as sum of two independent legs of futures contract
(b) Lower margin than sum of two independent legs of futures contract
(c) Higher margin than sum of two independent legs of futures contract
(d) No margin need to be paid for calendar spread positions
Correct Answer : B

44. 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?
(a) 10
(b) 7
(c) 3
(d) 17
Correct Answer : C

45. An investor, who is anticipating a broad stock market fall, but is not willing to sell his
entire portfolio of stocks, can offset his potential losses by shorting a certain number of
Index futures.
(a) True
(b) False
Correct Answer : A

46. Margins in 'Futures' trading are to be paid by _______.

(a) Only the buyer
(b) Only the seller
(c) Both the buyer and the seller
(d) The clearing corporation
Correct Answer : C

47. When the near leg of the calendar spread transaction on index futures expires, the
farther leg becomes a regular open position.
(a) True
(b) False
Correct Answer : A

48. Selling short a stock means ___________.

(a) Seller does not own the stock he is supposed to deliver
(b) Seller has to deliver the stock within a short time
(c) Seller owns the stock he is supposed to deliver
(d) Seller has more than a year's time to deliver the stock which he sold
Correct Answer : A

49. The buyer of an option cannot lose more than the option premium paid.
(a) True only for European options
(b) True only for American options
(c) True for all options
(d) False for all options
Correct Answer : C

50. Cost of carry model states that ______________.

(a) Price of Futures = Spot + Cost of Carry
(b) Price of Futures = Spot - Cost of Carry
(c) Price of Futures = Spot Price
(d) Price of Futures = Cost of Carry
Correct Answer : A

Mock Paper 1

Question1. A client Mr. P has bought March series contract and another client Mr. Q has sold March
series contract on Nifty futures. This has been done through the same broker. Will this qualify as a
calendar spread ?

a) Yes
b) No

Question2. The adjustment factor for a stock which issues a Bonus in the ratio A : B is

a) (A + B) / B
b) (A - B) / B
 c) (A + B) x B
d) (A-B)*A

Question3. The spot price of a stock is Rs 200. A trader buys the Rs 195 strike price call option by
paying a premium of Rs 10. On expiry the settlement price is Rs 220. What is the net profit for the
trader ?

a) Rs 25
b) Rs 15
c) Rs 10
d) NIL

Question4. The theoretical future price is considered for traded during the day.

a) the opening price

b) the daily mark to mark settlement price
c) premium settlement
d) last traded price

Question5 Delivery based settlement in single stock futures is provided by

a) BSE
b) NSE
c) OTC
d) Both BSE and NSE

Question6. The Final Settlement Price in Options is the closing price of such underlying security on
the last trading day of the options contract - True or False.

a) TRUE
b) FALSE

Question7 Nifty consists of securities having

a) Large
b) Medium
c) Small
d) All of the above

Question8. A bull spread can be created only by

(a) Buying and selling Futures

 (b) Buying and selling Cash and Futures

(c) Buying and selling Options

(d) Buying and selling ETF's

Question9. Any member or client who increases his existing positions or has created a new position
in a F&O banned security, the client/trading members will be subject to a penalty 1% of the value of
increased position subject to a minimum of Rs. and maximum of Rs..

(a) 5000 , 100000

(b) 5000, 50000

(c) 10000, 100000

(d) 10000, 25000

Question10 ______ is at the lowest level of hierarchy of a trading firm.

(a) Speculator

(b) Dealer

(c) Branch Manager

(d) Regional Manager

Question11 . Mr. Mohit buys 3 Call options of strike price 200 when the spot price was 190 at a
premium of Rs16. Will he have to pay STT?

(a) Yes

(b) No

Question 12. The open position of a Trading Member is arrived by

(a) Adding up all his proprietary positions

(b) Adding up all his clients net outstanding positions

(c) Adding both - his proprietary positions and all his clients net outstanding positions

(d) None of the above

Question13 An investor has ICICI Bank shares in his portfolio. He wants to protect against the
downslide in this stock as he thinks the market may go down. What should he do ?

(a) Buy ICICI Put Option

(b) Buy ICICI Call Option

(c) Buy Nifty futures

(d) Buy Bank Nifty

Question14. A spread that is designed to profit if the prices goes down is called

(a) Hedge Spread

(b) Arbitrage Spread

(c) Bull Spread

(d) Bear Spread

Question15 Time value of an option is the difference between

(a) its Strike price and premium

(b) its strike price and spot price

(c) its premium and spot price

(d) its premium and intrinsic value

Question16. In the F&O segment of NSE one can trade in the following derivative instruments except

(a) index based futures

(b) individual stock options

(c) index based options

(d) individual warrant options

Question17 What will be the payoff if a stock future was bought at Rs 100 and sold at Rs 87 ? The lot
size is 1000 shares.

(a) NIL

(b) 13000
 (c) -13000

(d) -8700

Question18 The price at which the underlying asset can be bought or sold on exercise of an option is
called

(a) Spot Price

(b) Risk Premium

(c) Strike Price

(d) Option Premium

Question19 All types of investors should allot some portion of their portfolio to derivative products
in order to increase the portfolio returns irrespective of their risk tolerance levels – State True or
False ?

(a) TRUE

(b) FALSE

Question20 Speculator accepts the risks in search of profits - State True or False?

a) FALSE
b) TRUE

Question21 In India, the clearing and settlement of derivatives trades would be through

(a) State Bank of India

(b) Euroclear

(c) SEBI approved Clearing Corporation / Clearing House

(d) The Interbank Clearing House

Question22. In a calendar spread transaction, the trader takes opposite position in two futures
contract with

(a) two different underlying assets and same delivery month

 (b) two differently delivery months and two different underlying assets

(c) two differently delivery months and same underlying asset

(d) one stock and one index of same delivery months

Question23 Excess of premium in an option over the intrinsic value is known as the time value –
State True or False ?

(a) FALSE

(b) TRUE

Question24. The simultaneous purchase and sale of two different tenors futures contracts in the
same underlying is known as a

(a) Limit order

(b) Short hedge

(c) Spread trade

(d) Long hedge

Question25. Delta is the change in option price given a one percentage point change in the risk-free
interest rate - State True or False ?

(a) FALSE

(b) TRUE

Question26 If the volatility of the underlying stock is decreasing, the premium of call option would

a) Increase
b) Decrease
c) will not change
d) None of the above

Question27 Investors who believe that the markets will fall are known as Bulls - State True or False?
 a) TRUE
b) FALSE

Question28 The mark to mark debits for stock options are done on a –

a) fortnightly basis
b) monthly basis
c) daily basis
d) weekly basis

Question29. 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?

a) TRUE
b) FALSE

Question30. Losses incurred on derivative transactions on a ‘recognized stock exchange’ can be

carried forward to subsequent assessment year and set off against any other non speculative
business income of the subsequent year.

a) 5
b) 8
c) 12
d) 15

Question31. A Forward Contract

a) can be cancelled but only after the expiry date

b) can be cancelled if the counter party also agrees to it
c) cannot be cancelled
d) can be cancelled even without the consent of the counter party

Question32. Can a Clearing Member give 'Fixed Deposits' as part of liquid assets to the Clearing
Corporation?

a) Yes
b) No
Question33. The option premium is adjustable against the exercise price on settlement, if the option
is exercised on maturity - State True or False ?

a) TRUE
b) FALSE

Question34. A Clearing Member has to deposit with the derivatives segment of the exchange or with
the clearing corporation a minimum of

a) Rs. 50 lakhs
b) Rs. 100 lakhs
c) Rs. 150 lakhs
d) Rs. 20 lakhs

Question35. When a seller SHORT SELLS a stock, it means

a) He has more than a months time to deliver the stock which he sold
b) He owns the stock he is supposed to deliver
c) He has to deliver the stock within a short time
d) He does not own the stock he is supposed to deliver

Question36. The strategy of buying a put option on a stock you are owning is known as

a) calendar spread
b) aggressive put
c) protective put
d) Straddle

Question37. State True or False - Scarcity of underlying commodity will generally cause a rise in its
futures price.

a) TRUE
b) FALSE
Question38. At which price can a trader place a bid or offer for a scrip?

a) At a price which is within the daily circuit filter limits

b) At a price which the trader wishes
c) At a price negotiated between the exchange and the member
d) At a price which the trader deems fit

Question39. A decrease in the interest rates will lead to

a) Increase the premium on the put option

b) Decrease the premium on the put option
c) Expires the put options immediately
d) No effect on put options

Question40. What will be the value of one lot of ABC futures contract if the price is Rs. 3200 and the
contract size is 150 ?

a) Rs.240000
b) Rs.320000
c) Rs.540000
d) Rs.480000

Question 41. A Professional Clearing member of derivatives segment

a) should also be a member of the cash segment

b) should also become a member of the cash segment within 2 years
c) provides trading facility to its clients
d) does not have any trading rights

Question43. Theta is a measure of the sensitivity of an option price to changes in market volatility.
State True or False?

a) TRUE
b) FALSE

Question44. When the strike price increases, the premium on call option decreases - State True or
False?

a) TRUE
 b) FALSE

Question45. 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?

a) 9000
b) 18000
c) -9000
d) -18000

Question 46. The Intrinsic Value is zero for out-of-the money options but always positive for in-the
money options - State True or False?

a) TRUE
b) FALSE

Question 47. A stock index like Nifty

a) is a basket of stocks
b) can be easily manipulated
c) Both 1 and 2
d) None of the above

Question 48. 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?

a) TRUE
b) FALSE

Question49. There is higher flexibility in fixing forward contract specification as compared to futures
contract specifications - State True or False?

a) TRUE
b) FALSE
Question50. What is Tick size?

a) Tick size is the size of the futures contract

b) Tick size is the maximum permitted movement in the price of the contract
c) Tick size is the minimum permitted movement in the price of the contract
d) Tick size is the average of the high and low permitted prices

Question51. Functions of a Derivative Market include

a) Improving price discovery based on actual valuations and expectations

b) Shift of speculative trades from unorganized market to organized market
c) Both 1 and 2
d) None of the above

Question52. Who appoints the board members of the Securities Exchange Board of India under the
SEBI Act ?

a) Maharashtra Government as SEBI is situated in Mumbai

b) The President of India
c) The Central Government
d) The Stock Exchanges

Question53 The expiry day for June series Index Futures on BSE would be

a) Last Thursday in June

b) Last Thursday in July
c) Last Thursday in August
d) Last Thursday in September

Question54. A call option gives its holder the right to buy ‘any quantity’ of the underlying asset from
the writer of the call option at a pre-specified price - State True or False ?

a) TRUE
b) FALSE

Question55. Institutional investors pay lower margins than the individual investors for derivatives
trading - State True or False ?
 a) TRUE
b) FALSE

Question56. Generally, other things remaining the same - American options value is lower than that
of European options - True or False?

a) TRUE
b) FALSE
c) The information given is inadequate
d) It depends on market condition

Question57. A short position in a PUT option can be closed out by taking a long position in a same
PUT option - State True or False?

a) FALSE
b) TRUE

Question58. The initial margin in derivatives market depends on the volatility of the underlying
market. Usually

a) Higher the volatility, Lower the initial margin

b) Higher the volatility, Higher the initial margin
c) Lower the volatility, Higher the initial margin
d) None of the above

Question59 In normal market, a forward contract having a longer time to maturity trades at a higher
price - State True or False?

a) TRUE
b) FALSE

Question61. A Trading Member on derivatives exchange does not have Clearing rights - State True or
False?

a) TRUE
b) FALSE
Question62. Exposure levels of Clearing Members are maintained with the Clearing Corporation,
correlated with the Liquid Assets

a) Positively
b) Negatively
c) Not related
d) Exponentially

Question63 Vega measures change in delta with respect to change in price of the underlying asset
State True or False?

a) TRUE
b) FALSE

Question64. A fall in the price of Wipro stock increases the value of the Wipro call option - State
True or False?

a) TRUE
b) FALSE

Question65. In general terms, if the number of participants in a market are more, the liquidity will
be low - State True or False?

a) TRUE
b) FALSE

Question66. The holder of a long position in a PUT option will gain if the price of the underlying
asset

a) Increases
b) Decreases
c) Does not change
d) If the option expires worthless

Question 67.Which of the below statement(s) hold true for Futures Contract?
 a) Futures Contracts are settled through clearing corporation of the exchange
b) Futures Contracts are standardized contracts
c) Futures Contracts are traded on an exchange
d) All of the above

Question68 Which one of these complaints against a trading member can an Exchange take up for
redressal?

a) Complaints regarding land dealings between a client and trading member

b) Complaints in respect of transactions which are already subject matter of Arbitrage
proceedings
c) Claims regarding notional loss for the disputed trade
d) Claims regarding unauthorized transaction in the client’s account

Question69 The securities or money deposited by clients

a) will be as per brokers rules and regulations

b) depends on the decision of Clearing Corporation
c) can be attached for meeting broker’s obligation on his proprietary account
d) cannot be attached for meeting broker’s obligation on his proprietary account

Question70. 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

a) As soon as the market price of ABC touches Rs. 470

b) As soon as the market price of ABC touches Rs. 450
c) As soon as the order is placed in the system
d) If similar orders are available in the order book at Rs. 450

Question71. In Index futures, an open position can be settled by

a) delivery on maturity
b) cash settlement on maturity
c) either by cash or delivery on maturity
d) exchange for gold on maturity
Question72. As per news, the Government can lose a vote of confidence and this can affect the stock
markets pretty badly. If you are an active trader, what is the ideal step you will take?

a) Buy index futures

b) Sell index futures
c) Double your portfolio holdings
d) Buy Blue Chip shares

Question73. When ordinary cash dividends are declared, Call Option values will decrease - State
True or False ?

a) TRUE
b) FALSE

Question74. When SEBI has approved the approves bye-laws of a derivative exchange, the exchange
is free to introduce futures contracts on any number of stocks and it does not require to go to SEBI
every time - State True or False?

a) TRUE
b) FALSE

Question75. In the derivatives market, the mark to market margin is equal to the initial margin -
State True or False?

a) TRUE
b) FALSE

Question76. On final settlement, the buyer/holder of the option will recognise the favourable
difference received from the seller/writer as in the profit and loss account.

a) Income
b) Expense
c) Loan
d) Amortization

Question77. Mr. A sold a put option of strike Rs.300 on ABC stock for a premium of Rs.20. The lot
size is 1000. On the expiry day, ABC stock closed at Rs. 250. What is your net profit or loss?
 a) -30000
b) 30000
c) 70000
d) -70000

Question78. The exercise date and expiration date of an European option is_________

a) Always the same

b) Always on the 28th of the expiry month
c) always different
d) May be same

Question79. In an ‘Opening Buy Transaction’ the effect will be that of creating or increasing

a) Arbitrage position
b) Cross position
c) Long position
d) Short position

Question80. What advantage does the screen based trading has over floor trading ?

a) There are no set up costs in screen based trading

b) There is transparency in trade execution and execution price
c) The technology needs are lower
d) There is no need to route the order through an exchange

Question81. The speculators play an important role in the futures market because –

a) They buy in one market and sell in another for arbitrage gains.
b) They transfer their risk to the hedgers
c) They add to the liquidity to the futures markets
d) They take delivery of the commodities at expiration

Question82. What does Value-at-risk measures ?

a) value of a volatile portfolio

b) Risk level of a financial portfolio
 c) Value of illiquid shares portfolio
d) Index PE value

Question83. A member has two clients Rohit and Mohit. Rohit has purchased 100 contracts and
Mohit has sold 300 contracts in March Tata Steel futures series. What is the outstanding liability
(open Position) of the member towards Clearing Corporation in number of contracts?

a) 100
b) 300
c) 400
d) 200

Question84. Are Broker-Members allowed on the Clearing Council of the Clearing Corporation of the
derivatives segment ?

a) Yes
b) No

Question85. One of the important duties of a trading member is to assess the financial soundness,
genuineness and background of a new client - True or False ?

a) TRUE
b) FALSE

Question86. Mr. Kailash has bought 200 shares of ABC Industries at Rs.850 per share. He expects the
price to go up but wants to protect himself if the price falls. He does not want to lose more than Rs.
4000 on this long position. What should he do?

a) Place a limit buy order for 200 shares Rs.830 per share
b) Place a limit sell order for 200 shares Rs. 830 per share
c) Place a stop loss sell order for 200 shares Rs.830 per share
d) Place a limit buy order for 200 shares at Rs.870 per share

Question87. Of the below mentioned options, in which option is the strike price better than the
market price and therefore it is profitable to exercise the option ?

a) At-the-money option
b) Out-of-the money option
c) In the money option
d) None of the above
Question88. What does selling short a stock means?

a) Seller owns the stock he is supposed to deliver

b) Seller has sufficient time to deliver the stock which he sold
c) Seller does not own the stock he is supposed to deliver
d) Seller has to deliver the stock within a short time

Question89. All the trades and open positions on a derivative exchange are guaranteed by the
Clearing Corporation and it becomes a legal counterparty.

a) TRUE
b) FALSE

Question90. Mark-to-Market margins are collected on a basis.

a) monthly
b) weekly
c) Bi weekly ie. Mondays and Thursdays
d) Daily

Question91. STT means –

a) Stock Trading Tax

b) Stock Transaction Tax
c) Securities Transaction Tax
d) Securities Trading Tax

Question92. Of the below options, when will the April index future contract be introduced on NSE?

a) On the 1st trading day after last Thursday in March

b) On the 1st trading day after last Friday in March
c) On the 1st trading day after last Thursday in January
d) On the 1st trading day after last Friday in January

Question93. Main objectives of Trade Guarantee Fund (TGF) are :

a) To protect the interest of the investors in securities.

b) To inculcate confidence in the minds of market participants.
c) To guarantee settlement of bonafide transactions of the members of the exchange.
d) All of the above
Question94. Initial Margin is –

a) The margin which is paid when a trading member starts his business
b) The Margin which is paid at the time of buying shares in the spot market.
c) The margin which a trading member needs to pay when applying for membership
d) The margin which is paid at the time of entering futures contract

Question95.In India, the derivatives product can be traded by

a) Brokers of NSE / BSE

b) SEBI registered brokers
c) SEBI registered brokers for trading in derivatives
d) All of the above

Question96.Mr. Banerjee sells a put option of a higher strike price and buys a put option of a lower
strike price, both on the same share and same expiration. This strategy is called

a) Bearish Spread
b) Bullish Spread
c) Calendar Spread
d) Straddle

Question97. As per the rules, the minimum networth of clearing members who handle and
clears/settles only deals executed by him is higher than those clearing members who handle
institutional trades.

a) FALSE
b) TRUE

Question98. Beta is a measure of systematic risk of a security that cannot be avoided through
diversification.

a) TRUE
b) FALSE

Question99. You have bought a CALL of Ambuja Cements of Strike price of Rs 200 of January. To
close the position, you will Sell a CALL of same strike price of January. True or False ?

a) FALSE
b) TRUE
Question100. A long position in a PUT option can be closed by taking a short position in the CALL
option.

a) TRUE
b) FALSE

Answers

1 .Correct Answer : No

Answer 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.

The above example is not a Calendar spread because here we have the same expiry ie. March series.
Also the spread has to be done by the same client.

2. Correct Answer : : (A + B) / B

Answer Explanation : The adjustment factor for :

Bonus Ratio – A: B Adjustment factor: (A+B)/B

Stock Splits and Consolidations Ratio – A: B Adjustment factor: A/B

Right Ratio – A: B and Issue price of rights is S. Adjustment factor: (P-E)/P Where P =

Spot price on last cum date E = (P-S) x A / (A+B)

3. Correct Answer : : Rs 15

Answer Explanation : The Rs 195 strike price call option settlement price is Rs 220 - So there is profit
of Rs 25 (220 - 195 ) He has paid Rs 10 as premium, so his net profit will be Rs 15 ( 25 - 10 )

4. Correct Answer : : the daily mark to mark settlement price

5. Correct Answer : : Both BSE and NSE

Answer Explanation : SEBI has allowed physical settlement of futures transactions. OTCEI (Over the
Counter Exchange of India) is no longer functional.

6. Correct Answer : : TRUE

7. Correct Answer : : Large

8. Correct Answer : Buying and selling Options

Answer Explanation : A bull spread is created when the underlying view on the market is positive but
the trader would also like to reduce his cost on position. So he takes one long call position with
lower strike and sells a call option with higher strike.

9. Correct Answer : : 5000 , 100000

10. Correct Answer : : Dealer

Answer Explanation : In the Futures and options trading software, trading member will have a
provision of defining the hierarchy amongst users of the system. This hierarchy comprises:

- Corporate Manager

- Branch Manager and

- Dealer

11 .Correct Answer : : No

STT - Securities Transaction Tax is paid only by the seller in case of derivative contracts.
12. Correct Answer : : Adding both - his proprietary positions and all his clients net outstanding
positions

13. Correct Answer : : Buy ICICI Put Option

Buying a Put option means he has gone bearish. So any fall in ICICI Bank shares will result in profits in
the Put option contract and this will negate the loss in cash market.

14. Correct Answer : : Bear Spread

In a bear spread, the trader is bearish on the market and so he shorts a low strike high premium call
option. The risk in a naked short call is that if prices rise, losses could be unlimited. So, to prevent his
unlimited losses, he longs a high strike call and pays a lesser premium.

15. Correct Answer : : its premium and intrinsic value

Option premium consists of two components ‐ intrinsic value plus the time value.

So the time value can be known by the difference in option premium and intrinsic value

16. Correct Answer : individual warrant options

17. Correct Answer : -13000

There will be a negative pay off as there is loss.

Rs 100 - Rs 87 = Rs 13 x 1000 lot size = Loss of Rs 13000.

18 . Correct Answer : Strike Price

Strike price or Exercise price is the price per share for which the underlying security may be
purchased or sold by the option holder.
19. Correct Answer : FALSE

Derivatives are ideally used as a hedging product and not investment products. Also, as a stand
alone investment, they can prove to be very risky. So investors who do not want to take risks, senior
citizens etc. should not trade / invest in derivative products.

20. Correct Answer : TRUE

Speculators try to predict the future movements in prices of stocks, commodities, currencies etc.
and accordingly buy or sell. There is risk in such activities but the speculators take these risks in
order to make profits.

21. Correct Answer : SEBI approved Clearing Corporation / Clearing House

Clearing Corporation/ Clearing House is responsible for clearing and settlement of all trades
executed on the F&O Segment of the Exchange. The clearing and settlement of derivatives trades
would be through a SEBI approved clearing corporation /house. Clearing corporations/houses
complying with the eligibility conditions as laid down by the L. C. Gupta committee have to apply to
SEBI for grant of approval.

22. Correct Answer : two differently delivery months and same underlying asset

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. For instance, a short position in
near month contract coupled with a long position in far month contract is a calendar spread
position.

23. Correct Answer : TRUE

Option premium consists of two components - intrinsic value and time value. Option premium is the
sum of intrinsic value and time value.

Time value is the difference between premium and intrinsic value. ATM and OTM options will have
only time value because the intrinsic value of such options is zero.

24. Correct Answer : Spread trade

In case of a Spread Trade, two opposite positions (one long and one short) are taken either in two
contracts with same maturity on different products or in two contracts with different maturities on
the same product.

25. Correct Answer : FALSE

Rho is the change in option price given a one percentage point change in the interest rate.

26. Correct Answer : Decrease

Lower the volatility lower the risk and so lower the premium.

The stocks which are highly volatile will have comparatively higher option premiums as there
involves a lot of risk trading in such stocks.

27. Correct Answer : FALSE

Investors who believe that the markets will fall are known as Bears.

28. Correct Answer : daily basis

In the futures and options market, profits and losses are settled on day-to-day basis – called mark to
market (MTM) settlement.

The exchange collects these margins (MTM margins) from the loss making participants and pays to
the gainers on day-to-day basis.

Therefore all option positions - for both Index and Stocks are marked to market on a daily basis.

29. Correct Answer : TRUE

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

30. Correct Answer : 8

Loss incurred on derivatives transactions which are carried out in a recognized stock exchange can
be carried forward for a period of 8 assessment years.

31. Correct Answer : can be cancelled if the counter party also agrees to it

Forwards are negotiated between two parties and the terms and conditions of contracts are
customized.

Any alteration in the terms of the contract or cancellation of the contract is possible if both parties
agree to it.

32. Correct Answer : Yes

Clearing member is required to provide liquid assets which adequately cover various margins and
liquid Net-worth requirements.

He may deposit liquid assets in the form of cash, bank guarantees, fixed deposit receipts, approved
securities and any other form of collateral as may be prescribed from time to time.

33. Correct Answer : TRUE

The premium paid is adjusted against the exercise price on settlement, if the option is exercised on
maturity.

34. Correct Answer : Rs. 50 lakhs

A Clearing Member has to deposit Rs. 50 lakhs with the clearing corporation which forms part of the
security deposit of the Clearing Member.

35. Correct Answer : He does not own the stock he is supposed to deliver

Selling Short means Seller does not own the stock he is supposed to deliver.

36. Correct Answer : protective put

Any investor in stocks always runs the risk of a fall in prices and thereby reduction of portfolio value.
By buying put options, the investor is effectively taking a bearish view on the market and
if his view turns right, he will make profits on long put, which will be useful to negate the

MTM losses in the cash market portfolio.

37. Correct Answer : TRUE

Generally, a shortage / scarcity of any commodity will lead to a rise in the spot as well as futures
prices.

For eg. A drop in the manufacturing of oil by OPEC will lead to a rise in the international oil prices.

38. Correct Answer : At a price which is within the daily circuit filter limits

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.

39. Correct Answer : Increase the premium on the put option

Low interest rates means low cost of capital and this will result in a decrease in the value of a call
option and an increase in the value of a put option.

40. Correct Answer : Rs.480000

Value of a futures contract is the price multiplied by the contract size.

In the above question :

3200 * 150 = Rs.480000

41. Correct Answer : does not have any trading rights

Professional clearing member is not a Trading Member of the exchange and does not have trading
rights.

When the price of a future contract increases, the margin account

42. Correct Answer : Both 1 and 2

The buyer of futures will have a notional gain and so his margin account will be credited by the
notional gain amount.

The seller of futures will have a notional loss if the price rises and his margin account will be debited
by the notional loss amount.

43. Correct Answer : FALSE

Theta : It is a measure of an option’s sensitivity to time decay. Theta is the change in option price
given a one-day decrease in time to expiration.

Vega : This is a measure of the sensitivity of an option price to changes in market volatility.

44. Correct Answer : TRUE

The higher strike price would have a lower call option premium because the intrinsic value is low or
nil.

45. Correct Answer : 9000

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 Rs 9000

46. Correct Answer : TRUE

In-the-money options have positive 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.

47. Correct Answer : is a basket of stocks

Stock Index like Nifty and Sensex consists of a basket of stocks and so its very difficult / almost
impossible to manipulate the index.
48. Correct Answer : TRUE

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 the 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)

49. Correct Answer :TRUE

Futures are standardized contracts introduced by the exchanges. They have certain

limitations in the context of limited maturities, limited underlying set, lack of flexibility in

contract design and increased administrative costs on account of MTM settlement etc.

Forward contracts are customised between two parties and there is complete flexibility in

designing the contract specifications as per mutual consent.

50. Correct Answer :Tick size is the minimum permitted movement in the price of the contract

Tick Size is the minimum move allowed in the price quotations.

51. Correct Answer : Both 1 and 2

Derivatives Market serves following specific functions:

- Derivatives market helps in improving price discovery based on actual valuations and

expectations.

- 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. For example hedgers

want to give away the risk where as traders are willing to take risk.

- Derivatives market helps shift of speculative trades from unorganized market

to organized market. Risk management mechanism and surveillance of activities

of various participants in organized space provide stability to the financial system.

52. Correct Answer : The Central Government

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

India.

53. Correct Answer : Last Thursday in June

On BSE and NSE, the expiry day is the last Thursday of the expiry month. If the last

Thursday is a trading holiday, then the expiry day is the previous trading day.

54. Correct Answer : FALSE

A call option gives its holder the right to buy ONLY THE SPECIFIED QUANTITY (lot size of the option
contract) of the underlying asset from the writer of the call option at a pre-specified price.

55. Correct Answer : FALSE

The margin requirement is same for both individual investors and institutional investors.

56. Correct Answer : FALSE

American options are generally valued higher than European options.

American options allow option holders to exercise the option at any time prior its maturity date,
thus increasing the value of the option to the holder relative to European options, which can only be
exercised at maturity.

57. Correct Answer : TRUE

A short position in a PUT option can be closed out by taking a long position in a same

PUT option with same exercise date and exercise price.

58. Correct Answer : Higher the volatility, Higher the initial margin

If the stock is very volatile it could result in looses to the trader in a short period of time.

So to safe guard the trading member and the trader, higher initial margin are levied on volatile
stocks.

59. Correct Answer : TRUE

Longer the maturity of a contract, higher is the interest cost / cost of carry. So, in a normal market,
the contracts having longer time to maturity trade at a higher price.

Option contracts can be settled

60. Correct Answer : in cash or settled by delivery depending on the terms of the contract

61. Correct Answer : TRUE

Trading Member: They are members of Stock Exchanges. They can trade either on behalf of their
clients or on their own account.

Trading cum Clearing Member: A Clearing Member (CM) who is also a Trading Member (TM) of the
exchange. Such CMs may clear and settle their own proprietary trades, their clients' trades as well as
trades of other TM's & Custodial Participants

62. Correct Answer : Positively

Exposure levels of Clearing Members are positively correlated with the Liquid Assets maintained
with the Clearing Corporation. More the liquid assets deposited with the Clearing Corporation,
higher will be the exposure levels available to the Clearing Member.

63. Correct Answer : FALSE

Vega is a measure of the sensitivity of an option price to changes in market volatility.

Gamma measures change in delta with respect to change in price of the underlying asset.
64. Correct Answer : FALSE

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.

65. Correct Answer : FALSE

Liquidity in the context of stock market means a market where large orders are executed without
moving the prices.

So if there are more the participants, higher should be the liquidity.

66. Correct Answer : Decreases

The buyer of a Put Option is bearish. He believes that the price of the underlying will fall.

When the price falls, the value of the put option rises. So he will benefit only if the price decreases.

67. Correct Answer : All of the above

Futures contract are standardised in terms of size of the contract, time to expiry etc. They are always
traded on a recognised exchange and the settlement is through a clearing corporation.

68. Correct Answer : Claims regarding unauthorized transaction in the client’s account

Complaints against trading members on account of the following can be taken by an

Exchange for redressal :

- Non-receipt of funds / securities

- Non- receipt of documents such as member client agreement, contract notes, settlement of
accounts, order trade log etc.

- Non-Receipt of Funds / Securities kept as margin

- Trades executed without adequate margins

- Delay /non – receipt of funds

- Squaring up of positions without consent

- Unauthorized transaction in the account

- Excess Brokerage charged by Trading Member / Sub-broker

- Unauthorized transfer of funds from commodities account to other accounts etc.

69. Correct Answer : cannot be attached for meeting broker’s obligation on his proprietary account

The securities or money deposited by clients cannot be attached for meeting broker’s obligation on
his proprietary account.

The broker has to maintain separate client bank account for segregation of client money.

Also brokers should keep margins collected from clients in a separate bank account.

70. Correct Answer : As soon as the market price of ABC touches Rs. 450

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.

71. Correct Answer : cash settlement on maturity

Index futures are always cash settled on maturity i.e. the difference between trade price and
settlement price is received or paid.

72. Correct Answer : Sell index futures

In case of a negative news like fall of a Government, the stock markets generally fall. Its difficult to
judge which stocks will fall more. So, the best way is to short the index futures as the index is bound
to fall in response to a negative news and the active trader can profit from it.

73. Correct Answer : TRUE

Cash dividends issued by stocks have a impact on their option prices. This is because the underlying
stock price is expected to drop by the dividend amount on the ex-dividend date.

In case of call options, the values get reduced / discounted by as much as the dividend amount.

Put options get more expensive as the stock price will drop by the dividend amount after the ex-
dividend date.

74. Correct Answer : TRUE

Once SEBI has approved the approves bye-laws / rules etc. of a derivative exchange, the exchange is
free to introduce futures contracts on any number of stocks in accordance to the approved rules and
it does not have to go to SEBI every time for approval.

75. Correct Answer : FALSE

Mark to Market is a process by which margins are adjusted on the basis of daily price changes in the
markets for underlying assets. So this margin is as per the daily price movements.

Initial margin is usually fixed depending on the price volatility. Higher the volatility, higher the initial
margin.

76. Correct Answer : Income

On exercise of the option, the buyer/ holder will receive favourable difference, between the final
settlement price as on the exercise/expiry date and the strike price, which will be recognised as
INCOME.

77. Correct Answer : -30000

Mr. A sold a PUT option, that means he has a bullish or neutral view on PQR stock.

However, ABC stock has fallen by Rs 50 ( 300 - 250 ).

Which means he has lost Rs 50.

Since he has sold a PUT, he will receive the premium which is Rs 20.

So his net loss will be Rs 50 (Loss) - Rs 20 (Premium Recd) = Rs 30

Total Loss = Rs 30 x 1000 (lot size) = Rs. 30000

78. Correct Answer : Always the same

An European option can only be exercised on the expiry date/day of the contract. So in an European
option the exercise date and expiration date is always the same. An American option can be
exercised on any day.

79. Correct Answer : Long position

Opening a position means either buying or selling a contract, which increases client’s open position
(long or short).

Opening a Buy transaction means creating or adding LONG positions with a view that the price will
increase.

80. Correct Answer : There is transparency in trade execution and execution price

Screen based (Trading thro' computers) trading is fully transparent.

81. Correct Answer : They add to the liquidity to the futures markets

Speculators are typically risk-taking investors with expertise in the market(s) in which they are
trading.

Speculators take large risks, especially with respect to anticipating future price movements, in the
hope of making quick gains. They trade quiet frequently and so add to the liquidity of the markets.

82. Correct Answer : Risk level of a financial portfolio

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.

83. Correct Answer : 400

For a member ie. Stock Broker, the liability will be the sum of all the contracts of all his clients. The
contracts cannot be netted in between two clients. So in this case the sum of contracts is 100 + 300 =
400 contracts.
84. Correct Answer : No

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

85. Correct Answer : TRUE

86. Correct Answer : Place a stop loss sell order for 200 shares Rs.830 per share

Mr. Kailash will make a loss if the price of ABC Industries fall. His loss bearing capacity is Rs 4000.
Therefore 4000 / 200 shares = Rs 20.

So if the shares fall by Rs 20, he will make a loss of Rs 4000.

850 - 20 = 830. Therefore 830 will be his stoploss price and he will place a stoploss order at

Rs 830.

87. Correct Answer : In the money option

In an In The Money Option, the strike price is better than market price. Such options have both
Intrinsic Value and Time Value.

88. Correct Answer : Seller does not own the stock he is supposed to deliver

89. Correct Answer : TRUE

Clearing Corporation or the Clearing House 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.

The Clearing and Settlement process comprises of three main activities, viz., Clearing, Settlement
and Risk Management.
90. Correct Answer : daily

In the futures market, profits and losses are settled on day-to-day basis – called mark to market
(MTM) settlement.

The exchange collects these margins (MTM margins) from the loss making participants and pays to
the gainers on day-to-day basis.

91. Correct Answer : Securities Transaction Tax

Securities Transaction Tax (STT) is payable by the Trading Members / Brokers on the stock market
transactions and this is collected from their clients.

92. Correct Answer : On the 1st trading day after last Thursday in January

There are always 3 contracts running. So for eg. we will have Jan-Feb-Mar contracts trading in
January.

When January contracts expire on last Thursday of January, on Friday the April contracts will be
introduced and so we will have Feb-Mar-April contracts.

93. Correct Answer : All of the above

94. Correct Answer : The margin which is paid at the time of entering futures contract

The amount one needs to deposit in the margin account at the time entering a futures contract is
known as the initial margin.

95. Correct Answer : SEBI registered brokers for trading in derivatives

Special permission has to be taken from SEBI for trading in derivatives.

96. Correct Answer : Bullish Spread

Bullish Spread using Puts - the call on the market is bullish, hence, the trader would like to short a
put option. If prices go up, trader would end up with the premium on sold puts.

However, in case prices go down, the trader would be facing risk of unlimited losses. In order to put
a floor to his downside, he may buy a put option with a lower strike. While this would reduce his
overall upfront premium, benefit would be the embedded insurance against unlimited potential loss
on short put. This is a net premium receipt strategy.

97. Correct Answer : FALSE

98. Correct Answer : TRUE

Beta is a measure of systematic risk of a security that cannot be avoided through diversification.
Hedge against the systematic risk mainly depends upon the relationship of portfolio with the index,
which is measured by beta.

99. Correct Answer : TRUE

When you buy a CALL option, it can only be squared up by selling the same CALL option.

100. Correct Answer : FALSE

A long position in any option can be closed by selling that option and not in any other way.

So a long position in a PUT option can be closed by selling that PUT option.
 Numerical

1. Mr. Ashu has bought 100 shares of ABC at Rs 980 per share. He expects the price to up but wants
to protect himself if price falls. He does not want to lose more than Rs. 1000 on this long position in
ABC. What should Mr. Ashu do?

(a) Place a stop loss order for 100 shares of ABC at Rs 990 per share

(b) Place a stop loss order for 100 shares of ABC at Rs 970 per share

(c) Place a limit buy order for 100 shares of ABC at Rs 990 per share

(d) Place a limit sell order for 100 shares of ABC at Rs 970 per share

Correct Answer : Place a stop loss order for 100 shares of ABC at Rs 970 per share

Answer Explanation Mr. Ashu will lose Rs 1000 if the ABC share will fall by Rs 10 as he has 100 shares
and a 10 rupee fall will lead to Rs 1000 loss. He has bought at Rs 980. So he will put the stop loss
order at Rs 970 (980 - 10).

2. 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 ?

(a) Selling 1 May Nifty futures contract at 5700

(b) Buying 1 May Nifty futures contract at 5700

(c) Buying 1 May Nifty futures contract at 5500

(d) Selling 1 May Nifty futures contract at 5500

Correct Answer Buying 1 May Nifty futures contract at 5500

Answer 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.
 3. 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?

(a) 206

(b) 196

(c) 49

(d) NIL

Correct Answer 196

Answer 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

4. You have bought a CALL of ITC Ltd. of Strike price of Rs 200 of January. To close the position,
you will SELL a PUT of same strike price of January. True or False ?

(a) FALSE

(b) TRUE

Correct Answer FALSE

Answer Explanation : If you have bought a CALL option, then to close the position you will
have to sell a CALL option Rs 200 strike price.

5. Mr Prashant has bought one lot of ABC futures for Rs 75 (lot size 2000) expecting that
this share will go up. But he also wants to protect himself against any loss of more than
Rs 3000. What should he do ?
(a) Put a stop loss sell order at Rs 74
(b) Put a stop loss sell order at Rs 73.5
(c) Place a buy order for 2000 shares of ABC at Rs.76.50 per
(d) None of the above

Correct Answer Put a stop loss sell order at Rs 73.5

Answer Explanation : Mr. Prashant has bought one lot ie. 2000 shares and does not want to
have a loss of more than Rs 3000. So 3000 / 2000 = Rs 1.50. So per share he should not lose
more than Rs 1.50.
His buying price is Rs 75. So 75 - 1.50 = 73.50 will be his stop loss price price.
When the share falls to Rs 73.50 , he will stand to lose Rs 3000.

6. In an Index Futures contract, the tick size is 0.2 of an index point & the index multiple is Rs 50,
then a tick is valued at _________

(a) Rs 50

(b) Rs 100

(c) Rs 10

(d) Rs 2.50

Correct Answer : Rs 10

Answer Explanation : Rs 50 X 0.2 = Rs 10.

7. Each tick movement will result in profit or loss of Rs 10 for the Index buyer or seller resp. A trader
sold on ABC Stock Futures Contract at Rs.354 & the lot size is 900. What is your profit or loss if you
purchase the contract back at Rs.341 ?

(a) Rs 11700

(b) - Rs 11700 (Loss)

(c) Rs 8300

(d) - Rs 8300 (Loss)

Correct Answer : Rs 11700

Answer Explanation : He sold at Rs 354 and bought back at Rs 341 which means he has made a
profit. Rs 354 - Rs 341 = Rs 13

Rs 13 X 900 (Lot size) = Rs 11700 Profit

8. Investor Mr. X wants to sell 11 contracts of Feb series at Rs.6300 & investor Mr. Y wants to sell 13
contracts of March series at Rs.6450. Lot size is 50 for both these contracts. The initial margin is fixed
at 6%. How much initial margin is required to be collected from both these investors(sum of initial
margin of X and Y) by the broker?

(a) Rs 251550
(b) Rs 459450

(c) Rs 640000

(d) Rs 374900

Correct Answer : Rs 459450

Answer Explanation : Margin from Mr. X

Rs 6300 X 11 contracts X 50 (lot size) X 6% = 207900

Margin from Mr. Y Rs 6450 X 13 contracts X 50 (lot size) X 6% = 251550

Total Margin = 207900 + 251550 = 459450.

9. A trader has taken a short position of one contract in Sept ABC futures (contract multiplier 50) at a
price of Rs.1800. When he closed this position after a few days, he realized that he has made a profit
a Rs.5000. Which of the foll closing actions would have enabled him to generate the profit?( Please
ignore brokerage costs) .

(a) Buying 1 Sept ABC futures contract at 1900

(b) Buying 1 Sept ABC futures contract at 1700

(c) Selling 1 Sept ABC futures contract at 1900

(d) Selling 1 Sept ABC futures contract at 1700

Correct Answer : Buying 1 Sept ABC futures contract at 1700

Answer Explanation : To make a profit of Rs 5000, he has to earn Rs 100 per share ( 5000 / 50 (lot
size) = 100 )

Since he has gone short, he will make a profit when the price falls and he buys at the reduced price.
He has sold at Rs 1800, so when he buys back at Rs 1700 he make Rs 100 profit per share. Rs 100 X
50 ( Lot size ) = Rs 5000 profit.

10. Which of the following is closest to the forward price of a share if cash price is Rs 425, forward
contract maturity=12 months from date, market interest rate 12%

(a) 425

(b) 482

(c) 476

(d) 437

Correct Answer : 476

Answer Explanation : 12 months maturity means full one year of interest cost.
So 12% of 425 = 425 x 12 / 100 = 51

425 + 51 = 476 is closest to the one year forward price

11. You sold a Put option on a share. The strike price of the put was Rs245 and you received a
premium of Rs 49 from the option buyer. Theoretically, what can be the maximum loss on this
position?

(a) 196

(b) 206

(c) 0

(d) 49

Correct Answer : A

12. Current Price of XYZ Stock is Rs 286. Rs. 260 strike call is quoted at Rs 45. What is the Intrinsic
Value?

(a) 19

(b) 26

(c) 45

(d) 0

Correct Answer : B

13. An option with a delta of 0.5 will increase in value approximately by how much, if the underlying
share price increases by Rs2?

(a) Rs 1

(b) Rs 2

(c) Rs 4

(d) There would be no change

Correct Answer : A

14. Mr. X purchases 100 put option on stock S at Rs 30 per call with strike price of Rs 280. If on
exercise date, stock price is Rs 350, ignoring transaction cost, Mr. X will choose _____________.

(a) To exercise the option

(b) Not to exercise the option

(c) May or may not exercise the option depending on whether he is in his hometown or not at that
time

(d) May or may not exercise the option depending on whether he like the company S or Not

Correct Answer : B

15. A trader has bought 100 shares of XYZ at Rs 780 per share. He expects the price to go up but
wants to protect himself if the price falls. He does not want to lose more than Rs1000 on this long
position in XYZ. What should the trader do?

(a) Place a limit sell order for 100 shares of XYZ at Rs 770 per share

(b) Place a stop loss sell order for 100 shares of XYZ at Rs770 per share

(c) Place a limit buy order for 100 shares of XYZ at Rs 790 per share

(d) Place a limit buy order for 100 shares of XYZ at Rs770 per share

Correct Answer : B

16. Trader A wants to sell 20 contracts of August series at Rs 4500 and Trader B wants to sell 17
contracts of September series at Rs 4550. Lot size is 50 for both these contracts. The Initial Margin is
fixed at 6%. How much Initial Margin is required to be collected from both these investors (sum of
initial margins of A and B) by the broker?

(a) 2,70,000

(b) 5,02,050

(c) 2,32,050

(d) 4,10,000

Correct Answer : B