Derivative Short Notes Final(1).pdf

PREFACE

Welcome to PTA Thanks for choosing PTA as your guide to help you in NCFM certification Professional Training Academy is an advanced research institute promoted by Mr. Rohan Sharma ACS. PTA specializes in financial market education and services. PTA is introducing preparatory classes and study material for Stock Market Courses of NSE, NISM and CFP certification. PTA train persons like Dealers / Arbitrageurs, Financial Market Traders, Marketing Personals, Research Analysts and Managers. We are constantly engaged in providing a unique educational solution through continuous innovation. Wish you Luck…………. Faculty and Content Team, PTA

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DERIVATIVE MARKET (DEALERS) MODULE Distribution of weights of the Derivative Market (Dealers) Module curriculum Chapter no. 1 2 3 4 5 6 7 8 9 10

Title Introduction To Derivatives Understanding Interest Rates And Stock Indices Futures Contracts, Mechanism And Pricing Application Of Future Contracts Option Contracts, Mechanism And Applications Pricing Of Options Contracts And Greek Letter Trading Of Derivative Contracts Clearing & Settlement Regulatory Framework Accounting For Derivative

Weights 5 5 5 10 10 10 20 20 10 5

Exam Pattern Test duration No. of Question Maximum Marks Pass% Negative Marking

120 Min. 60 100 60 25%

Key to Success 

Never attempt all question due to negative marking.



If any confusion in any question kindly leave the question.



Always attempt the question first in which you are confident.



The average question attempted is around 85%.



Always get an confirmation that 75% question are attempted correctly



Before submit the paper get a re-total of the question attempted

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INDEX 1. INTRODUCTION TO DERIVATIVE……………………………………………4

2. UNDERSTANDING INTEREST RATES AND STOCK INDICES………….13 3. FUTURES CONTRACTS, MECHANISM AND PRICING ………………....22 4. AAPLICATION OF FUTURE CONTRACTS………………………………....30

5. OPTION CONTRACTS, MECHANISM AND APPLICATION.…………….38

6. PRICING OF OPTION CONTRACTS AND GEEK LETTERS.…………….47 7. TRADING OF DERIVATIVE CONTRACTS ………………………………...52 8. CLEARING & SETTLEMENT…………………………………………………66

9. REGULATORY FRAMEWORK……………………………………………….83 10. ACCOUNTING FOR DERIVATIVES………………………………………....92

A. MOCK TEST ...………………………………………………………………..99 B. SAMPLE QUESTION PAPER …………………………………………….109

11. COURSES OFFERED………………………………………………………….120

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CHAPTER 1 INTRODUCTION TO DERIVATIVES 1.

Derivatives Defined a. Derivative is a product whose value is derived from the value of one or more basic variables, called bases (underlying asset, index, or reference rate), in a contractual manner. b. Underlying asset – equity, forex, commodity or any other asset

2. Derivative Products a. Forwards: - contract between two entities -

Settlement takes place on a specific date

-

Today‟s pre-agreed price

b. Futures: - agreement between two parties -

buy or sell an asset at a certain time in future at a certain price

c. Options :- two types- calls and puts -

Calls give the buyer the right but not the obligation to buy

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Puts give the buyer the right, but not obligation to sell a given quantity of the underlying asset at a given price

d. Warrants:- options generally have lives of upto one year -

Longer –dated options are called warrants

e. Leaps:- Long –Term Equity Anticipation Securities. -

Options having a maturity of upto three years

f. Baskets:- options on portfolio of underlying assets -

Equity index options are a form of basket options

g. Swaps:-

agreement between two parties to exchange cash flows in future

according to a prearranged formula -

Interest Rate Swaps:- interest related cash flows between the parties in the same currency

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Currency Swaps:- swapping both principal and interest between the parties

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cash flow in one direction

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currency than those in the opposite direction

h. Swaptions:- options to buy or sell a swap that will become operative at the expiry of the options

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-

A receiver swaption is an option to receive fixed and pay floating

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A payer swaption is an option to pay fixed and receive floating

Exchange –Traded vs. OTC Derivatives Market a. The management of counter –party (credit) risk is decentralized b. No formal centralized limits on individual positions c. No formal rules for risk and burden –sharing d. No formal rules or mechanisms for ensuring market stability and integrity e. OTC contracts are generally not regulated by a regulatory authority 3. History of Derivatives Trading at NSE -

Derivatives trading on the NSE commenced on June 12, 2000

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Trading in Index Options commenced June 4, 2001

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Trading in Options on Individual securities commenced on July 2, 2001

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Single stock future were launched on November 9, 2001

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NSE is the largest derivatives exchange in India

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Three contracts are available for trading – with 1 month, 2 months, and 3 months expiry

CBOT- Chicago Board of Trade in 1848 (Forward Market) Exchange Traded listed in 1865 CME - Chicago Mercantile Exchange (Future Market) CBOE – in 1973, the Chicago Board of Trade created the Chicago Board Option Exchange (CBOE) Underlying Assets Equity

Exchange –traded futures Index future Stock future

Exchange traded options Index option Stock option

4. Participants in the Derivative Markets a. Hedgers:- face risk associated with the price of an asset b. Speculators:- wish to bet on future movements in the price of an asset c. Arbitrageurs:- business to take advantages of a discrepancy between price in two different markets 5. Economic Function of the Derivative Market a. Price in an organized derivative market reflect the perception of market participants about the future

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b. Derivatives market helps to transfer risks c. Due to their inherent nature, are linked to the underlying cash markets d. Speculative trades shift to a more controlled environment of derivatives market. e. It act as a catalyst for new entrepreneurial activity 6. Factors Driving the Growth of Derivatives a. Increased volatility in asset price b. Increase integration of national financial markets with international market c. Marked improvement in communication facilities d. Development of more sophisticated risk management tools e. Innovation in the derivatives market

QUESTIONS 1. Future trading commenced first on …………. a. Chicago Board of Trade b. Chicago Mercantile Exchange c. Chicago Board Options Exchange d. London International Financial Futures and Options Exchange 2. The underlying asset for a derivative contract can be …………. a. Equity b. Commodities c. Interest Rate d. Any of the above 3. Derivative first emerged as …….. product a. Speculative b. Volatility c. Hedging d. Risky 4. a. b. c. d.

Who are the participants in the derivatives market? Hedgers Arbitrageurs Speculators . All of the above

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5. The first exchange traded financial derivative in India commenced with the trading of a. Index futures b. Stock options c. Index options d. Interest rate futures 6. OTC derivatives are considered risky because _____________. a. There is no formal house margining system. b. They are not settled on a clearing c. They do not follow any formal rules or mechanisms. d. All of the above 7. Which of the following is not an example of a derivative on security derivative? a. Index futures b. Stock futures c. Index options d. Interest rate futures 8. Derivatives includes…..? a. Forward b. Future c. Options d. All of the above 9. Which of the following is not included in Derivative? a. Forward b. Spot c. Future d. Swap 10. A Contract derives its value from the ………? a. Prices of underlying securities b. Index of price of underlying securities c. Both a & b d. None of the above 11. Derivatives are governed by…….? a. Income tax Act b. RBI Act c. Securities Contract Regulation Act d. None of the above 12. Which of the following is not included in Underlying Assets? a. Physical Asset b. Commodity c. Currency d. Index

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13. Which of the following is included in Underlying Assets? a. Commodity b. Currency c. Equity d. All of the above 14. Which of the following contract is carried outside the stock exchange? a. Swap b. Futures c. Options d. Forward 15. Derivatives product initially emerged as ……….. devices against fluctuations in commodity prices a. Speculation b. Hedging c. Investment d. Arbitrage 16. An Instrument, to be settled at a future date, whose value is derived from change in? a. Interest rate b. Equity c. Credit rating d. All of the above 17. Future contracts not have features like ……? a. Standardized b. Traded on exchange c. Agreement between private parties d. Settlement taken place by clearing corporation 18. In which options buyer have right but not the obligation to buy a given quantity of the underlying asset. a. Call b. Put 19. In which options buyer have right but not the obligation to sell a given quantity of the underlying asset. a. Call b. Put 20. Equity index option is a form……..? a. Futures b. Options c. Forward d. Baskets 21. In interest rate swap only the interest related cash flow between the parties in the …….currency?

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a. Same currency b. Different currency 22. A receiver swaption is an option to receive ……. and pay……..? a. Floating, Fixed b. Fixed, Floating c. Floating, Floating d. Fixed, Fixed 23. A payer swaption is an option to receive ……. and pay……..? a. Floating, Fixed b. Fixed , Floating c. Floating, Floating d. Fixed, Fixed 24. Growth drivers of derivatives are ……? a. Increased volatility in asset prices b. Increase integration of national market with international markets c. Development of risk tools d. All of the above 25. Long position is considered for….? a. Buyer of the contract b. Seller of the contract 26. Short position is considered for….? a. Buyer of the contract b. Seller of the contract 27. Who gives guarantee to all transaction and counter party risk is eliminated? a. Exchange b. SEBI c. Depository d. None of the above 28. Which of the contract are trades over the counter? a. Forward Contracts b. Future Contracts c. Options d. None of the above 29. ……..give the buyer a right but not an obligation to buy or sell an asset in future? a. Forward b. Future c. Options d. Swaps 30. Options give the ………. a right but not an obligation to buy or sell an asset in future?

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a. Buyer b. Seller 31. The seller of the option is known as? a. Seller of option b. Buyer of the options c. Options Writer d. None of the above 32. An option can be exercised at the expiry of the contract period? a. American Option b. European Option 33. An option exercised any time up to the expiry of the contract period? a. American Option b. European Option 34. ………..are private agreements between two parties to exchange cash flows in the future according to a prearranged formula. a. Forward b. Future c. Options d. Swaps 35. Derivatives that traded on an exchange a. OTC b. Spot c. Forward d. Exchange traded derivatives 36. Exchange traded derivative include? a. Currency b. Commodity c. Equity d. All of the above 37. Exchange traded derivatives not include? a. Forwards b. Swaps c. Interest rate contract d. All of the above 38. Exchange traded derivatives contain? a. Standardized contract b. Definite life span (Expiry) c. No counter party risk d. All of the above

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39. OTC derivatives have following features? a. Counter party risk is decentralized b. No formal rules for risk c. Not regulated by authority or exchange d. All of the above 40. Derivative on the NSE commenced on….? a. 1848 b. 1958 c. 2000 d. 1919 41. First derivative traded on the NSE was…? a. Index Future b. Stock Future c. Stock Option d. Index Option 42. The derivative contracts have a maximum of …..month expiration. a. 6 b. 3 c. 9 d. 12 43. ………. Is the largest derivative exchange in India? a. BSE b. OTC c. MCX d. NSE 44. NSE launched last derivative product in India. a. Index Future b. Stock Future c. Stock Option d. Index Option 45. Forward contracts are fist introduced in……? a. NSE b. CBOT c. CME d. MCX 46. Future contract first introduced in ….? a. NSE b. CBOT c. CME d. MCX 47. Foreign currency futures are introduced in ….?

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a. b. c. d.

1919 by CBOT 1848 by CBOT 1972 by CME 1919 by CME

48. Option contract first introduced by..? a. USA b. Chicago c. India d. China 49. They take position in financial markets to earn riskless profits? a. Hedger b. Trader c. Speculator d. Arbitrager 50. Use the derivatives markets primarily for price risk management of assets and portfolios. a. Hedger b. Trader c. Speculator d. Arbitrager 51. Individuals take a view on the direction of the markets. a. Hedger b. Trader c. Speculator d. Arbitrager 52. First Stock index futures contract was traded at…? a. CBOT b. CME c. NSE d. Kansas city board of trade

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CHAPTER 2 UNDERSTANDING INTEREST RATES AND STOCK INDICES 1. Understanding Interest Rates - When people invest in financial markets (such as equity shares), returns on assets change continuously and lead to the fact that continuous compounding should be used - Interest rates are always quoted on per annum basis - Example:- What is the equivalent rate for continuous compounding for an interest rate which is quoted: a. 8% per annum semiannual compounding? b. 8% per annum annual compounding? Solution: I. 2In (1 + 0.08/2) = 0.078441 = 7.844% II. In (1+.08) = 0.07696 = 7.696% - Example:- A bank quotes you an interest rate of 10 % per annum with quarterly compounding. What is the equivalent rate when it is: a. Continuous compounding b. Annual compounding Solution: I. 4In (1 + 0.10/4) = 0.098770 = 9.877% II. [(1 + 0.10/4)4] – 1= 10.38% 2. Understanding the Stock Index - The base value of the nifty was set to 1000 start date of November 3, 1995 3. Market Index - Barometer for market behavior - Benchmark portfolio performance - Underlying in derivative instruments like index futures - Passive fund management by index funds 4. Economic Significance of Index Movements Every stock price moves for two possible reasons: -News about the company - News about the country 5. Types of Indexes a. Free Float Market Capitalization Weighted Index - The free float factor for each company in the index is determined based on the public shareholding of the companies as disclosed in the shareholding pattern - Free Float Market Capitalization = Issue Size * Price * Investible Weight Factor Index =

𝐹𝑟𝑒𝑒 𝐹𝑙𝑜𝑎𝑡 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑀𝑎𝑟𝑘𝑒𝑡 𝐶𝑎𝑝𝑖𝑡𝑎𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛 𝐹𝑟𝑒𝑒 𝐹𝑙𝑜𝑎𝑡 𝐵𝑎𝑠𝑒 𝑀𝑎𝑟𝑘𝑒𝑡 𝐶𝑎𝑝𝑖𝑡𝑎𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛

∗ 𝐵𝑎𝑠𝑒 𝑉𝑎𝑙𝑢𝑒

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- India Index Services Limited (IISL), a joint venture between the NSE and CRISIL, introduced the free float market capitalization methodology for its main four indices, viz., S&P CNX Nifty, S&P CNX Defty, CNX Nifty Junior and CNX 100 - May 4, 2009 CNX Nifty Junior and with effect from June 26, 2009, s&P CNX Nifty, CNX 100 and S&P CNX Defty are being calculated using free float market capitalization b. Price Weighted Index: - Each stock is given a weight proportional to its stock price c. Market Capitalization Weighted Index:-

Current Market Capitalization = Sum of (current market price * outstanding shares) of all securities in the Index Base Market Capitalization = Sum of (Market price * Issue Size) of all securities as on base date 5. Desirable Attributes of an Index - Capture the behavior of a large variety of different portfolios - Stocks included in the index should be highly liquid - Should be professionally maintained 6. The S&P CNX Nifty -Correct size to use is 50 -Stock considered for the S&P CNX Nifty must be liquid by the impact cost‟ criterion - Largest 50 stocks that meet the criterion go into the index S&P CNX Nifty- A contrast to the adhoc methods that have gone into index construction in the preceding years. - Diversification : stock market index should be well diversified - Liquidity of the index: index should be easy to trade on the cash market - Operational issues:- professionally maintained, with a steady evolution of securities in the index Nifty – uniquely equipped as an index for the index derivatives market - Low market impact cost - High hedging effectiveness - Good diversification of Nifty generates low initial margin requirement 7. Name of the indexes - Nifty, CNX IT, BANK Nifty, CNX Nifty Junior, CNX 100, Nifty Midcap 50, Mini Nifty 50

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They are owned , computed and maintained by India Index Services & Product Limited (IISL) - Set up by NSE and CRISIL with technical assistance from Standard & Poor‟s 8. Application of Index a. Index Derivatives - Most popular index derivative contracts – index futures, index options - Followed by Nifty options, derivative contracts on sectoral indexes like CNX IT and BANK Nifty Contracts. - Trading on index derivatives introduced on CNX Nifty Junior, CNX 100, Nifty Midcap 50 and Mini Nifty 50 b. Index funds - A fund that tries to replicate the index returns - Nifty index fund would seek to get the same return as the Nifty Index - Stock is proportional to its market capitalization, as in the case of Nifty c. Exchange Traded Funds - First existence in the USA in 1993 - $300 billion invested as of end 2001 in about 360 ETFs Globally. - About 60% of trading volume on the American Stock Exchange is form ETFs - ETFs provide exposure to an index or a basket of securities that trade on the exchange like a single stock - First ETF in India ”Nifty BeEs” (Nifty Benchmark Exchange Traded Scheme) - Launched in December 2001 by Benchmark Mutual Fund 9. Use of futures market by index funds - Synthetic index funds created using futures contracts have advantages of simplicity and low costs - Commissions and bid –ask spreads are lower in the futures markets 10. Index Derivatives – two most popular index derivatives are - Index futures and index options Advantage of Index Derivatives - Institutional and large equity –holders need portfolio –hedging facility - Ease of use for hedging any portfolio - Stock index is difficult to manipulate - Stock index, being an average, is much less volatile - Index derivative are cash settled

QUESTION 1. Nifty includes the ______ most liquid stocks that trade on NSE. a. 30 3. 100 b. 50 4. 500 2. The Indian company which provides professional index management services is ___ a. IISL

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b. S&P c. NSCCL d. CRISIL 3. Impact cost measures the ___________. a. Volatility of the stock b. Return on a stock c. Liquidity of the stock d. None of above 4. Assume that the base value of a market capitalization weighted index was 1000 and the base market capitalization was Rs.35000 crore. If the current market capitalization is Rs.77, 000 crore, the index is at ________. a. 2200 b. 1200 c. 2250 d. 1350 A: The current index value is (77000/35000)* 1000. 5. The market impact cost on a trade of Rs.3 million of the full Nifty works out to be about 0.5%. This means that if Nifty is at 2000, a buy order will go through at roughly _________. a. 2010 b. 2500 c. 2050 d. None of the above A: 0.5% of 2000 works out to be 5. Hence a buy order will go through at 2010. 6. Index funds are _________ managed. a. Actively b. Family c. Passively d. None of the above 7. Investment in Equity market is…..? a. b. c. d.

Discrete compounding Continuous compounding Simple compounding None of the above

8. Fixed deposits are continuous compounding. a. True b. False 9. Interest rates are always quoted on per…..basis. a. Day b. Month

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c. Annum d. All of the above 10. When the interest compounding frequency is more frequently than the investor earned? a. b. c. d.

More Less No change None of the above

11. Which compounding frequency will provide more interest ….? a. b. c. d.

Continuous Compounding Daily compounding Half yearly Yearly

12. ...compounding is the new norm for calculating saving account balance of banks in India? a. b. c. d.

Continuous Daily Yearly Monthly

13. What you get if interest rate is 8% P.A interest on basis of semiannual compounding? a. b. c. d.

8% 8.16% 9% 8.32%

14. What you get if interest rate is 8% P.A interest on basis of quarterly compounding? a. b. c. d.

8% 8.16% 9% 8.32%

15. What is the equivalent rate for continuous compounding for an interest rate 8% per annum semiannual compounding? a. b. c. d.

8% 8.50% 7.84% 7.92%

16. The base value for nifty was set as …..?

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a. b. c. d.

100 500 1000 5000

17. Stock market indices are useful for a variety of reasons. a. b. c. d.

Barometer for market behavior Bench mark for portfolio performance Passive fund management All of the above

18. News about the company is……? a. Micro economic factor b. Macro Economic factor 19. Going for 10 stocks to 20 stocks in index gives a sharp reduction in risk? a. True b. False 20. Free float factors for each company in the index is determined based on…..? a. b. c. d.

Public shareholding Promoters holding Financial institutions holding FII‟s holding

21. IISL stands for? a. b. c. d.

India institute of services limited India Index services limited International Index services Limited India Index Software limited

22. IISL is started as joint venture between? a. b. c. d.

NSE & BSE BSE & SEBI NSE & NSDL NSE & CRISIL

23. IISL is using which capitalization methodology for its main indices? a. Free float market capitalization b. Market Capitalization Weighted Index

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c. Price Weighted index d. None of the above 24. In market capitalization weighted index, Index = Current Market Capitalization/ Base Market Capitalization * ……… value a. Base value b. Current Value 25. Current market capitalization is 2, 20,000 and Base market capitalization is 2, 00,000. Base value = 1000? a. b. c. d.

2000 2200 2100 1900

26. A well diversified index is more representative of the market /economy? a. True b. False 25. In …………. Each stock influences the index in proportion to its price per share? a. b. c. d.

Free float market capitalization Market Capitalization Weighted Index Price Weighted index None of the above

26. Which index is calculated on the base of free float market capitalization? a. b. c. d.

S&P CNX Nifty CNX nifty junior CNX 100 All of the above

27. Which one is not the desirable attributes of an index? a. b. c. d. e.

Capture behavior of a large variety of different portfolios Stocks included are highly liquid Professionally maintained Large stock diversification All of the above

28. The S&P CNX NIFTY includes …….. Stocks a. 50

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b. 100 c. 150 d. 30 29. The S&P CNX NIFTY covers ……..Sectors? a. b. c. d.

10 21 25 50

30. Nifty as an index derivative owing to it‟s…? a. b. c. d.

Low market impact cost High hedging effectiveness Both a & b Only a

31 ……………………. Is a measure of the liquidity of the market? a. b. c. d.

Beta Market Impact cost Alpha Rio

32 For qualify in inclusion in nifty the minimum market impact cost is …..? a. b. c. d.

1% 2% 0.50% 1.5%

33. If Nifty currently trade on 2000 and the market impact cost is 0.50% then the buy and sell order at….? a. b. c. d.

2001,1999 2000,2000 2002,2000 2000,1998

(2000*o.50%= 1 rupees (buy 2000+1=2001 & sell 2000-1=1999) 34 …….. is a fund that tries to replicate the index returns. a. Nifty b. Index Fund c. Hedging fund

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d. Arbitrage fund 35 Various products develop on the index? a. b. c. d.

Index fund Index Derivatives ETF‟s All of the above

36 The most popular index derivatives contracts are ……? a. b. c. d.

Index Futures Index Options Both a & b None of the above

37 The index derivatives are settled on …..Basis? a. b. c. d.

Cash Physical Both a & b None of the above

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CHAPTER 3 FUTURE CONTRACTS, MECHNISM AND PRICING 1. Forward Contracts - Agreement to buy or sell an asset on a specified date for a specified price - Delivery date, price and quantity are negotiated bilaterally by the parties Features of Forward Contract - Bilateral contracts and exposed to counter –party risk - Contract is custom designed - Contract price is nor available in public domain - On the expiration date, contract settled by delivery of the asset - If the party reverse the contract, has to compulsorily go to the same counter –party - Useful in hedging and speculation Limitation of Forward Markets - Lack of centralization of trading - Illiquidity - Counterparty risk 2. Futures contracts - A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price - Standardized items areI. Quantity of the underlying II. Quality of the underlying III. Date and month of the delivery IV. Units of price quotation and minimum price change V. Location of settlement 3. Distinction between futures and forwards Futures Forwards Trade on an organized exchange OTC in nature Standardized contract terms Customized contract terms Hence more liquid Hence less liquid Requires margin payments No margin payment Follow daily settlement Settlement happens at end of period The first financial future market - The first exchange that traded in Chicago in the year 1972 - “Leo Melamed” father of financial future - He is the Chairman of the Chicago Mercantile Exchange 4. Futures Terminology Spot price: - price at which an asset trades in the spot market Future price: - price at which future contracts trades in future market Contract Cycle: - period over which a contracts trades

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-

Index future contracts on the NSE have 1 month, 2 months & 3 months expiry cycles Expire on the last Thursday of the month

Expiry date: - date specified in the future contract. - Last day on which the contract will be traded Contract size (Lot size):- amount of asset that has to be delivered. Basis: - future price – spot price -

Different basis for each delivery month

Cost of carry: - relationship between futures prices and spot prices -

Storage cost + interest

Initial Margin: - amount that deposited in the margin account -

Futures contract in first entered is known as initial margin

Marking-to-market: - end of each trading day, margin account is adjusted to reflect the investor‟s gain or loss depending upon the future closing price Maintenance margin: - balance in the margin account never becomes negative - Investor receives a margin call NSE ranks first in the world in terms of number of contracts traded in single stock futures 5. Future Payoffs a. Long futures:- a person who buys a futures contract is similar to the payoff for a person who holds an asset - Unlimited upside - Unlimited downside - When the index moves up, the long futures position starts making profits - When the index moves down it starts making losses - Example :- Nifty Portfolio (long) = 2220 - 2500 ↑ Profit , 2100 ↓ Loss b. Short Futures:- a person who sell a futures contract is similar to the payoff for a person who shorts an asset - Unlimited upside - Unlimited downside - Example:- short = 2220 - 2500 ↑ loss, 2100 ↓ Profit 6. Pricing Future:- cost of carry model used for pricing future - F = SerT - Where r = cost of financing e= 2.71828 -

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-

-

T = time till expiration in years Example: Security XYZ Ltd trades in the spot market at Rs. 1150. Money can be invested at 11% p.a. the fair value of a one –month futures contract on XYZ is calculated as follows: F = SerT = 1150 * e 0.11 * 1/12 = 1160 a. Pricing Equity Index Futures Cost of carry = Financing cost – Dividends b. Pricing index futures given expected dividend amount It is also based on the cost –of-carry model Example: Nifty futures trade on NSE as one, two and three –months contracts. Money can be borrowed at a rate of 10% per annum. What will be the price of a new two – month futures contract on Nifty? Let us assume dividend of Rs. 20 per share after 15 days of purchasing the contract.

-

F = 4000e0.1*60/365 – (

-

-

200 ∗20𝑒0.1845 /365 100

) = Rs. 4025.80

c. Pricing index futures given expected dividend yield - Annual dividend yield = F = se(r-q)T - Where r = cost of financing q = expected dividend yield - F = futures price S = spot index value - T = holding period - Example: a two –month future contract trades on the NSE. The cost of financing is 10% and the dividend yield on Nifty is 2% annualized. The spot value of Nifty 4000. What is the fair value of the futures contract? - Fair value = 4000e(0.1 – 0.02) * (60/365) = Rs. 4052.95 - The cost of carry model explicitly defines the relationship between the futures price and the related spot price. As we know, the difference between the spot price the futures price is called the basis. 7. Pricing Stock Futures:- cost of carry = Financing cost – Dividends a. pricing stock futures when no dividend expected - Example: XYZ futures trade on NSE as one, two and three –month contracts. Money can be borrowed at 10% per annum. What will be the price of a unit of new two – month futures contracts on SBI if no dividends are expected during the two –month period? I. Assume that the spot price of XYZ is Rs. 228 II. Future price F = 228e0.10 * (60/365) = Rs. 231.90 b. Pricing stock futures when dividends are expected - Reducing the cost of carry to the extent of the dividends - Example:- XYZ futures trade on NSE as one, Two and three –month contracts. What will be the price of a unit of new two –month futures contract on XYZ if dividends are expected during the two –month period?

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I. II. III.

IV.

Let us assume that XYZ will be declaring a dividend of Rs. 10 per share after 15 days of purchasing the contract. Assume that the market price of XYZ is Rs. 140 To calculate the future price, we need to reduce the cost –of –carry to the extent of dividend received. The amount of dividend received is Rs. 10. The dividend is received 15 days later and hence compounded only for the remainder of 45 days. Future price F= 140e0.1 * (60/365) – 10 e0.1 * (45/365) = Rs. 132.2 QUESTION

1. Which of the following cannot be an underlying asset for a financial derivative contract? a. Equity index b. Interest rate c. Commodities d. Foreign exchange 2.

Which of the following exchanges was the first to start trading financial futures? a. Chicago Board of Trade b. Chicago Board Options Exchange c. Chicago Mercantile Exchange d. London International Financial Futures and Options Exchange

3. In an options contract, the option lies with the __________. a. Buyer b. Both c. Seller d. Exchange 4. The potential returns on a futures position are: a. Limited b. A function of the volatility of the index c. Unlimited d. None of the above 5. Two persons agree to exchange 100 gms of gold three months later at Rs.400/gm. This is an example of a ____________. a. Futures contract b. Spot contract c. Forward contract d. None of the above 6. Spot value of Nifty is 2140. An investor buys a one month nifty 2157 call option for a premium of Rs.7. The option is _________. a. in the money b. out of the money c. at the money

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d. None of the above 7. A call option at a strike of Rs.176 is selling at a premium of Rs.18. At what price will it break even for the buyer of the option? a. Rs.196 b. Rs.187 c. Rs.204 d. Rs.194 A: To recover the option premium of Rs.18, the spot will have to rise to 176 + 18. The correct answer is number 4. 8.

A forward contract is traded on exchange? a. True b. False

9.

Underlying asset can be ……….? a. Equity b. Foreign Exchange c. Commodity d. All of the above

10. Future contracts not have features like ……? a. Standardized b. Traded on exchange c. Agreement between private parties d. Settlement taken place by clearing corporation 11. In forward contract is settled by……? a. Delivery of asset b. Cash c. Both a & b d. None of the above 12. Which one is the limitation of forward contract? a. Lack of centralization of trading b. Illiquidity c. Counter party risk d. All of the above 13. Growth drivers of derivatives are ……? a. Increased volatility in asset prices b. Increase integration of national market with international markets c. Development of risk tools d. All of the above

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14. Counter party risk is involved in….? a. Forward b. Future c. Options d. Spot 15. Forward contract is a ……contract? a. Bilateral b. Group c. Single d. Trilateral 16. Forward contracts are customized contract. a. True b. False 17. Future contracts are standardized on….? a. Quantity b. Location of settlement c. Expiry d. All of the above 18. Forward contracts are required margin payments at the time of contract. a. True b. False 19. In future contracts the contract cycle are of…..month? a. 3 month b. 1 month c. 6 month d. 12 month 20. ……..defined as difference between future & spot prices? a. Basis b. Intervals c. Spread d. None of the above 21. The ……… is the margin which is the minimum required to by a future contract. a. Initial Margin b. Marking to market

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c. Calendar margin d. Spread Margin 22. In future contract the expiry will be on ………. Of the month? a. Last Thursday of the month b. Last Tuesday of the month c. Last Monday of the month d. Last day of the month 23. If the January contract is expired today then which contract cycle is available? a. Jan, Feb, March b. Feb, March, April c. Feb, April, June d. Jan, Feb, April 24. Mark to market margin calculated on the basis of trade price &……..? a. Closing price of the day b. Closing price of the month c. Closing price on expiry d. Closing price of the year 25. Maintenance margin is used for….? a. For settlement of MTM b. For the maintenance of spread margin c. For the maintenance of Initial margin d. For the maintenance of calendar margin 26. Profit & loss are unlimited in which form of derivatives. a. Future b. Forward c. Options d. None of the above 27. Mr. A buy a two month expiry nifty index at 5200 & when the index goes down then he will make ….? a. Loss b. Profit c. No change d. None of the above 28. Mr. A Sell a two month expiry nifty index at 5200 & when the nifty goes down then he will make ….?

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a. b. c. d.

Loss Profit No change None of the above

29. Security XYZ trades in the spot market at Rs. 1150. Interest rate at 11% P.A.What is the fair value of one month futures contract. a. 1160 b. 1150 c. 1170 d. 1155 (F= Se rt) 30. Cost of storage is included in cost of carry in equity. a. True b. False 31. Commodity future cost of carry include dividend. a. True b. False 32. Cost of carry for equity = Finance cost -…….? a. Profits b. Dividends c. Storage cost d. None of the above

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CHAPTER 4 APPLICATION OF FUTURES CONTRACT

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1. Understanding Beta Kinds of factor I. Market :- affect all stocks and portfolios ( inflation, interest rates, business cycle etc) II. Non –market:- specific to a company (a fire breakout in a factory, invention, death of a key employee, strike in the factory) Beta of a stock measures the sensitivity of the stocks responsiveness to these market factors. Beta of a portfolio, measures the portfolios responsiveness to these market movements. Index has a beta of 1 A portfolio with a beta of two, responds more sharply to index movements If index moves up by 10% , the value of a portfolio with a beta of two will move up by 20% If a portfolio has a beta of 0.75, a 10 % movement in the index will cause a 7.5% movement in the value of the portfolio 2. Numerical illustration of Applications of Stock Futures a. Hedging : Long Security, Sell Futures Investor who holds the shares of a company and gets uncomfortable with market movements in the short run With security futures he can minimize his price risk Take on a short futures positions Assume that the spot price of the security he holds is Rs. 390. Two –month futures cost him Rs. 402. For this he pays an initial margin Price of his security falls to Rs. 350 The loss of Rs. 40 incurred on the security he holds, will be made up by the profits made on his short futures position Long Portfolio + Short Nifty can often become one-tenth as risky as the Long Portfolio positions Suppose we have a portfolio of Rs. 1 million which has a beta of 1.25. then a complete hedge is obtained by selling Rs. 1.25 million of Nifty futures b. Speculation : Bullish security, buy Futures If bullish view Buy Future Unlimited upside or downside risk Example: 1006 of 100 share lot pay initial margin of 20,000 if he still at 1010 then profit 4 * 100 = 400 Return = 20,000 / 4 c. Speculation : Bearish security, sell futures

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If bearish view sell future Unlimited upside or downside risk Example Opp. Of previous d. Arbitrage : overpriced futures : buy spot , sell futures Spot price is less than future price Overpriced futures: buy spot, sell futures One has to build in the transactions costs in to the arbitrage strategy e. Arbitrage : underpriced futures : buy futures, sell spot Future price is less than spot price Underpriced futures: buy futures, sell futures Investing in riskless instruments is more than the return from the arbitrage trades 3. Hedging Using Stock Index Futures There are two type of risk a. Unsystematic Risk / Company Specific Risk/ Diversifiable Risk This risk can be reduced through appropriate diversification Investor can buy more stocks of different industries to diversify his portfolio so that the price change of any one stock does not affect his portfolio Diversification reduces unsystematic risk b. Systematic Risk / Market Risk / Non –Diversifiable Risk / Market Specific Risk A risk associated with the overall market returns It is the risk which cannot be reduced through diversification Market is denoted by index A falling overall market would see most stock falling Hedging can be done in two ways a. By selling Index Futures b. By selling stock futures and buying in spot market QUESTIONS

1. On 15th January Mr. Arvind Sethi bought a January Nifty futures contract which cost him Rs.240, 000. Each Nifty futures contract is for delivery of 100 Nifties. On 25th January, the index closed at 2460. How much profit/loss did he make? a. +6000 b. -3000 c. -4500 d. +2500 A: Mr. Sethi bought one futures contract costing him Rs.240, 000. At a market lot of 100, this means he paid Rs.2400 per Nifty future. On the futures expiration day, the futures price converges to the spot price. If the index closed at 2460, this must be the futures close price as well. Hence he will have made of profit of (2460 - 2400)* 100.

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Kantaben sold a January Nifty futures contract for Rs.240, 000 on 15th January. Each Nifty futures contract is for delivery of 100 Nifties. On 25th January, the index closed at 2450. How much profit/loss did she make? a. -7,000 b. +5,000 c. -5,000 d. +7,000 A: Kantaben sold one futures contract costing her Rs.240, 000. At a market lot of 100, this works out to be Rs.2400 per Nifty future. On the futures expiration day, the futures price converges to the spot price. If the index closed at 2450, this must be the futures close price as well. Hence she will have made of loss of (2450 - 2400)* 100. 2.

3. On 15th January Mr.Kajaria bought a January Nifty futures contract which cost him Rs.240, 000. Each Nifty futures contract is for delivery of 100 Nifties. On 25th January, the index closed at 2360. How much profit/loss did he make? a. +6000 b. -3000 c. -4000 d. +2500 A: Mr.Kajaria bought one futures contract costing him Rs.240, 000. At a market lot of 100, this means he paid Rs.2400 per Nifty future. On the futures expiration day, the futures price converges to the spot price. If the index closed at 2360, this must be the futures close price as well. Hence he will have made of loss of (2400 - 2360)* 100. 4. Krishna Seth sold a January Nifty futures contract for Rs.240, 000 on 15th January. Each Nifty futures contract is for delivery of 100 Nifties. On 25th January, the index closed at 2350. How much profit/loss did she make? a. -7,000 b. +5,000 c. -5,000 d. +7,000 A: Krishna Seth sold one futures contract costing her Rs.240, 000. At a market lot of 100, this works out to be Rs.2400 per Nifty future. On the futures expiration day, the futures price converges to the spot price. If the index closed at 2350, this must be the futures close price as well. Hence she will have made of profit of (2400 - 2350)*100. 5. Speculators with a bullish view on a security can _________. a. buy stock futures b. sell stock futures c. buy index futures d. sell index futures 6. Mohan owns a thousand shares of Reliance. Around budget time, he gets uncomfortable with the price movements. Which of the following will give him the hedge he desires? a. Buy 10 Reliance futures contracts b. Buy 5 Reliance futures contracts c. Sell 10 Reliance futures contracts d. Sell 5 Reliance futures contracts

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A: Since he owns a thousand shares of Reliance, he will have to sell 10 Reliance futures contracts (one contract has 100 underlying shares) to give him a complete hedge. 7. Santosh is bullish about Company XYZ and buys ten one- month XYZ futures contracts at Rs.2, 96,000. On the last Thursday of the month, XYZ closes at Rs.271. He makes a ___ a. profit of Rs. 15000 b. loss of Rs.15000 c. profit of Rs.25000 d. loss of Rs.25000 A: At Rs.2, 96,000 per futures contract, it costs him Rs.296 per unit of futures, i.e. 2, 96,000/(10 * 100). On expiration day the spot and futures converge. Therefore he makes a loss of (296 - 271) * 1000 = 25000. 8. Rajiv is bearish about Company ABC and sells twenty one- month ABC futures contracts at Rs.3.04, 000. On the last Thursday of the month, ABC closes at Rs.134. He makes a _____________. a. profit of Rs. 18000 b. loss of Rs. 18000 c. profit of Rs.36000 d. loss of Rs.36000 A: At Rs.3, 04,000 per futures contract, it costs him Rs.152 per unit of futures, i.e. 3, 04,000/ (20 * 100). On expiration day the spot and futures converge. Therefore his profit is (152-134) * 2000 = 36000. 9. Suppose the Company PQR trades at 1000 in the cash market and two month PQR futures trade at 1030. If transactions costs involved are 0.4%. What is the arbitrage return possible? a. 1.8% per month b. 2% per month c. 1.3% per month d. 1.1% per month A: Return over two months is 1030/1000 = 3%. Minus transactions costs of 0.4% and the net return works out to be 2.6%. The return per month is 1.3%. 10. Anand is bullish about the index. Spot Nifty stands at 2200. He decides to buy one three- month Nifty call option contract with a strike of 2260 at a premium of Rs 15 per call. Three months later, the index closes at 2295. His payoff on the position is __ a. Rs.4,000 b. Rs.2,000 c. Rs.9,000 d. None of the above A: Each call option earns him (2295 - 2260 -15)*100 = 20*100= Rs.2,000. 11. Chetan is bullish about the index. Spot Nifty stands at 2200. He decides to buy one three month Nifty call option contract with a strike of 2260 at Rs.60 a call. Three months later the index closes at 2240. His payoff on the position is _____.

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a. -7,000 b. -4,000 c. - 12,000 d. -6,000 A: The call expires out of the money, so he simply loses the call premium he paid, i.e. 60 * 100 = Rs.6, 000. 12. ……….measures the sensitivity of stocks responsiveness to market factors. a. Alpha b. Rio c. Beta d. Impact cost 13. The index has a beta of ….? a. 2 b. 1 c. 0.5 d. 1.5 14. If the stock with a beta of 1.5 and index have a beta of 1. When index moves up by 10% then stock moves to….? a. Stock move up by 10% b. Stock move down by 10% c. Stock move up by 15% d. Stock move down by 15% 15. An investor buy shares of XYZ Company at Rs 450 and now he would Suffer the discomfort of a price fall. What he is making the position in future? a. Buy Future b. Sell future c. No need of any position d. None of the above 16. An investor buy shares of XYZ Company at Rs 450 and now he would Suffer the discomfort of a price fall. He is making the short position in future at Rs 450 and the current price prevailing in the market is 390. So the investor suffers how much loss? (Assume that lot size of XYZ is 100 shares) a. Loss of 6000 Rupees b. Profit of 6000 Rupees c. No Change in Profit or Loss d. None of the above

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17. An investor buys 100 shares of XYZ Company at Rs 450 and now he would expect that a price rise. He is making another Long position in future at Rs 450 and the current price prevailing in the market is 390. So the investor suffers how much loss? (Assume that lot size of XYZ is 100 shares) a. Loss of 6000 Rupees b. Profit of 6000 Rupees c. Loss of 12000 Rupees d. None of the above 18. An investor buys 100 shares of XYZ Company at Rs 450 and now he would expect that a price rise. He is making another Long position in future at Rs 450 and the current price prevailing in the market is 510. So the investor suffers how much loss? (Assume that lot size of XYZ is 100 shares) a. Profit of 6000 Rupees b. Profit of 12000 Rupees c. Loss of 12000 Rupees d. None of the above 19. An investor Sell 100 shares of XYZ Company at Rs 450 and now he would expect that a price fall further. He is making another Short position in future at Rs 450 and the current price prevailing in the market is 410. So the investor suffers ….? (Assume that lot size of XYZ is 100 shares) a. Profit of 8000 Rupees b. Profit of 4000 Rupees c. Loss of 8000 Rupees d. None of the above 20. Investors notice that future of the security is overpriced. Shares of XYZ Company at Rs 1000 and Future at Rs 1025. So the investor will take the step for arbitraging? a. Long Cash & Short Future b. Long Future & Short Cash c. Only Long Cash d. Only Short Future 21. An investor notices that future of the security is underpriced. Shares of XYZ Company at Rs 1025 and Future at Rs 1000. So the investor will take the step for arbitraging? a. Long Future & Short Cash b. Long Cash & Short Future c. Only Long Future d. Only Short Cash

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22. Company specific risks are also known as? a. Unsystematic Risk b. Systematic Risk c. Future Risk d. None of the above 23. Change in Government policy would affect price of steel and also the company share prices, this is considered as..? a. Unsystematic Risk b. Systematic Risk 24. Risk associated with overall market returns, which is called as ? a. Unsystematic Risk b. Systematic Risk 25. The overall market is denoted by the …? a. Index b. Shares c. Government Securities d. None of the above 26. Diversification reduces which ……..risk? a. Unsystematic Risk b. Systematic Risk 27. Hedging using stock index future or single stock future is one way to reduce the …….risk? a. Unsystematic Risk b. Systematic Risk 28. An investor buy 3000 shares of XYZ Company at Rs 300 (Portfolio value of Rs 9 Lakh) and now the he would Suffer the discomfort that market will fall. He uses nifty march future to hedge so how much value uses for hedging? a. Long Nifty value of Rs 9 Lakh b. Short Nifty value of Rs 4.5 Lakh c. Short Nifty value of Rs 9 Lakh d. Short Nifty value of Rs 9 Lakh 29. An investor buy 3000 shares of XYZ Company at Rs 300 (Portfolio value of Rs 9 Lakh) and now the he would Suffer the discomfort that market will fall. He uses nifty march future to hedge .Nifty currently traded at 6000 and 1lot = 50 shares. a. Long 3 lot Nifty

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b. Short 3 lot Nifty c. Short 30 lot Nifty d. Long 30 lot Nifty 30. An investor buy 2000 shares of XYZ Company at Rs 390 (Portfolio value of Rs 7, 80,000) and now the he would Suffer the discomfort that market will fall. The XYZ future trades at 402.To hedge, the investor will have ….take position of XYZ Ltd? a. Sell 2000 XYZ Ltd future b. Buy 2000 XYZ Ltd future c. Sell 1000 XYZ Ltd future d. None of the above 31. An investor buy 2000 shares of XYZ Company at Rs 390 (Portfolio value of Rs 7, 80,000) and now the he would Suffer the discomfort that market will fall. The XYZ future trades at 402.To hedge, the investor will have take short position of XYZ Ltd future? XYZ spot price on Expiry day is Rs. 300.So what is the amount investor get as profit & loss? a. Loss of Rs. 90 per share b. Profit of Rs 102 per share c. Profit of Rs 12 per share d. Loss of Rs 12 per share

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CHAPTER 5 OPTIONS CONTRACTS, MECHANISM AND APPLICATION 1. Option Terminology Index Options: - options have the index as the underlying Stock Options:- options on individual stocks Buyer of an option:- who by paying the option premium buys the right Writer of an option:- who receives the option premium -

Obliged to sell / buy the asset if the buyer exercises on him

Call option: - holder the right but not the obligation to sell an asset by a certain date for a certain price Put Option: - gives the holder the right but not the obligation -

Sell an asset by a certain date for a certain price

Option price / premium: - price which option buyer pays to the option seller Expiration Date: - date specified in the options contract Strike Price: - price specified in the options contract American Options: - options that can be exercised at any time upto expiration date European Options: - exercised only on the expiration date itself In-the-money option (ITM):- Spot price > strike price Deep ITM:- spot is much higher than strike price At-the-money option (ATM):- spot price = strike price Out –of-the-money option (OTM):- spot price < strike price Deep OTM: - spot is much lower than strike price Option premium: - two components- intrinsic value and time value Intrinsic value of an option: - amount the option is ITM, if it is ITM. -

If it is OTM, its intrinsic value is ZERO

Time value of an option: - difference between its premium and its intrinsic value History of option- April 1973, CBOE was set up specifically for the purpose of trading options 2. Distinction between futures and options Futures

Options

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Exchange traded, with novation Same as future Exchange defines the product Same as futures Price is zero, strike price moves Strike price is fixed, price moves Price is zero Price is always positive Linear payoff Nonlinear payoff Both long and short at risk Only short at risk 3. Options payoffs i. Payoff profile of buyer of asset : Long Asset - Price upward ↑ profit - Price downward ↓ loss ii. Payoff profile for seller of asset : Short Asset - Price upward ↑ loss - Price downward ↓ profit iii. Payoff profile for buyer of call options : Long Call - A call option gives the buyer the right to buy the underlying asset at the strike price specified in the option - Spot price > strike price = profit - Spot price < strike price = loss iv. Payoff profile for writer of call options: Short Call - The writer of the option charges a premium. - The profit / loss that the buyer makes on the option depends on the spot price of the underlying v. Payoff profile for buyer of put options : Long Put - A put option gives the buyer the right to sell the underlying asset at the strike price specified in the option - Spot price < strike price = profit - Spot price > strike price = loss vi. Payoff profile for writer of put options : Short Put - The writer of the option charges a premium - The profit / loss that the buyer makes on the option depends on the spot price of the underlying - Spot price > strike price = profit - Spot price < strike price = loss 4. Application of Options i. Hedging : have underlying buy puts - Buy spot & buy puts - Equity portfolios often experience discomfort about the overall stock market movement - To protect the value of your portfolio from falling below a particular level, buy the right number of put options with the right strike price - If you are concerned about the overall portfolio, buy put options on the index ii. Speculation : bullish security, buy calls or sell puts

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Bullish security Buy calls or sell puts Buy call upside is unlimited & downside limited up to premium Sell put upside is limited up to the premium received downside is unlimited Profit if spot price is strike price iii. Speculation: bearish security, sell calls or buy puts Bearish security Sell calls or buy puts Sell call upside is limited up to the premium received, downside is unlimited Buy put upside is unlimited & downside limited up to premium Profit if spot price < strike price iv. Bull spreads – buy a call and sell another A spread that is designed to profit if the price goes up is called a bull spread The buyer of a bull spread buys a call with an exercise price below the current index level and sells a call option with an exercise price above the current index level It limits both the upside potential as well as the downside risk Three type of Bull spreads a. Both calls initially out –of –the –money b. One call initially in –the –money and one call initially out –of – the –money c. Both calls initially in –the –money v. Bear spreads – sell a call and buy another A spread that is designed to profit if the price goes down is called a bear spread In a bear spread, the strike price of the option purchased is greater than the strike price of the option sold Buyer of a bear spread buys a call with an exercise price above the current index level Sell a call option with an exercise price below the current index level Three type of Bear spreads a. Both calls initially out –of –the –money b. One call initially in –the –money and one call initially out –of – the –money c. Both calls initially in –the –money

1. a. b. c. d.

QUESTION …………contracts help a hedger reduce his risk with a much wider variety of strategies? Future Options Spot None of the above

2. In option contract both parties are under obligation to fulfill the contract? a. True b. False

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3. All index options are cash settled? a. True b. False 4. a. b. c. d.

Who receives the option premium? Option Buyer Option Writer Future Buyer None of the above

5. Holders have the right but not an obligation to buy an asset? a. Call Option b. Put Option 6. Holder has the right but not an obligation to sell an asset? a. Call Option b. Put Option 7. Option premium is the price which the option seller pays to the option buyer? a. True b. False 8. a. b. c. d.

The price specified in the option contract is known as ….? Strike price Future Price Spot Price None of the above

9. Option contract can be exercised at any time up to the expiration date? a. American Option b. European Option 10. Option contract can be exercised only on the expiration date itself? a. American Option b. European Option 11. Where the spot price > strike price is known as …? a. In the money options b. Out the money options c. At the money options d. None of the above

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12. Where the spot price = strike price is known as …? a. In the money options b. Out the money options c. At the money options d. None of the above 13. Where the spot price < strike price is known as …? a. In the money options b. Out the money options c. At the money options d. None of the above 14. When the intrinsic value of call is maximum? a. Spot price is more than Strike price b. Spot price is less than strike price c. Spot price is equal to strike price d. None of the above 15. a. b. c. d.

The intrinsic value of put is max when? Strike price is more than spot price Strike price is less than spot price Strike price is equal to spot price None of the above

16. a. b. c. d.

……… of an option is the difference between its premium and its intrinsic value? Intrinsic value Time value Internal value None of the above

17. a. b. 18.

At expiration, there is no time value of an option? True False Option buyers are paid whole amount at the time of purchase that is not in the case of future? a. True b. False

19. In the option contract strike price is fixed, price moves? a. True b. False

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20. In future contract both long as well as short position at risk but in options only short at risk? a. True b. False 21. In future contract exchange define the product but not in the case of Options? a. True b. False 22. The losses for the buyer of an option are limited however profits are unlimited? a. True b. False 23. An investor buy the underlying price for 5200 and now the price at the time of expiry at 5300, then what is the investor P&L position? a. Investor bears losses b. Investor gain profits c. No change in P&L d. None of the above 24. An investor sell the underlying price for 5200 and now the price at the time of expiry at 5100, then what is the investor P&L position? a. Investor bears losses b. Investor gain profits c. No change in P&L d. None of the above 25. An investor buy the underlying price with buying call at a strike price of 5200 at a premium of Rs. 86 and now the price at the time of expiry at 5300, then what is the investor P&L position? a. Loss of Rs. 86 b. Profits of Rs. 86 c. No change in P&L d. Profit of Rs. 14 26. An investor Sell the underlying price with buying put at a strike price of 5200 at a premium of Rs. 86 and now the price at the time of expiry at 5300, then what is the investor P&L position? a. Loss of Rs. 86 b. Profits of Rs. 86 c. Loss of Rs. 14

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d. Profit of Rs. 14 27. An investor sell the underlying price with sell call at a strike price of 5200 at a premium of Rs. 86 and now the price at the time of expiry at 5300, then what is the investor P&L position? a. Loss of Rs. 86 b. Profits of Rs. 86 c. Loss of Rs.14 d. Profit of Rs. 14 28. An investor sell the underlying price with sell put at a strike price of 5200 at a premium of Rs. 86 and now the price at the time of expiry at 5300, then what is the investor P&L position? a. Loss of Rs. 86 b. Profits of Rs. 86 c. Loss of Rs.14 d. Profit of Rs. 14 29. An investor buy the underlying price with sell call at a strike price of 5200 at a premium of Rs. 86 and now the price at the time of expiry at 5100, then what is the investor P&L position? a. Loss of Rs. 86 b. Profits of Rs. 86 c. Loss of Rs.14 d. Profit of Rs. 14 30. For using hedging mechanism, investor have buy underlying asset than how investor use hedging mechanism? a. Buy Put b. Buy Call c. Buy future d. None of the above 31. For using hedging mechanism, investor have sell underlying asset than how investor use hedging mechanism? a. Buy Put b. Buy Call c. Sell future d. None of the above 32. For using speculation, investor have buy underlying asset than how investor use hedging mechanism?

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a. b. c. d.

Buy Put Buy Call Sell future None of the above

33. For using speculation, investor have buy underlying asset than how investor use hedging mechanism? a. Sell Put b. Buy Call c. Buy future d. All of the above 34. For using speculation, investor have Sell underlying asset than how investor use hedging mechanism? a. Sell call b. Buy put c. Sell future d. All of the above 35. A speculator sells 2 calls at a premium 100 each and buys a call at 60 what is the net premium payment or receive? a. Net premium payment of 200 b. Net premium receive of 200 c. Net premium receipt of 140 d. Net premium payment of 140 36. In bear spread buy a out of money strike price and sell a in the money strike price? a. True b. False 37. In bear spread investor buy a in the money call and sell them at the money call? a. True b. False 38. In Bull spread buy a call at the money and sell a call out the money? a. True b. False 39. In bull spread investor gain profit when market or spot prices move? a. Higher b. Lower 40 In bear spread investor gain profit when market or spot price moves? a. Higher b. Lower

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CHAPTER 6 PRICING OF OPTIONS CONTRACTS AND GREEK LETTERS

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1. Pricing options An option buyer has the right but not the obligation to exercise on the seller In case a buyer is the loss of the premium paid by him Downside is limited to this premium Upside is potentially unlimited 2. Variable affecting option pricing Option pricing are affected by six factors. These are Spot Price (S), Strike Price (X), Volatility (𝜎) of spot price, time for expiration of contract (T) risk free rate of return ® and Dividend on the asset (D) Price of a call option is negatively related with size of anticipated dividends Price of put option positively related with size of anticipated dividends All option contracts have price limits Limits can be defines as follows a. The maximum price of a call option can be the price of underlying asset. In case of stocks a call option on it can never be larger than its spot price b. The minimum price of an European call option would always be the difference in the Spot Price (S) and present value of the strike price (x) (S – Xe –rt) c. The maximum price for a put option can never be more than the present value of the strike price X d. The minimum price of the European put option would always be equal to difference between present value of strike price and the spot price of the asset (Xe –rt –S) 3. The Black Schools Merton Model For Option Pricing (BSO) The model is based on the premise that stock price changes are random in nature but log normally distributed and that technical analysis does not matter BSO model he option price and the stock price depend on the same underlying source of uncertainty and we can form a portfolio consisting of the stock and the option which eliminates this source of uncertainty C = SN(d1) – Xe –rtN(d2) P = Xe –rtN(-d2) – SN (-d1 ) Where d1 =

𝑆 𝑋

1𝑛 + 𝑟+𝜎 2 /2 𝑇 𝜎 √𝑇

And d2 = d1 - 𝜎√𝑇 C = call option X = exercise price T = time to expiration measured in years N(x) cumulative distribution 4. The Greeks i. Delta (∆)

P = put option S = spot price 𝜎 = volatility

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-

-

-

∆ is the rate of change of option price with respect to the price of the underlying asset Example : ∆ of an call option is 0.5, Rs. 1 change in stock prices lead to change of 0.5 in option ii. Gamma (𝝉) 𝜏 is the rate of change of the option‟s delta (∆) iii. Theta (𝜽) Rate of change of the value of the portfolio with respect to the passage of time Measure (𝜃) “ per calendar day “ or “ per trading day” iv. Vega(𝜸) Portfolio of derivatives is the rate of change in the value of the portfolio with respect to volatility of the underlying asset v. Rho (𝝆) A portfolio of options is the rate of change of the value of the portfolio with respect to the interest rate QUESTION 1. a. b. c. d.

The worst can happen to a buyer of option is the loss of…..? Premium Profit Price Strike price

2. a. b. c. d.

Downside is limited to the premium, but upside is limited. Option Buying Option Writing Future buying Future selling

3. Time factor is applicable for European type of option but not in American style of option. a. True b. False 4. a. b. c. d.

Option prices tend to fall as the contract is likely to…? Open Expiry During the day During the month

5. BSO model have option price and the stock price depend on the same underlying source of uncertainty

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a. True b. False 6. Combination of stock and option eliminates the source of uncertainty & provide earning of risk free rate. a. True b. False 7. a. b. c. d.

BSO model used which kind of interest calculation? Annual Compounding Semi Annual Compounding Daily Compounding Continuous Compounding

8. a. b. c. d.

Aim of traders is to manage the …… in order to manage their overall portfolio. Greeks Delta Alpha Gamma

9. a. b. c. d.

θ is the symbol of which Greeks ? Delta Gamma Theta Vega

10. Delta of a portfolio is the change in the value of portfolio with respect to change in the price of …….? a. Index b. Underlying asset c. Economy d. Price of future 11. ………….. Is the change in the price of call option per unit change in the spot of the underlying asset? a. Delta b. Theta c. Gamma d. Vega 12. If the Delta of the call option of stock is 0.50 then ,then if stock moves by 1 rupees then the change in option price by….?

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a. b. c. d.

0.5 1 2 None of the above

13. Gamma is the rate of change of the option‟s ………..with the respect to the price of the underlying asset. a. Delta b. Vega c. Rho d. None of the above 14. …….. is the rate of change of the value of portfolio with respect to the passage of time? a. Delta b. Gamma c. Theta d. Rho 15. Theta is also referred as to the ……decay of the portfolio. a. Time b. Price c. Underlying asset d. Interest rate 16. To obtain theta per trading day, theta is divided by …..? a. 365 b. 360 c. 250 d. 300 17. ……..of a portfolio is the rate of change of the value of portfolio with respect to the interest rate. a. Delta b. Gamma c. Theta d. Rho 18. Rho measures the sensitivity of the value of portfolio to the….? a. Time b. Price c. Underlying asset

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d. Interest rate 19. If Vega is high in absolute terms, the portfolio value is …….to small change in volatility? a. Low Sensitive b. High Sensitive c. No sensitivity d. None of the above 20. ……… of a portfolio of derivatives is the rate of change in the value of the portfolio with respect to the volatility of the underlying asset? a. Delta b. Gamma c. Theta d. Vega 21. S become very large a call option in BSO is almost certain to expiry? a. True b. False

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CHAPTER 7 TRADING OF DERIVATIVES CONTRACTS 1. -

Future & Option Trading Systems Called Neat F&O trading systems Fully automated screen based trading Online monitoring & surveillance mechanism Order driven and complete transparency a. Entities in the Trading System I. Trading Member (TM) - They are the member of NSE - Trade either on their own account or on behalf of their existing clients including participants - They are must be registered with the exchange and Assigned unique user ID - Responsibility of the trading member to maintain adequate control over persons having access to the firm‟s User ID‟s II. Clearing Member (CM) - They are the members of NSCCL - They carry out risk management activities and confirmation / inquiry of trades through the trading system III. Professional Clearing Member (PCM) - A clearing member who is not trading member - Banks and custodians become professional clearing members and clear and settle for their trading members IV. Participants - A client of trading member like financial institutions b. Basis of trading - Order driven market, order matches automatically - Exchange notifies regular lot size and tick size from time to time - Active order are those which entered in trading system, it tries to find a suitable match, if matched trade executed - If not matched it become passive 4. Corporate Hierarchy according to the activity a. Corporate Manager - Assigned to user placed at the highest level in a trading firm - Only a corporate manager can sign off any user and also define exposure limits for the branches of the firm and its dealers b. Branch Manager - Assigned to a user who is placed under the corporate manager - User can perform and view order and trade related activities for all dealers under the branch c. Dealer

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-

They are users at the bottom of the hierarchy A Dealer can perform view order and trade related activities only for one self and does not have access to information on other dealers under either the same branch or other branches d. Admin - Admin is provided to every trading member along with the corporate manager user - They facilitates the trading members and the clearing members to receive and capture on a real –time basis all the trades, exercise requests and give up requests of all the user under him - Admin user can also view the relevant message for trades, exercise and give up request in the message area I. Clearing Member Corporate Manager - View all o/s orders, trades, net position by putting TM id II. Clearing Member and Trading Member Corporate Manager - view all outstanding orders, trades, net position by putting TM ID ,Branch ID, dealer ID III. Clearing Member and Trading Member Dealer - Can only view requests entered by him IV. Trading Member Corporate Member - Outstanding requests and activity log for requests entered by him by entering his own branch and user IDs. This his default screen V. Trading member branch manager - Outstanding requests entered by his users either by filling the user ID field with a specific user or leaving the user ID field work VI. Trading Member Dealer - His can only view requests entered by him 5. Client broker relationship in derivative segment - Filling KYC form - Execution of client broker agreement - Bring risk factors in the knowledge of the client - Collection of adequate margins from the client - Maintaining client separate bank account - Avoiding receipt & payment of cash - Maintain the unique client code 6. Order type & conditions - Time condition Day order- valid for the day, if order not executed during the day, then system cancels the order automatically at the end of the day Immediate or cancel (IOC) – allows the user to release order into the system if not matched then cancelled immediately or if partial matched then remaining cancel immediate

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-

Price Condition Stop Loss- release the order into the system after the market price crosses trigger price For ex – stop loss buy order , trigger price is 1027, limit price 1030 and market price is 1023,when ever the market prices reaches to 1027 then 1030 order is released in the system -Other Conditions Market price- no price is specified at the time of order Trigger price- price at which order get triggered from stop loss book Limit Price- Price of the order after triggered Pro- order of the trading member own account Cli- Order on behalf of the client 7. Inquiry Window - Market by price(MBP)- Market depth according to the trade tiger - Market Enquiry – Market watch acc to trade tiger - Basket Trading- Facility for easy arbitrage between cash and future markets. Buy portfolio by a single order click 8. F & O Market Instruments Contract Specification Details Index /Stock Future Index/Stock Options Contract Size 50/Permitted lot 50/Permitted lot (Lot size * trade rate) (Lot Size * trade rate) Tick size Rs 0.05 Rs 0.05 Expiry day

Last Thursday of the month Last Thursday of the month or previous trading day or previous trading day Settlement Basis MTM and final settlement Cash settle on T+1 day on t+1 day Settlement Price Daily settlement price on Daily settlement price ( not closing price of a day/Final Applicable)/Final settlement settlement on closing value on closing value or trade rate or trade rate 9. Generation of strikes - Exchange has a policy for introducing strike prices and determining the strike price intervals 10. Eligibility criteria of stocks - Amongst top 500 stocks in term of last six month daily volume and market capitalization - Order size of stock not less than 5 lakh rupees - Market wide position not less than 100 crores (20% shares held with non promoters) - Existing f& O criteria- market capitalization not less than 60 crore and Contract size not less than 2 lakh

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-

If eligibility criteria fails then no fresh month contrat introduced and unexpired contract are trade till expiry - Not considered for re inclusion for a period of 1 year 11. Eligibility criteria of Indices - Stocks contributing 80% weight age of the index are individually eligible for derivative trading .No single ineligible stock contribute more than 5% 12. Eligibility criteria for the stock derivative after restructuring - Follow eligibility criteria from the first day of listing of post restructured company - F&O is traded on such stock of pre re structured company - pre re structured company market capitalization is at least 1000 crore - post re structured company treated like new company - In contract month new company F & O begin to trade - In subsequent months the normal rules applicable for entry and exit 13. Charges - Maximum Brokerage for futures charged by broker is 2.5 % of the contract value - Maximum Brokerage for Options charged by broker is 2.5 % of the Notional Value (Strike Price + Premium)* Quantity) - Above charges Exclude statutory charges - Transaction charges- 0.002% - Option transaction charges – 0.05% on premium price Total traded value in a month Transaction Charges (Rs. Per lakh or traded value) Up to first Rs. 2500 crore Rs. 1.90 each side More than Rs. 2500 crores up to Rs. 7500 Rs. 1.85 each side crores More than Rs. 7500 crore up to Rs. 15000 crore Es. 1.80 each side Exceeding Rs. 15000 crores Rs. 1.75 each side QUESTIONS 1. a. b. c. d.

The best buy order for a given futures contract is the order to buy the index at the ----Highest price Average of the highest and lowest price Lowest price None of the above

2. The F & O segment of NSE provides trading facilities for the following derivative instruments: a. Index Based Futures b. Individual Stock Options c. Index Based Options d. All of the above

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3. At the time, the F&O segment of NSE provides trading facilities for……….. nifty futures contract a. Two b. Three c. Nine d. None of the above 4. The maximum brokerage chargeable by a trading member in relation to trades executed in the contracts on the F&O segment of NSE is fixed at ….. of the contract value , exclusively of statutory a. 1.5% b. 2.0% c. 1% d. 2.5% 5. a. b. c. d.

All futures and options contract expires on the ………………… Last Friday of the month Last Thursday of the month Last day of the month Last Monday of the month

6. a. b. c. d.

The Neat F&O trading system support an ………………… Order driven market Demand driven market Price Driven Market None of the above

7. a. b. c. d.

On the NSE‟s Neat F&O systems, matching of trades takes place at the …………… Active order Price Market price Passive order price None of the above

8. On 26 Jan, the nifty index stands 5000.lot size of nifty is 50 shares. The value of single index future contract is……………… a. 2,22,500 b. 2,50,000 c. 5,00,000 d. 4,56,000 9. All option expires on the …………… a. Last Friday of the month

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b. Last Monday of the month c. Last Thursday of the month d. None of the above 10. New Option contract are introduced on the ……………… a. First trading of the month b. Last Wednesday of the month c. Last Thursday of the month d. Next trading day following the expiry of near month contract 11. a. b. c. d.

The future & options trading system of NSE, called ….? NEAT F&O trading System ODIN Trading system BOLT trading System None of the above

12. a. b. c. d.

NEAT F&O trading system have…..? Automated screen based trading Online monitoring Surveillance mechanism All of the above

13. a. b. c. d.

NEAT trading system support …..? Order driven market Complete transparency Only futures None of the above

14. Which one is not included in entities in the currency future trading system? a. Trading Member b. Exchange c. Clearing Member/Professional Clearing Member d. Participants like Financial Institutions 15. a. b. c. d.

A Professional clearing member who is not a …….. Member? Clearing member Trading cum clearing member Trading member None of the above

16. Each user of a trading member is registered with exchange and is assigned an……? a. Member ID

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b. Unique user ID c. Trading ID d. None of the above 17. It is the responsibility of the….. to maintain adequate control over persons having access to the firm‟s User ID? a. Exchange b. Clearing Member c. Trading Member d. Professional Clearing Member 18. a. b. c. d.

Clearing member are members of …..? NSCCL Exchange SEBI Depository

19. ……become professional clearing members and clear & settle for their trading member? a. Trading Member b. Banks c. Custodians d. Financial Institutions 20. Participants may trade through multiple trading members & settle through multiple clearing members? a. True b. False 21. An …….order allows the user to buy or sell a contract as soon as the order is released into the system, failing which the order is cancelled from the system. a. IOC order b. Day order 22. A……. order which is valid for the day on which it is entered. a. IOC order b. Day order 23. a. b. c. d.

……are the order for which no price is specified at the time the order is entered. Limit price Market price Stop loss price None of the above

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24. a. b. c. d.

For the stop loss buy order, the trigger price has to be …….. Than the limit price? Less than More than Equal None of the above

25. a. b. c. d.

For the stop loss sells order, the trigger price has to be …….. than the limit price? Less than More than Equal None of the above

26. In which condition trading member enters the order in their own account. a. Pro b. Cli 27. When an order enters the trading system, it is an …..? a. Active order b. Passive order 28. When an order enters the trading system, and doesn‟t find a match such order is known as …..? a. Active Order b. Passive order 29. a. b. c. d.

The corporate hierarchy comprises of….? Corporate manager Branch manager Client Dealer

30. ……. Can sign off any user and also define exposure limits for the branches of the firm and its dealer? a. Corporate manager b. Branch manager c. Admin d. Dealer 31. Corporate managers are view net position of all dealers but are not able to view all client level position? a. True

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b. False 32. ……….can receive end of the day consolidated trade and order report dealer wise for all branches of the trading firm? a. Corporate manager b. Branch manager c. Admin d. Dealer 33. a. b. c. d.

Dealers are users at the …… of the hierarchy? Bottom position Top position No change in position None of the above

34. ……..facilitate the trading members and the clearing members to receive and capture real time basis all the trades. a. Corporate manager b. Branch manager c. Admin d. Dealer ……..user cannot put any order or modify & cancel them? Corporate manager Branch manager Admin Dealer Clearing member corporate manager can view O/s order, previous trades and net position of is client trading members by putting the TM ID, Branch ID, Dealer ID. a. True b. False

35. a. b. c. d. 36.

37. CM and TM corporate manager can view outstanding orders, previous trades and net positions entered for any of his users/dealers by entering…..? a. TM ID b. Branch ID c. User ID d. All of the above 38. Trading member dealer can only view the requests entered by him? a. True b. False

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39. A broker is not bring risk factor to the knowledge of client is not treated as default as per client broker relationship? a. True b. False 40. A broker is not issue contract notes on time is treated as default as per client broker relationship? a. True b. False 41. A broker is charging excess brokerage is treated as default as per client broker relationship? a. True b. False 42. a. b. c. d.

In client broker relationship in derivative segment a TM must ensure that? Filling of KYC Maintain single bank account for own and clients Send periodical statement Maintain unique client code

43. A broker can issue a same client code to many clients? a. True b. False 44. A broker can receive cheque, demand draft, and cash from the clients a. True b. False 45. A broker is not collecting adequate margins is consider as default of client broker relationship? a. True b. False 46. a. b. c. d.

There are following window are displayed on the trader workstation screen? Title bar Order/trade window Market watch window All of the above

47. In inquiry window enables the user to view the information such as ….?

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a. b. c. d.

Outstanding orders Market by price Market movement All of the above

48. a. b. c. d.

The purpose of the market by price window is to enable user to view…orders? Active Passive Outstanding order Executed order

49. The market inquiry screen can provide details of all contracts at a single point of time? a. True b. False 50. The CLI order is identified as place by….? a. TM own trade b. Client order 51. a. b. c. d.

The total number of outstanding contracts at any point of time is called…? Outstanding orders Volume Open interest Turnover

52. Combination orders are traded with an ….. Attribute? a. IOC b. DAY 53. Spread orders are traded with an ….. Attribute? a. IOC b. DAY 54. a. b. c. d.

The security descriptor of an index option is …? FUTIDX OPTIDX OPTSTK FUTSTK

55. The security descriptor of an stock option is …? a. FUTIDX

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b. OPTIDX c. OPTSTK d. FUTSTK 56. The style of stock option is …? a. American b. European 57. Strike price interval of index option is specified by the exchange? a. True b. False 58. Strike price interval of stock option is specified by the exchange? a. True b. False 59. Strike price interval of index option is depending on the index level? a. True b. False 60. Price band in the index future is the operating range of ….. % of the base price? a. 5% b. 10% c. 15% d. 20% 61. a. b. c. d.

Price band in the stock future is the operating range of ….. % of the base price? 5% 10% 15% 20%

62. Price band in the stock option is based on 10% of the base price? a. True b. False 63. Price band in the stock option is based on 20% of the base price? a. True b. False 64. Price band in the Index option is based on delta value? a. True

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b. False 65. Price band in the stock option is based on delta value? a. True b. False 66. Price step in stock option is Rs. 0.05? a. True b. False 67. a. b. c. d.

NSE provides a minimum of ……strikes for every option type? 11 13 9 8

68. a. b. c. d.

NSE provides a minimum …..Strike of ITM - ….ATM -…OTM? 5-1-5 6-1-6 5-2-5 6-2-6

69. a. b. c. d.

NSE specified the minimum value of Rs ….. lakh? 1 lac 2 lac 1.5 lac 2.5 lac

70. The expiration cycle of stock option and index option are different? a. True b. False 71. a. b. c. d.

Long term options contract have a life cycle of maximum…. Years? 3 1 5 2

72. a. b. c. d.

The option contract has a contract cycle of … month? 1 2 3 None of the above

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CHAPTER 8 CLEARING & SETTLEMENT 1

Clearing Entities a) Clearing Member (Self Clearing Member, Tm as well as CM, Professional CM) b) Clearing Bank- Fund settlement, separate bank account open with designated bank of NSCCL Three activities by clearing bank 2. Clearing Mechanism – Ascertain all net position of proprietary, client position Ex- proprietary position (buy 600@1010 sell 400@1011) Client A(buy 800@1000 sell 1000@1020) Client B (buy 600@1008 Sell 200@1010) Proprietary= 200 open long position, Client A=200 open short position Client B=400 open long position, total=600 open long & 200 open short 3. Settlement Mechanism

a.

-

All F&O segment are cash settled

-

Settlement amount ascertain on al netted position of CM

Settlement of futures MTM Settlement 1) Trade price and daily settlement price (Closing Price) if not squared up 2) Previous settlement price and current day settlement price 3) The buy price and the sell price (if squared up on that day) -

CM is responsible to collect & settle the daily MTM P&L by TM or client

Ex - Trade day- 100@100 (Trade price) 105(Settlement price) MTM = 5*100=500 Next day - Buy 200@100 sell 100@102 (Settlement price) 102 MTM= Previous Day= 100*(105-102) =-300 Today

= 100*(100-102)= 200 100*(100-102)=200

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MTM Final =100Rs Final settlement for futures NSCCL mark all position of CM P&L is netted and settled in cash -

Settlement price for Futures Daily settlement price on a trading day is the closing price on such day Closing price is calculated as last half hour weighted average price

-

Settlement of Options a) Daily Settlement- Buyer pay the premium and seller receive the premium Net premium payable amount = Net premium pay- net premium receive b) Exercise Settlement- option seller has obligation to fulfill the rights then if premium is increase then it is cash settled(MTM) c) Final Exercise= Option are settled on expiration day

-

Exercise settlement price Call option=Closing price of security- strike price Put Option=strike price-closing price of security T=exercise day T+1 =Exercise settlement value debited /credited to the relevant CM bank account Adjustment of corporate actions Corporate actions are of two kinds:

-

Stock benefit- bonus, right issue, merger/demerger, amalgamation, splits etc

-

Cash benefits- dividends All adjustment are made on last day on which security traded after the closing of trading hours Adjustments:

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-

Strike price

-

Position

-

Market lot/multiplier

4. Risk Management -

NSCCL developed a comprehensive risk containment mechanism

-

Some features of risk mgmt

-

For financial soundness of risk management (Capital adequacy( net worth, security deposits) are quite strict

-

NSCCL charge upfront margin for all open position. Follow VAR based margining through SPAN

-

MTM is settled on contract settlement price.

-

MTM is settled in cash on T+1 day

-

NSCCL monitor a CM‟s open position on real time basis.

-

A member is alerted of his position to enable him to adjust his exposure or bring additional capital

-

Separate guaranteed fund created

-

The actual position and margining is carried out online through Parallel Risk Management System(PRISM).PRISM uses SPAN(standard portfolio analysis of risk) For the purpose of computation of online margins a. NSCCL-SPAN

NSCCL-SPAN identify overall risk in a portfolio of all F&O contracts for each member Factor affects the value of an option: 1)

Underlying price

2) Strike price 3) Time to expiration 4) Interest rate 5) Volatility of underlying instrument

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b. Types of margins -

Initial Margin- Margin is calculated by NSCCL by using SPAN.NSCCL collect for open position of CM‟s/TM‟s

-

Premium Margin- Premium margin is charged at client level, paid by the buyer of the option

-

Assignment margin for the options : Paid on assigned position of CM‟s towards interim and final exercise settlement obligation

-

Client margin: members are also required to report details of margin collect from client to NSCCL

5. Margin System a. SPAN Approach -

SPAN recognized the unique exposure associated with option portfolio like extreme deep out of the money short position, inter month risk, inter commodity risk .The scenario contract values are updated at least 5 times a day. Start,11:30,12:30,2:00 &at the end b. Mechanics of SPAN I. Risk array The result calculation for each risk scenario i.e. the amount by which the F&O contracts will gain & lose value over the look ahead time under the risk scenario-is called risk array value for that scenario II.

Risk Scenario

Specific set of market condition evaluated by the SPAN are called risk scenario

-

III. Scanning risk charge SPAN starts at the last underlying market settlement price and scans up and down three even intervals of price changes SPAN calculates the probable premium value at each price scan point for volatility up and volatility down scenario IV. Calendar spread margin Hedge of same securities future with different expiry, Minimum margin 1% max 3% V.

Short option minimum margin

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To cover the risk associated with deep short option position. SPAN assesses a minimum margin for each short position set by NSCCL. Short option min margin 3% of notional value, Stock option is equal to 7.5%

-

-

-

VI. Net option value Calculated as the current market value of the option times the number of option units in the portfolio It is added to the liquid net worth of the clearing member VII. Net buy premium To cover the one day risk on long option positions( in which premium shall be payable on T + 1 day), net buy premium to the extent of the net long options position value is deducted from the liquid net worth of the member on a real time basis c. Overall Portfolio Margin Requirement The total margin requirements for a member for a portfolio of futures and options contract would be computed by SPAN Initial margin requirement = Total SPAN Margin Requirement + Net Buy Premium d. Cross margining It is provided for off – setting positions at an individual client level in equity and equity derivatives segment

QUESTION 1. Which one is not included in entities in the clearing entities? a. b. c. d. 2.

Trading Member Exchange Clearing Member/Professional Clearing Member Participants like Financial Institutions

A Professional clearing member who is not a …….. Member? a. Clearing member b. Trading cum clearing member c. Trading member d. None of the above

3. …………. Acts as legal counterparty to all trades on the derivatives segment and guarantees their financial settlement. a. Clearing corporation b. Exchange c. SEBI d. Depositories

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4. For the purpose of settlement all clearing members are required to open a separate……… a. Bank account b. Clearing bank account c. Current bank account d. Saving bank account 5. The clearing mechanism essentially involves working out open positions and obligation of clearing member .this position is considered for …..? a. Daily margin b. Exposure c. Both a & b d. None of the above 6. The proprietary open position buy 40 units of RIL and sell 60 units & Buy 40 units of SBI and sell 20 units. What is the open position of proprietary? a. No open position b. 20 short of RIL & 20 long of SBI c. 20 short of RIL d. 20 long of SBI 7.

The Client A open position buy 40 units of RIL and sell 60 units & Client B Buy 40 units of RIL and sell 20 units. What is the open position of clearing member on behalf of client? a. No open position b. 20 short of client A & 20 long of client B c. 20 long of Client B d. 40 long position

8.

The net open position of trading member is …..? a. Client position b. Proprietary position c. Both a & b d. None of the above

9. The client take a buy position of 1000 shares of RIL @ Rs 1000 and the closing price of the day is 990. Calculate the MTM. a. Rs 10 b. Rs 100 c. Rs 1000 d. Rs 10000

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10. The client take a buy position of 1000 shares of RIL @ Rs 1000 and the previous day closing price of the day is 990. Today closing price is Rs 950. Calculate the MTM. a. Rs 10 b. Rs 1000 c. Rs 50,000 d. Rs 40,000 11. The client take a buy position of 1000 shares of RIL @ Rs 1000 and the closing price of the day is 990 and also buy position of 1000 shares of SBI @ 3000 and the closing price of the day is 3010 Calculate the MTM. a. No MTM b. Rs 100 c. Rs 20,000 d. Rs 10000 12. The client take a buy position of 1000 shares of RIL @ Rs 1000 and the previous day closing price of the day is 990. Today client sell position at price is Rs 950. Calculate the MTM of today. a. Rs 10 b. Rs 1000 c. Rs 50,000 d. Rs 40,000 13. SPAN means ……? a. Standard portfolio analysis of risk b. Special portfolio analysis of risk c. Standard parallel analysis of risk d. None of the above 14. Upfront initial margin is charged for all the ………position of a clearing member? a. Final b. Open c. Settled d. All 15. Open positions of the members are marked to market based on contract .The difference is settled in cash on a ………basis. a. T day b. T+2 day c. T+1 day d. T+5 day

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16. The clearing member‟s liquid net worth must be at least……. At all point in time. a. 10 lakh b. 50 lakh c. 100 lakh d. 500 lakh 17. The exchange updates the scenario contract values at least ….. Times in the day. a. 1 b. 5 c. 2 d. 10 18. Extreme loss margins are computed at …… on the mark to market value of the gross open position. a. 1% b. 2% c. 5% d. 3% 19. Client margin include…..? a. Initial margin b. Extreme loss margins c. Calendar spread margin d. Mark-to- market settlements e. All of the above 20. The clearing corporation on an ongoing basis conduct back testing of the margins collected at least once in every …. Month. a. 3 b. 6 c. 12 d. 9 21. The clearing member maintained separate bank account of the TM and the clients. a. True b. False 22. Risk management measures ………..? a. Capital adequacy norms b. Upfront initial margin c. Online position monitoring systems

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d. All of the above 23. Clearing & settlement process comprises ….? a. Clearing b. Settlement c. Risk Management d. All of the above 24. All futures & options contracts are physically settled? a. True b. False 25. Profit & loss are computed as? a. Trade price and closing price b. Previous day closing price & Current day closing price c. Trade price and square off price d. All of the above 26. On expiry date NSCCL exercised all options contract without giving notice? a. True b. False 27. Exercise settlement value is debited /credited to the CM‟s bank account on ….Day? a. T b. T+1 c. T+2 d. None of the above 28. The exercise settlement computed as closing price of the security on the day of exercise –Strike price in which type of option? a. Call option b. Put option 29. FII‟s or other institutional to execute trades through any TM, which may be cleared by which entity? a. Clearing Member b. Custodial Participants c. Professional CM d. TM 30. A Unique code is provided to which entities by the NSCCL in the case of clearing of FII‟s. a. Clearing Member

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b. Custodial Participants c. Professional CM d. TM 31. ……..develop a comprehensive risk containment mechanism for the F&O segment. a. NSE b. NSCCL c. BSE d. SEBI 32. PRISM means…..? a. Parallel Risk Management System b. Positional Risk Management System c. Parallel Revenue Management System d. None of the above 33. No capital adequacy requirement in the risk containment mechanism? a. True b. False 34. NSCCL have offline monitoring of the open position of all CM‟s? a. True b. False 35. Separate settlement guarantee fund has been from the own fund of NSCCL? a. True b. False 36. Largest loss that a portfolio might suffer from one day to next day is based on……? a. PRISM b. SPAN c. VAR d. None of the above 37. The actual position monitoring and margining is carried out online through? a. PRISM b. SPAN c. BETA d. VAR 38. If the TM open position is exceeds the position limit set then trading facility is stops. a. True b. False

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39. A TM member for again start trading facility provide…? a. Additional Fund b. Reduce exposures c. Any one option a or b d. Both option 40. PRISM uses …… for computation of online margins, based on the parameters defined by SEBI a. SPAN b. VAR c. DELTA d. VEGA 41. …………margin is paid by a buyer of an option till the premium settlement is complete? a. Initial Margin b. Premium Margin c. Assignment Margin d. None of the above 42. …………margin is paid upfront on gross basis at individual client level? a. Initial Margin b. Exercise Margin c. Assignment Margin d. None of the above 43. …………margin is required to be paid on the assigned position of CM‟s towards exercise settlement obligation for the option contract? a. Initial Margin b. Exercise Margin c. Assignment Margin d. None of the above 44. ……. To identify overall risk in a portfolio of futures & options contract ? a. SPAN b. PRISM c. VAR d. None of the above 45. There are factors which affect the value of an option? a. Volatility b. Time to expiration

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c. Underlying market price d. All of the above 46. The scenario contract in the SPAN are updated at least…in a day? a. 3 times b. 5 times c. 1 time d. 2 times 47. The result of complex calculations in SPAN is…? a. Risk array b. Risk Scenario 48. The amounts by which the futures and options contract will lose or gain over the look ahead time under the scenario are called …? a. Risk array b. Risk Scenario 49. Specific set of market condition evaluated by SPAN are called….? a. Risk array b. Risk Scenario 50. …… method is used to obtain the volatility estimate every day. a. Risk array b. Risk scenario c. Exponential Moving Average d. Simple Moving Average 51. SPAN has scanned the 16 scenarios of underlying market price and volatility changes, it selects the largest loss from among these 16 scenario is called….? a. Scanning risk charge b. Risk array c. Average d. Risk scenario 52. …………… is a position in an underlying with one maturity which is hedged by an offsetting position in the same underlying with the different maturity? a. Calendar spread b. Risk array c. Risk scenario d. Scanning risk

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53. Margin on calendar spread is levied subject to a minimum margin of ….. And a maximum margin .On the far month contract of the spread. a. 1% & 2% b. 1% & 3% c. 1% & 5% d. 2% & 5% 54. SPAN assesses a minimum margin for each short option position in the portfolio called….? a. Risk charges b. Scanning margin c. Calendar margin d. Short option minimum margin 55. The net option value is ………… for long option & ……. For short options. a. Positive & negative b. Negative & positive 56. Net option value is ……… to the liquid net worth of CM? a. Added b. Deducted c. No change d. None of the above 57. The net buy premium to the extent of long options position value is deducted from the net liquid net worth of the member on a ……basis. a. Net b. Real time c. Gross d. Value 58. The net buy premium margin shall be released towards the liquid net worth of the member on …… day after the completion of pay in towards premium settlement. a. T b. T+1 c. T+2 d. T+3 59. Scanning risk charges and the calendar spread charges are deducted for the overall portfolio margin requirement. a. True b. False

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60. Initial margin requirement equals to Total SPAN margin Requirement &..? a. Net buy premium b. Short option margin c. Scanning charges d. Calendar spread margin 61. Positions in the option contract are considered for cross margining benefits. a. True b. False 62. Which one is not considered for cross margining benefits? a. Index future & stock future position b. Index future & stock Cash market position c. Stock future & stock cash market position d. Index future & stock option position 63. In the case of options, final exercise settlement is ___________. a. Sequential b. Automatic c. Random d. Voluntary 64. Which of the following option contracts are compulsorily settled on exercise date? a. In the money options contracts b. Out of the money options Contracts c. At the money options contracts d. Deep out of the money options contracts 65. Assignment margin is charged at ___________. a. Client level b. Clearing member level c. Trading member level d. Institution level 66. A Trading member Manoj bhai took proprietary positions in a November expiry contract. He bought 3000 trading units at 1210 and sold 2400 at 1220. The end-of-day settlement price for November expiry contract is 1220. If the initial margin per unit for the November contract is Rs 100 per unit, then the total initial margin payable by Manoj bhai would be ________. a. Rs.60, 000 b. Rs.3, 00,000

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c. Rs.30, 000 d. Rs.5, 40,000 67. What is the outstanding position on which initial margin will be calculated if Mr. Madanlal buys 800 which @ 1060 and sells 400 units @1055? a. 1250 units b. 450 units c. 800 units d. 400 units 68. What will be MTM profit/loss of Mr. Ramesh if he buys 800 @ 1040 and sells 600 @1045? The settlement price of the day was 1035. a. -4000 b. +6000 c. -6000 d. +2000 69. Mr. Amar buys 600 units @ 1040 and sells 400 units @ 1030. The settlement price is 1030. What is his MTM profit/loss? a. +Rs.7, 200 b. -Rs.6, 000 c. +Rs.8, 000 d. +Rs.6, 000 70. Trading member Shantilal took proprietary purchase in a March contract. He bought 1600 units @ 1200 and sold 1200 @1220. The end of day settlement price was 1221. What is the outstanding position on which initial margin will be calculated? a. 2700 units b. 1500 units c. 1200 units d. 400 units 71. What is the outstanding position on which initial margin will be charged if no proprietary trading is done and the details of client trading are: one client buys 800 units @ 1260. The second client buys 1000 units @ 1255 and sells 1200 units @ 1260. a. a.. 900 units b. 800 units c. 1000 units d. 2700 units A: One client buys 800, he is long 800. The second buys 1000 and sells 1200, hence he is short 200. The outstanding position on which margin is Charged is 1000 (i.e. 800 + 200).

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72. The May futures contract on XYZ Ltd. closed at Rs.3940 yesterday. It closes today at Rs.3898.60. The spot closes at Rs.3800. Raju has a short position of 3000 in the May futures contract. He sells 2000 units of May expiring put options on XYZ with a strike price of Rs.3900 for a premium of Rs.110 per unit. What is his net obligation to/from the clearing corporation today? a. Payin of Rs.344200 b. Payout of Rs.344200 c. Payout of Rs.640000 d. Payin of Rs.95800 A: On the short position of 3000 May futures contract, he makes a profit of Rs.124200 (i.e. 3000 * (3940 - 3898.60)). He receives Rs.220000 on the put options sold by him. Therefore his net obligation from the clearing corporation is Rs.344200. 73. On April 1, Ms. Shetty has sold 400 calls on ABC Ltd. at a strike price of Rs.200 for a premium of Rs.20/call. On the cash market, ABC closes at Rs.240 on that day. If the call option is assigned to her on that day, what is her net obligation on April 1? a. Payin of Rs. 16000 b. Payout of Rs.8000 c. Payin of Rs.8000 d. Payout of Rs.16000 A: On the 400 calls sold by her, she receives a premium of Rs.8000. However on the calls assigned to her, she loses Rs. 16,000(400 * (240-200)). Her payin obligation is Rs.8000. 74. Margining on the NSE's derivatives market is done using the _______ margining system. a. TIMS b. Risk metrics c. SPAN d. PRISM 75. The actual margining and position monitoring is done on-line, on an intraday basis using _________ which is real-time. a. TIMS b. Risk metrics c. SPAN d. PRISM 76. The SPAN _________ represents how a specific derivative instrument will gain or lose value, from the current point in time to a specific point in time in the near future, for a specific set of market conditions which may occur over this time duration. a. Standard deviation b. Price scan range

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c. Risk array d. Volatility scan range 77. SPAN is a ______ based margining system. a. Portfolio b. Futures c. Options d. Derivatives

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CHAPTER 9 REGULATORY FRAMEWORK 1. Securities and Exchange Board of India Act, 1992 - SEBI with statutory powers for a. Protecting the interested investors in securities b. Promoting the development of the securities market and c. Regulating the securities market 2. Derivative Trading - Obtain prior approval of SEBI before start of trading in any derivative contract - Exchange should have minimum 50 members - Derivative segment would need to fulfill the eligibility conditions - Clearing and settlement of derivatives through SEBI approved clearing corporation / houses - Derivative brokers / dealers required to seek registration from SEBI  Clearing Member Rs. 300 lakh net worth  Capital + Free Reserve = net worth of clearing member - Minimum contract value not be less than Rs. 2 lakh - Initial margin requirement, exposure limits linked to capital adequacy and margin demands - “know your customer” rules and Requires that every client shall be registered with the derivatives broker - Issue to the client the Risk Disclosure Document and obtain a copy of the same duly signed by the client - Qualified approved user and sales person - Passed a certification program approved by SEBI 3. Forms of collateral’s acceptable at NSCCL - Divided in two parts:- cash component, non –cash component - Cash component:- cash, bank guarantee, fixed deposit receipts, t –bills and dated government securities - Non –cash components:- deposits of approved demat securities a. Requirements for clearing member Particulars CM and F & O CM, WDM, and F (all values in Rs. Lakh) segment & O segment Net worth 100 200 300 300 Interest free security deposits (IFSD) 110 260 with NSEIL Interest free security deposits (IFSD) 15* 15* with NSCCL Collateral Security Deposit (CSD)3 25** 25** Annual subscription 1 2

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b. Requirements for professional clearing membership Particulars F & O segment (all values in Rs. Lakh) Net worth 300 Interest free security deposits (IFSD) 25 Collateral Security Deposit (CSD) 25 Annual subscription NIL

CM segment 300 25 25 2.5

c. Requirements to become authorized / approved user - Each approved user is given a unique identification number through which he will have access to the NEAT system d. Position Limits :- specified by SEBI Trading member positions limits - Equity index option contracts:- Rs 500 Crore or 15% of the total open interest in the market - Equity index Future Contract:- Rs. 500 Crore or 15% of the total open interest in the market - Stocks having applicable market –wise position limit (MWPL) of Rs. 500 Crores or more  Combined futures and options limit is 20 % of applicable MWPL or Rs. 300 Crores, whichever is lower  Stocks future position cannot exceed 10% of applicable MWPL or Rs. 150 Crore, whichever is lower - Stock having applicable market –wise position limit (MWPL) less than Rs. 500 Crores  Combined future and option is 20% of applicable MWPL and futures position cannot exceed 20% of applicable MWPL or Rs. 50 crore, whichever is lower Client level position limits - Not exceed 1% of the free float market capitalization - 5% of the open interest in all derivative contracts in the same underlying stock, whichever is higher FII and sub –account position limits - Index options contracts is Rs. 500 crore or 155 of the total open interest , whichever is higher - Index futures contracts same as options - Short positions in index derivatives FIIs holding of stocks - Long positions in index derivatives FIIs holding of cash, Government Securities, T –bills and similar instruments - FII should report to the clearing member (Custodian) - Clearing member in turn should report the same to the exchange Position Limits for Mutual funds a. Position Limits for mutual fund index option

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All index options Rs. 500 crore or 15% of the total open interest of the market, whichever is higher Open position in all options contracts on a particular underlying index b. Mutual fund in Index futures contracts Rs. 500 crore or 15% , whichever is higher c. Position for hedging Short position in index derivative shall not exceed holding of stocks Long positions shall not exceed holding of cash, government securities, t –bills and similar instruments d. Individual securities Stock MWPL of Rs. 500 crore or more, 20% of applicable MWPL or Rs. 300 crores, whichever is lower Stock futures cannot exceed 10% of applicable MWPL or Rs. 50 crores, whichever is lower Stocks MWPL less than Rs.500 crores, futures and options limits 20% of applicable MWPL Stock futures cannot exceed 20% of applicable MWPL or Rs. 50 crore, whichever is lower Position limits for each scheme of a mutual fund Not exceed the higher of 1% of the free float market capitalization or 5% of open interest on a underlying stock Combined position in all derivatives contracts on underlying stock at a stock exchange Open interest equals to or exceed 15% 5. Reporting of client Margin

- clearing member (CMs) and Trading Member (TMs) are required to collect upfront initial margin - CMs required to compulsorily report, on a daily basis, details such margin amount due and collected, from TMs / Constituents - CMs have paid to NSSCL - TMs are required to report on daily basis detail such margin amount due and collected from constituents clearing and setting trough them - CMs have allowed initial margin limit to the TMs 6. Adjustments for Corporate Actions -

Strike price:- arrived at by dividing the old strike price by the adjustment factor Market Lot / Multiplier:- arrived at by multiplying the old market lot by the adjustment factor Position :- arrived at by multiplying the old positions by the adjustment factor  Adjustment Factor Bonus:- Ratio – A:B; Adjustment Factor: (A + B) /B

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Stock splits and consolidations: Ratio – A:B Adjustment factor: B/A QUESTION

1. As per Section 2 (H) of the act, securities not included…… a. Shares, Scrip, Stocks, Bonds b. Derivatives c. Commodity d. Government Securities 2.

A contract which derives value from the ……? a. Prices b. Index of prices c. Prices of underlying d. All of the above

3.

Derivative shall be legal and valid if such contracts are….? a. Traded in recognized exchange b. Settled by clearing corporation c. Both a & b d. None of these

4. SEBI have statutory power …? a. Protecting the interest of investors b. Promoting the development of the securities market c. Regulating the securities market d. All of the above 5.

RBI-SEBI standing technical committee is organized for trading? a. Commodity b. Futures c. Currency futures d. Shares

6. …………setup a 24 member committee under the chairmanship of Dr. L.C. Gupta to develop appropriate regulatory framework for derivatives trading in India. a. SEBI b. RBI c. Exchange d. Depository 7.

Exchange should have minimum….. Members? a. 10

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b. 50 c. 100 d. 25 8.

The minimum contract value shall not be less than Rs. ? a. 2 lac b. 1 lac c. 10 thousand d. 5 lac

9. RBI has issued notification in exercise of power conferred by section ……. Of the reserve bank of India act 1934? a. 45 W b. 45V c. 45 Z d. 45 X 10. Which one is not a part of standardized in Derivatives future? a. Size of the contract b. Contract is quoted in Indian rupees c. Buyer and sellers d. Maturity of the contract 11. Clearing member of derivatives segment having the minimum net worth. a. 100 Lac b. 300 Lac c. 125 Lac d. None of the above 12. A Recognized stock exchange having national wide terminals or new exchanges after obtaining approval from……? a. RBI b. FEDAI c. SEBI d. FEMA 13. Separate governing council is made by exchanges in which the representation of TM & CM should not exceed ….? a. 25% b. 40% c. 10% d. 75%

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14. Eligibility criteria for members in currency derivatives segment are….? a. Minimum age of 21 years b. At least graduate c. Indian citizen d. All of the above 15. Who are eligible to become PCM? a. SEBI registered custodian b. Banks c. Exchanges d. Both a & b e. All (a, b, c) 16. Eligibility criteria for membership in Derivative segment? a. Valid certification b. Payment of fees and deposits c. Strict enforcement of KYC d. All of the above 17. Who can become a member? a. Declared as adjudged bankrupt b. Compounded with his creditors c. Convicted in an offence d. Above the age of 21 18. Cash component not include collateral security? a. Bank guarantee b. Securities in Demat c. Fixed deposits d. Treasury bills 19. What are the annual subscription charges for CM in F&O segment? a. Lac b. 1 Lac c. 10,000 d. 100 Lac 20. What should be the minimum net worth of Professional Clearing Member? a. 100 Lac b. 200Lac c. 300Lac d. 500Lac 21. What is meant by IFSD? a. International fixed security deposits b. Interest free security deposits

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c. Interest fixed security deposits d. None of the above 22. For maintaining the net worth and other fund requirement collateral security is not considered? a. True b. False 23. Collateral security have only one component called cash component? a. True b. False 24. What is the minimum annual subscription charge for a PCM? a. 1 Lac b. 10 Lac c. 2 Lac d. 2.5 Lac 25. The PCM is required to bring in IFSD of Rs…. Lac and CSD of Rs… Lac per trading member in the F&O segment? a. 2 , 8 b. 6,17.5 c. 9,25 d. None of the above 26. Trading member position limit in equity index futures contracts ……. Of the total open interest in the market. a. 500 Crore or 15 % whichever is lower b. 500 Crore or 15 % whichever is higher c. 300 Crore or 20% whichever is lower d. 300 Crore or 20% whichever is higher 27. Stocks having applicable MWPL of Rs 500 Crore then the trading member position limit is…? a. 500 Crore or 15 % whichever is lower b. 500 Crore or 15 % whichever is higher c. 300 Crore or 20% whichever is lower d. 300 Crore or 20% whichever is higher 28. In client level position limits, position limit is not exceeding 1% of the total open interest or 5% of the free float market capitalization, whichever is higher? a. True b. False 29. The Stock is come in ban period if the exceeds …. % of the market wide open interest? a. 75 b. 80 c. 85 d. 95

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30. The normal trading is resumed from ban period if the ……% is below that open interest? a. 90 b. 80 c. 75 d. 95 32Every FII made disclosure on his position is more than…..% of the total open interest of the market. a. b. c. d.

10% 5% 15% 20%

31. CM‟s are required to compulsorily report on ….basis, details of margin amount due and collected from TM? a. Daily b. Weekly c. Monthly d. Yearly 32. Adjustments shall be carried out on….? a. All open position b. All Exercised Position c. All Assigned Position d. All of the above 33. On adjustment for corporate actions, in which changes incorporated? a. Strike price b. Lot size c. Position d. All of the above 34. On which % of dividend is not applicable for the adjustment in strike price? a. 10% b. 5% c. 20% d. 15%

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CHAPTER 10 ACCOUNTING FOR DERIVATIVE 1. Accounting for Futures - The Institute of Charted Accountants of India has issued guidance notes on accounting of index futures contracts from the view points of parties who enter into such futures contracts as buyers and sellers a. Accounting at the inception of a contract - Initial margin equity index futures account -Balance Sheet Date:- Balance in the Initial Margin - Equity index futures account should be shown separately under the head “Current Assets” - A disclosure should be made in the notes to the financial statement b. Accounting at the time of daily settlement: - Mark –to –market margin- equity index future account - “deposit for mark –to –market margin account” should be shown as a deposit under the head “current assets” c. Accounting for open positions - Net payment made to the broker (represented by the debit advanced in the “mark –to –market margin – equity index future account”) should created by debiting the profit and loss account. - Net amount received (represented by credit balance in the “mark –to –market margin – equity index futures account) being anticipated profit should be ignored and no credit for the said should be taken in the profit and loss account - Debit balance in the said “mark –to –market margin – equity index future account” - Net payment made to the broker. Shown under the head “current assets, loan and advances” - The credit advance in the said account, Net amount received from the broker should be shown as a current liability under the head “current liabilities and provisions in the balance sheet

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e. Accounting at the time of final settlement First In First out (FIFO) method for calculating profit / loss on squaring –up f. Accounting in case of a default When a client defaults in making payment in respect of a daily settlement, the contract is closed out The amount is not paid by the client is adjusted against the initial margin In the books of the client, the amount so adjusted should be debited to “mark – to –market – equity index futures account” with a corresponding credit to “Initial margin – equity index futures account” g. Disclosure requirements Bank guarantee and book value as also the market value of securities loaded should be disclosed in respect of contracts

2. Accounting for options a. Accounting at the inception of a contract - Initial margin would be debited to „Equity index option margin account‟ or to „equity stock option margin account‟ as the case may be - In the balance sheet, such account should be shown separately under the head „Current Assets‟ b. Accounting at time of payment / receipt of margin - Margin should be credited / debited to the bank account and the corresponding debit / credit for the adjustment should also be made to „Equity Index Option Margin Account‟ or to „Equity Stock Option Margin Account‟ as the case may be. - Lump sum amount with the Trading / clearing member in respect on margin paying / receiving on daily basic should be debited / credited to the „deposit for margin account‟ - At the end of the year the advance in this account should be shown as deposit under „Current Assets‟ c. Accounting on or open positions as on balance sheet dates - The provision created should be credited to „provision for loss on Equity Index Option Account‟ to the „Provision for Loss on Equity stock Options Account‟ as the case may be. - The provision made as above be shown as deduction from „Equity Index Option Premium „or „Equity Stock Option Premium „ which is shown under „Current Assets‟. - „Equity Index Options Premium Account‟ or „Equity Stock Options premium Account‟ and „provision for loss on equity index options account„ or „provision for loss on equity stock options account should be shown under „current liabilities and provisions‟. d. Accounting at the time of final settlement

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- premium as an expenses should be debit the profit and loss account by crediting „Equity Index options premium account‟ or „Equity stock option premium account‟. e. Accounting at the time of squaring off an option contract - The difference between the premium paid and received on the squared off transaction should be transferred to the profit and loss account. 3. Taxation of Derivative Transaction in Securities - taxed under income from Business and Profession - Loss carried forward for 8 years 10. Securities Transaction Tax (STT) - Option – 0.017 % seller - Option – 0.125 % buyer - Future – 0.017% seller

QUESTIONS 1. The Securities and Exchange Board of India Act, 1992 was an act to provide for the establishment of a Board ___________. a. To protect the interests b. To regulate the securities of investors market c. To promote the development of securities market d. All of the above 2. The regulatory framework for the derivatives market in India has been developed by the __ a. L. C. Gupta committee b. A. C. Gupta committee c. J. R. Varma committee d. None of the above 35. A member is short 400 March futures contracts and long 200 April futures contracts. A calendar spread in this case will be __________. a. Long 200 futures contracts b. Long 400 futures contracts c. Short 200 futures contracts d. Short 400 futures contracts 4. As per the requirements of SEBI, a derivatives exchange must have minimum of ______ members. a. 100

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b. 75 c. 50 d. 25 5. The minimum net worth for clearing members of the derivatives clearing corporation / house shall be __________. a. Rs.300 Lakh b. Rs.500 Lakh c. Rs.250 Lakh d. None of the above 6. Which of the following persons are eligible to become trading members in the F&O segment of NSE? a. Individuals b. Companies c. Registered firms d. Any of the above 7. The dealer/broker and sales persons in the F&O segment shall be required to pass which of the following examinations? a. MBA (Finance) b. Certified Financial Analyst c. Chartered Accountancy d. NCFM 8. Which of the following Acts governs trading of derivatives in India? a. Securities Contracts (Regulation) Act, 1956 b. Capital Issues (Control) Act, 1947 c. SEBI Act, 1992 d. Depositories Act, 1956 9. The open position for the proprietary trades will be on a ________. a. net basis b. Gross basis 10. The computation of open position for client trades would be carried out on a ______ a. Gross basis i.e. long minus short separately. b. Net basis i.e. long and short 11. A clearing member of F&O segment is required to have a net worth of_____ and keep collateral security deposit of _______. a. Rs.3 Crore, 50 Lakh. b. Rs.3 Crore, 80 Lakh. c. Rs.5 Crore, 50 Lakh. d. Rs.5 Crore, 10 Lakh. 12. The clearing member has to maintain a minimum liquid net worth of ______. a. Rs.35 Lakh b. Rs.80 Lakh

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c. Rs.50 Lakh d. Rs.20 Lakh 13. Initial margin paid/payable should be debited to _________. a. “Initial margin - Equity index futures Account” b. “Initial margin - Equity index futures client‟s account” c. c. “Initial margin - Equity index futures broker‟s account” d. None of the above 14. At the inception of a contract initial margin paid should be debited to …? a. Initial margin- Equity Index future account b. Initial margin deposit – Equity Index future account c. Deposits in the balance sheets d. None of these 15. Excess amounts in initial margin – Equity Index future account is shown at the yearend …? a. Current Assets b. Deposit – current asset c. Current liability d. Provisions – Current Liability 16. At the inception of a contract Marked to market margin paid should be debited to …? a. Marked to market margin - Equity Index future account b. Marked to market margin deposit – Equity Index future account c. Deposits in the balance sheets d. None of these 17. Excess amounts in Marked to market margin – Equity Index future account are shown at the yearend …? a. Current Assets b. Deposit – current asset c. Current liability d. Provisions – Current Liability 18. Accounting for open position – consideration for preparation of financial statement, provision of anticipated loss, which is equivalent to the net payment to the broker. a. Debiting the profit & loss account b. Debiting the mark to margin – Equity Index option account

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19. If credit balance in mark to market margin- Equity Index option account i.e. amount received by the broker is shown under….? a. Deposits – current asset b. Provisions – current liabilities c. Current asset d. Current liability 20. If more than one contract in respect of the series of futures contract to which the squared- up contract using ……… method for calculating profit & loss on squaring up a. Latest position b. FIFO c. LIFO d. Average 21. When in the case of client payment default then the amount not paid by the client is adjusted in…….? a. Mark to market margin account b. Initial margin account c. Bank account d. None of the above 22. The amount to be paid on daily settlement exceeds the initial margin the excess is shown under? a. Current Liability b. Debited in Profit & loss c. Provision – Current liability d. Both b & c 23. If initial margin amount is provided in the form of fixed deposit or bank guarantee then shown …..? a. Profit & loss account b. Mark to market margin account c. Note s to the accounts d. Provisions – current liability 24. Loss can be carried forward for a period of ….assessment years. a. 5 year b. 10 year c. 8 years d. 7 years

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25. Income or loss on derivative transaction is treated as speculative income or loss a. True b. False 26. Loss on derivative transaction is set off against any other head of income a. True b. False 27. Loss on derivative transaction is carried off to next year and adjusted against any other head of income a. True b. False 28. Guidance notes on accounting of currency futures are issued by….? a. ICSI b. SEBI c. RBI d. ICAI 29. What is the rate of STT on sale of an option in securities where option is exercised? a. 0.017% b. 0.010% c. 0.125% d. None of the above 30. STT is applicable on the ………side at the time of sale of the future contract? a. Seller b. Buyer

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MODEL TEST DERIVATIVES MARKET (DEALERS) MODULE 1. Weekly options traded on NSE follow an _______. [1 Mark] a. European style settlement b. American style settlement c. Asian style settlement d. Weekly Options are not traded at NSE 2. a. b. c. d.

A stock is currently selling at Rs. 75. The put option to sell the stock at Rs.80 costs Rs. 6. What is the time value of the option? [1 Mark] Rs. 1 Rs. 5 Rs. 2 Rs. 4

3. a. b. c. d.

Equity Index Options are a form of _________. [1 Mark] Options on Futures Basket Options Swaptions Warrants

4. a. b. c. d.

Swaption is an option to buy or sell a _______at the expiry of the option [1 Mark ] Swap Futures Basket option Warrant

5. _________ is one of the uses of Derivatives? [1 Mark] a. Forecasting b. Risk taking c. Arbitrage d. All of the above 6.

To be eligible for options trading, the ____ of a stock is taken into account. [3 Marks] a. Price Limit b. Trading Member Position Limit c. Client Wise Position Limit d. Market Wide Position Limit

7. The theoretical futures price is considered for _________in case a Futures Contract is not traded during the day? [2 Marks] a. Opening price

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b. Last traded price c. Premium settlement d. Daily mark to market settlement 8. You are the owner of a 4 million portfolio with a beta 1.0. You would like to insure your portfolio against a fall in the index of magnitude higher than 15%. Spot Nifty stands at 4200. Put options on the Nifty are available at three strike prices. Which strike will give you the insurance you want? [2 Marks] a. 4,870 b. 4,840 c. 3,570 d. None of the above 9. 2.50% is the ___________ brokerage chargeable by a trading member in relation to trades affected in the contracts admitted to dealing on the F&O segment of NSEIL, exclusive of statutory levies. [1 Mark] a. Maximum b. Minimum c. There is no limit on the brokerage d. Fixed 10. Ms. Shetty has sold 800 calls on DR. REDDY'S LAB at a strike price of Rs.882 for a premium of Rs.25 per call on April 1. The closing price of equity shares of DR. REDDY'S LAB is Rs. 884 on that day. If the call option is assigned against her on that day, what is her net obligation on April 01? [2 Marks ] a. Pay-out of Rs.18,300 b. Pay-in of Rs.18,300 c. Pay-in of Rs.13,800 d. Pay-out of Rs.18,400 11. T+1 are the basis on which ___________of futures takes place. [2 Marks ] a. Hedging b. Arbitrage c. Pricing d. Daily Mark to Market settlement 12. The stock symbol, volume and price at which each successive trade occurs is displayed in the ………? [3 Marks] a. NEAT Trading System Ticker Screen b. MBP Screen c. Outstanding Orders screen d. None of the above

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13. „A unique user ID is assigned to each _______ in F&O segment of NSEIL. [3 Marks] a. user of the trading member b. Director of the trading member c. Branch d. Exchange 14. An IOC order stands for ______________ [2 Marks] a. Interest Order Cancellation b. Immediate or Cancel order c. Increase Order Cancellation d. Immediate or Correct order 15. _________ facility is available on the F&O segment of NSEIL. [3 Marks] a. Stock trading facility b. Commodity trading c. Carry forward d. Basket trading facility 16. _________ is an order which will be cancelled if it is not matched immediately and in its entirety, in F&O segment of NSEIL. [2 Marks] a. MBP order b. Immediate or Cancel order c. Limit order d. Stop Loss 17. Institutional investors worldwide are major users of ______. [1 Mark] a. Stock Futures b. Stock Options c. Index Linked derivatives d. Equity linked derivatives 18. An 'authorized person' in the Futures & Options segment is ____[1 Mark] a. The client of the broker b. A clearing member c. An approved user of a participant d. All of the above 19. All trading member‟s positions are monitored on a real time basis by the___ [1 Mark] a. Clearing member only b. Trading member only c. NSCCL d. NSE

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20. The option price is the _______. [3 Marks] a. price paid by the buyer of the option to the seller of the option b. Paid by the seller of the option to the buyer of the option c. Sum of intrinsic value plus daily margin of an option d. All of the above 21. __________ contracts are not settled on exercise date? [2 Marks] a. In the money option contracts b. Deep in the money option contracts c. Both in the money and deep in the money option contracts d. Out of the money option contracts 22. Which of the following are derivatives? [2 Marks] a. Stocks b. Bonds c. Forward Rate Agreements d. All of the above 23. To safeguard against potential losses on out-standing positions___ is collected. [2 Marks] a. Premium margin b. Assignment margin c. Initial Margin d. None of the above 24. The seller of a derivative instrument pays ___________. [1 Mark] a. Wealth b. Sales Tax c. Securities Transaction tax d. Excise duty 25. The intrinsic value of a call option is the amount the option is ___[1 Mark] a. Deep out-of-the-money b. at-the-money c. out-of-the-money d. None of the above 26. 1 is the beta of _______. [2 Marks] a. All stocks traded at NSE b. Nifty 50 c. All stocks which are part of Nifty 50

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d. None of the above 27. A stock broker must have a certificate of registration granted by SEBI before he is allowed to __________. [1 Mark] a. Set up his broking firm b. Hire employees for his broking firm c. Appoint any director in the broking firm d. Buy, sell or deal in securities 28. The market impact cost on a trade of Rs. 3 million of the S&P CNX Nifty works out to be about 0.05%. This means that if S&P CNX Nifty is at 4000, a sell order of that value will go through at a price of Rs. _____[1 Mark] a. 3998 b. 3995 c. 3,999.50 d. 3,995.50 29. ________can be bought and sold on an exchange like shares. [1 Mark] a. ETFs b. Index Funds c. Fixed deposits d. None of the above 30. Ms. Shetty has sold 600 calls on WIPRO at a strike price of Rs.1403 for a premium of Rs.30 per call on April 1. The closing price of equity shares of WIPRO is Rs. 1453 on that day. If the call option is assigned against her on that day, what is her net obligation on April 01? [2 Marks] a. Pay-out of Rs. 21,600 b. Pay-in of Rs.15,000 c. Pay-out of Rs.13,400 d. Pay-in of Rs.12,000 31. ____ seeks to measure the amount of value that a portfolio may stand to lose within a certain time horizon due to potential changes in underlying asset spot price. [2 Marks] a. Black & Scholes model b. VaR methodology c. Binomial model d. Volatility model 32. Mr. A sells a futures contract of M/s. XYZ Ltd. (Lot Size: 1000) expiring on 29th Sep for Rs. 300. The spot price of the share is Rs. 290. He will have to pay a [1 Mark] a. Wealth tax b. Sales Tax c. Excise Tax

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d. Securities transaction tax 33. An index put option at a strike of Rs.4176 is selling at a premium of Rs.18. At what index level will it break even for the buyer of the option? [1 Mark] a. Rs. 4194 b. Rs. 4196 c. Rs. 4158 d. Rs. 4162 34. Which of the following is the duty of the trading member? [3 Marks] a. Giving tips to clients to buy and sell b. Funding losses of the clients c. Ensuring timely pay-in and pay-out of funds d. All of the above 35. Which of the following should be disclosed separately for long and short positions, in respect of each series of equity index futures as of the balance sheet date? [1 Mark] a. Number of equity index futures contracts having open position b. Names of the clients of each trade in the units of equity index futures c. Names of the dealers of each trade in the units of equity index futures d. All of the above 36. Futures and forwards are similar in the following respect____. [2 Marks] a. Settlement of contract takes place in the future b. They have settlement guarantee c. Positions are marked-to-market everyday d. Contracts are custom designed 37. You have bought a stock on the exchange. To eliminate the risk arising out of the stock price, you should _____. [3 Marks] a. Buy index futures b. Buy stock futures c. Sell stock futures d. Buy more stocks 38. MTM settlement stands for _____________. [1 Mark] a. Member to Member settlement b. Market to Market settlement c. Money to Money settlement d. Monday to Monday settlement

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39. The spot price of ABC Ltd. is Rs. 1000 and the cost of financing is 10%. What is the fair price of a one month futures contract on ABC Ltd.? [2 Marks] a. 1,082.80 b. 1008.35 c. 1,085.15 d. 1,099.40 40. Cyrus is short 800 WIPRO July Puts at strike Rs. 1620 for a premium of Rs. 43 each on July 22. On July 25, (the expiration day of the contract), th spot price of WIPRO closes at Rs.1653, while the July futures on WIPRO close at 1655. Does Cyrus have an obligation to the Clearing Corporation on his positions, and how much, if any? [2 Marks] a. Yes. Rs.19,800 pay-out b. No pay in or pay-out on expiration of contract c. Yes. Rs.18,900 pay-out d. Yes. Rs.19,800 pay-in 41. Which of the following is required for personnel working in the industry in order to dispense quality intermediation? [1 Mark] a. To follow certain code of conduct. b. To give frequent buy and sell recommendations to clients. c. To have good contacts with institutional clients. d. All of the above 42. June futures contract on ABC Ltd. closed at Rs. 4153 on May 20 and at Rs. 4150 on May 21. Raju has a short position of 8000 in the June futures contract. On May 21, he sells 5000 units of 28-June expiring Put Options on ABC Ltd. at strike price of Rs.4145 for a premium of Rs.30 per unit. What is his net obligation to / from the Clearing Corporation for May 21? [2 Marks] a. Pay-in of Rs.1,32,000 b. Pay-in of Rs.1,72,000 c. Pay-out of Rs.1,74,000 d. Pay-out of Rs.1,32,000 43. Assume that the base value of a market capitalization weighted index were 1000 and the base market capitalization were Rs.55, 000 crore. If the current market capitalization is Rs.110, 000 crore, the index is at Rs. ____. [1 Mark] a. 2,110 b. 2,350 c. 2,250 d. 2,000

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44. TRAHK (Tracks) is a popular ETF based on the _________ . [1 Mark] a. Nifty 50 index b. S&P 500 Index c. Hang Seng index d. Dow Jones index 45. If the annual risk free rate is 12%, then the „r' used in the Black Scholes formula should be ______. [1 Mark] a. 0.1133 b. 0.1398 c. 1.1 d. None of the above 46. At the balance sheet date, the balance in the `initial margin equity index options account' should be shown separately under the head ________. [1 Mark] a. Prepaid expenses b. Current assets c. Outstanding balance d. Current liabilities 47. Hedging with stock futures means ___________. [1 Mark] a. Long security, short security b. Long index futures, short index futures c. Long security, short stock futures d. Long security, long index futures 48. Which of the following is the duty of the trading member? [3 Marks] a. Filling of 'Know Your Client' form b. Execution of Client Broker Agreement c. Bringing risk factors to the knowledge of client d. All of the above 49. On expiry, the settlement price of a stock futures contract is _____[2 Marks] a. Opening price of futures contract b. Closing stock price c. Closing price of futures contract d. Opening stock value 50. The NEAT F&O trading system _____________. [3 Marks] a. Allows spread trades b. Does not allow combination trades c. Allows only a single order placement at a time

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d. None of the above 51. Santosh is bearish about ABC Ltd. and sells ten one- month ABC Ltd. futures contracts at Rs.3, 96,000. On the last Thursday of the month, ABC Ltd. closes at Rs.410. He makes a _________. (Assume one lot = 100) [1 Mark] a. Profit of Rs. 7,000 b. Loss of Rs. 7,000 c. Profit of Rs. 14,000 d. Loss of Rs. 14,000 52. The ____________ applies to SEBI for the trading member registration. [1 Mark] a. stock exchange, of which he or she is admitted as a member, b. Stock broker c. Association of Trading Members d. Association of National Trading Members 53. The on-line certification of NSE is known as the ___________. [1 Mark] a. National Certification in Financial Management (NCFM) b. National Certification in Financial Markets (NCFM) c. NSE's Certification in Financial Markets (NCFM) d. NSE's Certification in Financial Management (NCFM) 54. In Indian context, trading of derivatives is governed by the regulatory Frame work under the _______ [2 Marks] a. SC(R)R b. SEBI Act c. SC(R)A d. None of the above 55. The theoretical futures price is ________. [2 Marks] a. The price of a contract in the future b. Spot price plus cost of carry c. The price at which a futures contract trades in the market d. The price set by the exchange 56. Stock options on ICICI Bank Ltd. can be exercised ________. [2 Marks] a. Any time on or before maturity b. Upon maturity c. Any time upto maturity d. On a date pre-specified by the trading member 57. ________is allowed to only clear trades of others but not trade themselves. [1 Mark]

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a. b. c. d.

Trading member - clearing member Trading members are not allowed to clear their own trades Professional clearing member Self clearing member

58. The initial margin amount is based on ______. [2 Marks] a. Black And Scholes calculations b. Binomial calculations c. VaR calculations d. Theoretical pricing calculations 59. A market index is very important for its use ___________. [2 Marks] a. As a barometer for market behavior b. As an indicator of future stock prices c. As an indicator of management quality of companies d. All of the above 60. Swaps are a form of __________: [1 Mark] a. Derivatives b. Stocks c. Bonds d. None of the above

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SAMPLE PAPER DERIVATIVES MARKET (DEALERS) MODULE 1. Swaps can be regarded as portfolios of ________. a. b. c. d.

[ 1 Mark ]

Future Contracts Option Contracts Call Options Forward Contracts

2. A stock is currently selling at Rs. 165. The put option at Rs. 163 strike price costs Rs. 3. What is the time value of the option? [ 1 Mark ] a. b. c. d.

Rs. 3 Rs. 2 Rs. 1 Rs. 1.50

3. LEAPS have a maturity of up to _________. a. b. c. d.

[ 1 Mark ]

one year three years ten years three months

4. What is the outstanding position on which initial margin will be levied if no proprietary trading is done and the details of client trading are: one client buys 500 units @ 1260. The second client buys 900 units @Rs.1255 and sells 1000 units @Rs.1260?[2 Marks ] a. b. c. d.

1900 units 2400 units 500 units 600 units

5. A payer swaption is an option to pay ______ and receive ____ [ 1 Mark ] a. b. c. d. e.

Floating, fixed Interest, interest Fixed, floating Options, futures I am not attempting the question

6. Forward contracts are ________ contracts. [ 3 Marks ] a. Multilateral b. Tri-lateral

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c. Future d. Bilateral 7. You are the owner of a 5 million portfolio with a beta 1.0. You would like to insure your portfolio against a fall in the index of magnitude higher than 10%. Spot Nifty stands at 4000. Put options on the Nifty are available at three strike prices. Which strike will give you the insurance you want? [ 2 Marks ] a. b. c. d.

3,870 3,840 3,600 None of the above

8. A receiver swaption is an option to receive ______ and pay __ [ 1 Mark ] a. b. c. d.

Fixed, floating Floating, fixed Interest, interest Options, futures

9. The market impact cost on a trade of Rs. 4 million of the S&P CNX Nifty works out to be about 0.06%. This means that if S&P CNX Nifty is at 4000, a sell order of that value will go through at a price of Rs. ______ [ 1 Mark ] a. b. c. d.

3997.60 3996 3,999.50 3,995.50

10. Ms. Shetty has sold 1000 calls on ABC Ltd. at a strike price of Rs. 885 for a premium of Rs.27 per call on April 1. The closing price of equity shares of ABC Ltd. is Rs. 890 on that day. If the call option is assigned against her on that day, what is her net obligation on April 01? [ 2 Marks ] a. b. c. d.

Pay-out of Rs.22,300 Pay-in of Rs.22,000 Pay-in of Rs.25,000 Pay-out of Rs.22,000

11. BANK Nifty is a derivative contract on NSE ____________. True or False? [3 Marks] a. True b. False 12. CNX IT is a derivatives contract on NSE. True or False? [3 Marks] a. True

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b. False c. I am not attempting the question 13. Forward contracts on expiration have to settle by _________. a. b. c. d.

[ 3 Marks ]

Cash Difference in price Payment of margin Delivery of the asset

14. On expiry the settlement price of a stock option contract is the _________.[ 2 Marks ] a. b. c. d.

Closing futures price Closing stock price Closing options price None of the above

15. In an index fund, trading in the stocks comprising the fund is required in response to ______. [ 1 Mark ] a. b. c. d.

Favorable company specific news Poor company specific news Mergers Government policies

16. The market impact cost on a trade of Rs. 3 million of the S&P CNX Nifty works out to be about 0.04%. This means that if S&P CNX Nifty is at 4100, a sell order of that value will go through at a price of Rs. _______. [ 1 Mark ] a. b. c. d.

4098.35 4096 4093 4099.50

17. The following is an example of an order with time condition. [ 3 Marks ] a. b. c. d.

Day order Stop Loss Limit All of the above

18. What is the outstanding position on which initial margin will be levied if no proprietary trading is d one and the details of client trading are: one client buys 1000 units @ 1260. The second client buys 1000 units @Rs.1255 and sells 1000 units @Rs.1260.? [ 2 Marks ] a. 2000 units b. 3000 units

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c. 1000 units d. 4000 units 19. The beta of TELCO is 0.8. A person has a long TELCO position of Rs. 800,000 coupled with a short Nifty position of Rs. 600,000. Which of the following is TRUE? [ 1 Mark ] a. b. c. d.

He is bearish on Nifty as well as on TELCO He has a complete hedge against fluctuations of Nifty He has a partial hedge against fluctuations of Nifty He is bullish on Nifty as well as on TELCO

20. Reliance Industries Ltd. does not have a Beta value. True or False ?

[ 2 Marks ]

a. True b. False 21. Nifty consists of securities having _____ market capitalization stocks. a. b. c. d.

[ 1 Mark ]

Large Small Medium Large and small

22. The beta of ICICI Bank is 1.5. A person has a long position of Rs. 400,000 of ICICI Bank. Which of the following gives a complete hedge?[1 Mark ] a. b. c. d.

SELL Rs. 600,000 of Nifty futures SELL Rs. 650,000 of Nifty futures SELL Rs. 700,000 of Nifty futures None of the above

23. On 15th January, Raju bought a January Nifty futures contract which cost him Rs.334,500. For this he had to pay an initial margin of Rs.31,520 to his broker. Each Nifty futures contract is for delivery of 100 Nifties. On 25th January, the index closed at 3360. How much profit/loss did he make? [ 2 Marks ] a. b. c. d.

(-) 1,200 (-) 1,500 (+) 1,200 (+) 1,500

24. Futures have a _______ pay off. a. b. c. d.

[ 2 Marks ]

Non-linear Linear Vertical Horizontal

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25. Mr. A buys a futures contract of M/s. XYZ Ltd. (Lot Size: 1000) expiring on 29th Sep for Rs. 300. The spot price of the share is Rs. 290. Does he have to pay securities transaction tax? [ 1 Mark ] a. b. c. d.

Yes, only if he buys more than 1 contract Yes No, only if he sells of the contract immediately No

26. Ms. Shetty has sold 5000 calls on ABC Ltd. at a strike price of Rs. 500 for a premium of Rs.25 per call on April 1. The closing price of equity shares of ABC Ltd. is Rs. 505 on that day. If the call option is assigned against her on that day, what is her net obligation on April 01? [ 2 Marks ] a. b. c. d.

Pay-out of Rs.1,22,300 Pay-in of Rs.1,22,000 Pay-in of Rs.1,25,000 Pay-out of Rs.1,00,000

27. An index put option at a strike of Rs. 4200 is selling at a premium of Rs. 30. At what index level will it break even for the buyer of the option? [ 1 Mark ] a. b. c. d.

Rs. 4175 Rs. 4176 Rs. 4170 Rs. 4162

28. Which of the following is the duty of the trading member? a. b. c. d.

[ 3 Marks ]

Giving tips to clients to buy and sell Funding losses of the clients Collection of adequate margins from the client All of the above

29. The only way an investor can manage risks in the underlying cash market is [ 1 Mark ] a. b. c. d.

Hedging in the futures market Speculating in the futures market Speculating in the options market All of the above

30. Nifty is a ________ index [2 Marks] a. Well diversified b. Poorly diversified c. Balanced

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d. volatile 31. You have bought a stock on the exchange. To eliminate the risk arising out of the stock price, you should _____. [ 3 Marks ] a. b. c. d.

Buy index futures Buy stock futures Sell the stock futures None of the above

32. On 1st January, a three month call option on the Nifty with a strike of 4280 is available for trading. The `T‟ that is used in the Black Scholes formula should be ______. [ 1 Mark ] a. b. c. d.

3 0.25 90 None of the above

33. The spot price of ABC Ltd. is Rs. 2000 and the cost of financing is 10%. What is the fair price of a one month futures contract on ABC Ltd.? [ 2 Marks ] a. b. c. d.

2015 2016.75 2018.75 2019

34. Cyrus is short 800 WIPRO July Puts at strike Rs. 1520 for a premium of Rs. 43 each on July 22. On July 25, (the expiration day of the contract), the spot price of WIPRO closes at Rs.1553, while the July futures on WIPRO close at 1655. Does Cyrus have an obligation to the Clearing Corporation on his positions, and how much, if any? [ 2 Marks ] a. b. c. d.

Yes. Rs.19,800 pay-out No pay in or pay-out on expiration of contract Yes. Rs.18,900 pa y-out Yes. Rs.19,800 pay-in

35. On 15th October, Arvind bought a December Nifty futures contract which cost him Rs. 325,600. For this he had to pay an initial margin of Rs. 30,100 to his broker. Each Nifty futures contract is for delivery of 100 Nifties. On 27th December, the index closed at 3280. How much profit/loss did he make? [ 2 Marks ] a. b. c. d.

(+) 1400 (-) 2400 (+) 2400 (-) 1400

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36. Assume that the base value of a market capitalization weighted index were 1000 and the base market capitalization were Rs.70, 000 crore. If the current market capitalization is Rs.140, 000 crore, the index is at Rs. ____. [ 1 Mark ] a. b. c. d.

2,110 2,350 2,250 2,000

37. On 1st January, a one month call option on the Nifty with a strike of 4250 is available for trading. The `T‟ that is used in the Black Scholes formula should be _______. [ 1 Mark ] a. b. c. d.

2 0.08 20 None of the above

38. If the annual risk free rate is 9%, then the „r' used in the Black Scholes formula should be ______. [ 1 Mark ] a. b. c. d.

0.086 0.099 1.1 None of the above

39. The beta of ACC is 1.5. A person has a long TELCO position of Rs. 900,000 coupled with a short nifty position of Rs. 800,000. Which of the following is TRUE? [ 1 Mark ] a. b. c. d.

He is bearish on Nifty as well as on ACC He has a complete hedge against fluctuations of Nifty He has a partial hedge against fluctuations of Nifty He is bullish on Nifty as well as on ACC

40. If the annual risk free rate is 8%, then the „r' used in the Black Scholes formula should be ______. [ 1 Mark ] a. b. c. d.

0.076 0.096 1.1 None of the above

41. Hedging with stock futures means ___________.

[ 1 Mark ]

a. Shorting stocks b. Shorting index futures c. Shorting stock futures

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d. Long index futures 42. Which of the following is the duty of the trading member? [ 3 Marks ] a. b. c. d.

Employing large numbers of research analysts Executing his own orders prior to client orders Bringing risk factors to the knowledge of client None of the above

43. On expiry, the settlement price of a Reliance Industries Ltd. futures contract is.. [2 Marks] a. b. c. d.

Opening price of Reliance Industries Ltd. Closing price of Reliance Industries Ltd. Closing price of Reliance Industries Ltd. futures contract Last traded price of Reliance Industries Ltd.

44. On 1st January, a two month call option on the Nifty with a strike of 4250 is available for trading. The `T‟ that is used in the Black Scholes formula should be _______. [ 1 Mark ] a. b. c. d.

3 0.16 90 None of the above

45. The NEAT F&O trading system _____________. a. b. c. d.

[ 3 Marks ]

Allows spread trades Allows combination trades Allows only a single order placement at a time (a) and (b) above

46. Santosh is bearish about ABC Ltd. and sells 10 one-month ABC Ltd. futures contracts at Rs.3,96,000. On the last Thursday of the month, ABC Ltd. closes at Rs.410. He makes a _________. (Assume one lot = 100) [ 1 Mark ] a. b. c. d.

Profit of Rs. 14,000 Loss of Rs. 14,000 Profit of Rs. 28,000 Loss of Rs. 28,000

47. To be eligible for trading a broker must be _________. a. b. c. d.

[ 1 Mark ]

SEBI registered Highly capitalized A member of the Association of trading members None of the above

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48. You are the owner of a 4 million portfolio with a beta 1.0. You would like to insure your portfolio against a fall in the index of magnitude higher than 12%. Spot Nifty stands at 4200. Put options on the Nifty are available at three strike prices. Which strike will give you the insurance you want? [ 2 Marks ] a. b. c. d.

3,870 3,840 3,696 None of the above

49. A stock is currently selling at Rs. 50. The call option to buy the stock at Rs.45 costs Rs.9. What is the time value of the option? [ 1 Mark ] a. b. c. d.

Rs. 9 Rs. 7 Rs. 4 Rs. 2

50. An option contract which will not be exercised on the expiry date is ______ [ 2 Marks ] a. b. c. d.

An in-the-money option A deep in-the-money An out-o f-the-money option None of the above

51. The theoretical futures price is based on the ________. a. b. c. d.

[ 2 Marks ]

Strike price Underlying spot price The price at which a futures contract trades in the market The price set by the exchange

52. On 1st January, a two month call option on the Nifty with a strike of 4000 is available for trading. The `T‟ that is used in the Black Scholes formula should be _______. [ 1 Mark ] a. b. c. d.

2 0.16 20 None of the above

53. Stock options on HDFC Bank Ltd. can be exercised ______. [ 2 Marks ] a. b. c. d.

Any time on or before maturity Upon maturity Any time up to maturity On a date pre-specified by the trading member

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54. Ms. Shetty has sold 1400 calls on HLL at a strike price of Rs.297 for a premium of Rs.11 per call on April 1. The closing price of equity shares of HLL is Rs. 300 on that day. If the call option is assigned against her on that day, what is her net obligation on April 01.[ 2 Marks ] a. b. c. d.

Pay-out of Rs.12,300 Pay-in of Rs.12,000 Pay-in of Rs.11,000 Pay-out of Rs.11,200

55. ____is allowed to clear trades of themselves but not of others.[ 1 Mark ] a. b. c. d.

Trading member - clearing member Trading members are not allowed to clear their own trades Professional clearing member Self clearing member

56. Index Funds use index futures to reduce _________ a. b. c. d.

[ 2 Marks ]

Tracking error Expenses Time to invest in the markets All of the above

57. Weekly options trading commenced on NSE in _______. a. b. c. d.

[ 1 Mark ]

02-Jun-2005 04-Jul-2005 NSE does not trade in Weekly options 04-Jun-2005

58. The market impact cost on a trade of Rs. 5 million of the S&P CNX Nifty works out to be about 0.05%. This means that if S&P CNX Nifty is at 4200, a buy order of that value will go through at a price of Rs. _______. [ 1 Mark ] a. b. c. d.

4202.10 4200 4210 4211

59. What is the outstanding position on which initial margin will be levied if no proprietary trading is done and the details of client trading are: one client buys 2000 units @ 1260. The second client buys 2000 units @Rs.1255 and sells 1000 units @Rs.1260.? [ 2 Marks ] a. 4000 units b. 5000 units

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c. 3000 units d. None of the above 60. In the F&O segment of NSEIL, obligations of client's positions are calculated on a ________ basis. [ 2 Marks ] a. b. c. d.

Cumulative Gross Net Portfolio

Answers : 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

D A B D C D C A A D A A D B C

16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

A A C C B A A D B D D C C A A

31 32 33 34 35 36 37 38 39 40 41 42 43 44 45

C B B B C D B A C A C C B B D

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B A C C C B B A D D A C A C C

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MBA GUARANTEED PLACEMENT PROGRAM PTA provides a Guaranteed Placement Program for MBA’s those want to become a Stock Market Professional or wish to choose financial sector as a career option. In this program 40 % fees charge after the placement. TERM -I (BASICS)  Overview of Capital Market  Fundamental Of Finance  Financial Products & Services  Investment Opportunities  Market Operations TERM-II (CERTIFICATIONS) · NSE Certification In Capital Market (Dealer) Module (Professional Training Academy provides the Short notes; In house develop Question bank, Mock test) TERM-III (PRACTICAL ASPECT) · Online simulated trading o Sales & Marketing · Live Case Studies o Operation · Risk Management Strategies · Software Training · Technical Analysis o In House Software · Fundamental Analysis o ODIN · Trading Psychology o NEAT · Online Test Practice · Stress Management · Professional Skills (Professional Training Academy give the projects & assignments to the students on various topics & then student also provide the presentation on their respective projects) TERM-IV (CERTIFICATIONS) · NSE Certification in Derivatives Market (Dealers) Module (Professional Training Academy provides the Short notes; In- house develop Question bank, Mock test) TERM-V (INTERNSHIP & DEVELOPMENT)  Corporate Internship – 45 Days  Personality Development  Interview Skills  Client Handling & Soft Skill  Professional Communication Skills KNOWLEDGE BANK  Daily Business Newspaper Discussions  Weekly Business Magazine Discussions  Financial Portals  In-house Developed Financial Library DURATION: 6 Months ELIGIBILITY: MBA‟s Fees: 15,500/- (paid in equal 3 installments) 10,000/- (after the placement) (Including all Exam, Registration Fees,& Taxes)

Full time internship available during the course 9:00 am to 5:00 pm (all specialization)

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CERTIFIED CURRENCY PROFESSIONAL TERM-1 (BASICS)  Introduction To Foreign Exchange Market & Currency Future  Regulatory Framework  Factor Effecting Currency Movement  Indian & US Economic Data Analysis  USD – INR Future Pricing TERM-II (CERTIFICATIONS)  NISM – Currency Derivative Professional (Professional Training Academy provides the Short notes, In house develop Question bank, Mock test) TERM-III (PRACTICAL ASPECT)  Online Simulated Trading  Professional skills  Live Case Studies  Sales & Marketing  Risk Management Strategies  Operation  Technical Analysis  Stress Management  Fundamental Analysis  Jobbing Strategies  Online Test Practice  Spread Strategies (Professional Training Academy give the projects & assignments to the students on various topics & then student also provide the presentation on their respective projects) TERM-IV (INTERNSHIP & DEVELOPMENT)  Industrial Training – 45 Days  Personality Development  Interview Skills  Client Handling & Soft Skill  Professional Communication Skills KNOWLEDGE BANK  Daily Business Newspaper Discussions  Weekly Business Magazine Discussions  Financial Portals  In-house Developed Financial Library DURATION: 3 Months ELIGIBILITY: Under graduates, Graduates, MBA‟s, Investors, and Professionals etc. Fees: 14,500/- (paid in equal 3 installments) (Including all Exam, Registration Fees, and Taxes)

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CERTIFIED MARKET PROFESSIONAL TERM -I (BASICS)  Overview of Capital Market  Fundamental Of Finance  Financial Products & Services  Investment Opportunities  Market Operations TERM-II (CERTIFICATIONS)  NSE Certification In Capital Market (Dealer) Module (Professional Training Academy provides the Short notes, In house develop Question bank, Mock test) TERM-III (PRACTICAL ASPECT) o Sales & Marketing  Online Simulated Trading o Operation  Live Case Studies  Software Training  Risk Management Strategies o In House Software  Technical Analysis o ODIN  Fundamental Analysis o NEAT  Trading Psychology  Stress Management  Online Test Practice  Professional Skills (Professional Training Academy gives the projects & assignments to the students on various topics & then student also provide the presentation on their respective projects) TERM-IV (CERTIFICATIONS)  NSE Certification In Derivatives Market (Dealers) Module (Professional Training Academy provides the Short notes; In- house develop Question bank, Mock test) TERM-V (INTERNSHIP & DEVELOPMENT)  Corporate Internship – 45 Days  Personality Development  Interview Skills  Client Handling & Soft Skill  Professional Communication Skills KNOWLEDGE BANK  Daily Business Newspaper Discussions  Weekly Business Magazine Discussions  In-house Developed Financial Library DURATION: 6 Months ELIGIBILITY: Under graduates, Graduates, MBA‟s, Investors, and Professionals etc. Fees: 24,500/- (paid in equal 6 installments) (Including all Exam, Registration Fees, and Taxes)

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CERTIFIED COMMODITIES PROFESSIONAL TERM-I (BASICS)  Overview Of Commodity Market  Knowledge Of Fundamental Of Commodities  Commodities Products & Services  Macro Economic Data Releases  Market Operation TERM-II  MCX – Certified Commodity Professional (Professional Training Academy provides the Short notes, In house develop Question bank, Mock test) TERM-III (PRACTCAL ASPECT) o Pair Trading  Online Simulated Trading  Professional skills  Live Case Studies o Sales & Marketing  Risk Management o Operation Strategies  Software Training  Technical Analysis o In House Software  Fundamental Analysis o ODIN  Online Test Practice o NEAT  Practical Strategies  Stress Management o Jobbing o Spread Trading (Professional Training Academy gives the projects & assignments to the students on various topics & then student also provide the presentation on their respective projects) TERM-IV  NCFM – Commodity Market Module (Professional Training Academy provides the Short notes, In house develop Question bank, Mock test) TERM –V  Industrial Training – 45 Days  Personality Development  Interview Skills  Client Handling & Soft Skill  Professional Communication Skills KNOWLEDGE BANK  DAILY Business Newspaper Discussion  Weekly Business Magazines Discussions  In House Developed Financial Industries DURATION: 6 Months ELIGIBILITY: Undergraduate, Graduate, MBA‟s, Investors, and Professionals etc Fees: 24,500/- (paid in equal 6 installments) (Including all Exam, Registration Fees, and Taxes)

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Derivative Market TECHNICAL ANALYSIS INTRODUCTION Given the volatile nature of capital markets in contemporary times, it is imperative to be equipped with every possible tool available to trade or invest successfully. Technical Analysis is an effective methodology which, if understood well can allow one to be in a „comfort zone‟ in every kind of market environment. The subject, as we are aware, deals with the pricing and chartical parameters of a given asset class, be it equity, commodities or precious metals. But, there is a lot more to just pricing and that is where the need for a course on Technical Analysis arises. ABOUT TECHNICAL ANALYSIS This course has been prepared after a very meticulous review of market behavior and volatility. Both play a very significant role in sensing the direction of an asset class. It will be an insightful experience to test various methods and tools to detect the pulse of the markets. The course also includes training sessions during market hours so as to put into practice the knowledge acquired. It covers various dimensions - from the detection of good, high quality trades to money management skills needed for capital protection and risk assessment. COURSE CONTENT • Philosophy of Technical Analysis • Definition of Technical Analysis, Advantage & Disadvantages • Basic Tenets of Dow Theory • Types of Charts (Line Chart, Candlestick Chart, Bar Chart, P & F Chart etc) • Basic Concepts of Trend • Support & Resistance – Psychology of Support & Resistance) • Channel Technique • How to study Candlestick Pattern (Continuation & Reversal pattern) • How to study Chart Pattern (Continuation & reversal pattern) • Volumes & Open Interest Analysis • Moving Averages – How to use moving Averages to find out Support, Resistance and to initiating Trade • Technical Indicators (Leading & Lagging Indicators, Bollinger Band, Other Stock Market Indicators) • Sentiment Analysis • How to Read Charts by pulling it all together – Top down Approach & Bottom up Approach • Fibonacci Analysis – Trading with Fibonacci • Elliot Wave Analysis – Elliot wave applied to Stock versus Commodities • Time Cycle Analysis • How to set your Price & Time Target by using your Elliot Wave, Fibonacci and Cycle • Relative Strength Analysis • Study of Behavioral Finance/Psychology & Money management DURATION: 7 weeks – 2 days a week (Total 15 Classes) Fees : 8000/Full time internship available during the (Including all fees and taxes) course 9:00 am to 5:00 pm

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Derivative Market PREPARATORY COURSES 

AMFI Certification (All Modules)



NISM Certification (All Modules)



NCFM Certification (All Modules)

Fees: 4000/-(for each module) (Including all Exam, Registration Fees, and Taxes)

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