Nism Series 1 Currency - Last Day Exam 1_unlocked.pdf

NISM SERIES 1 – CURRENCY DERIVATIVES CERTIFICATION V.IMP LAST DAY REVISION EXAM 1

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NISM SERIES 1 – CURRENCY DERIVATIVES CERTIFICATION V.IMP LAST DAY REVISION EXAM 1

LAST DAY REVISION EXAM 1 Question 1

(a) (b) (c) (d)

Question 2

(a) (b) (c) (d)

As a trader you believe EURUSD will move from 1.65 to 1.60 in the next one month. You are a trader based in India where there is no trading in EURUSD. Therefore which of the following would you do to execute this view using currency future contracts of EURINR and USDINR. Short EURINR Long EURINR Long EURINR and Short USDINR Short EURINR and Long USDINR

Indo Trading. Ltd has taken a foreign currency loan in GBP and the repayment of this loan has to be done by monthly installments. The MD of this company is of the strong view that the interest rate gap between UK and India will widen in the coming months. So which is the most appropriate step he should take ? Do nothing as the GBP futures is generally at a premium. Buy current GBPINR future and sell one year GBPINR future He should buy GBPINR future He should sell GBPINR future

Correct Answer 1

Short EURINR and Long USDINR

Correct Answer 2

He should buy GBPINR future

Answer Explanation

When the interest rate gap widens between GBP and India, the forward premium also goes up. So by buying GBPINR futures he can hedge his position and safegaurd against possibility of a higher GBPINR price in future due to interest rate gap widening.

NISM SERIES 1 – CURRENCY DERIVATIVES CERTIFICATION V.IMP LAST DAY REVISION EXAM 1

Question 3

(a) (b) (c) (d)

Question 4

(a) (b) (c) (d)

Correct Answer 3 Answer Explanation

Correct Answer 4 Answer Explanation

A trader takes a long position in USDINR futures contract at a price of 58 by buying 10 lots. At the expiry, the settlement price is 57.30. How much Profit or Loss did the trader make ? Profit of 700 Profit of 7000 Loss of 700 Loss of 7000

A trading member has two clients Jay and Vijay - in currency futures segment and one client - Veer Gin currency option segment. During the day, each of the clients in currency futures segment sold 6000 USD and bought 3000 USD. At the end of a trading day, each of the client in currency futures segment have 6000 USD short position and 3000 USD long position. Additionally, the currency option client has 3000 USD long position. What is the gross open position for the trading member for the purpose of monitoring open position 6000 USD 9000 USD 3000 short for currency futures and 2000 long for currency options No Open Position

Loss of 7000 The trader went long which means he bought USDINR at 58. Settlement price is 57.30 P/L = Selling Price - Buying Price = 57.30 - 58 = (-) 0.70 Loss (-) 0.70 x 10 Lots X 1000 ( lot size of USDINR ) = (-) 7000 Loss

9000 USD Open postion of Jay : - 6000 + 3000 USD = 3000 USD Short Open position of Vijay : - 6000 + 3000 USD = 3000 USD Short Open position of Veer : 3000 USD Long Gross open position of the trading member is the sum of open position of all clients 9000 = 9000 USD

NISM SERIES 1 – CURRENCY DERIVATIVES CERTIFICATION V.IMP LAST DAY REVISION EXAM 1

Question 5

(a) (b) (c) (d)

Question 6

(a) (b)

Correct Answer 5 Answer Explanation

Correct Answer 6

If more than one contract in a series are outstanding at the time of expiry/ squaring off, the contract price of the contract so squared off should be determined using ______________. LIFO method FIFO method Average price method Weighted price method

In managed float, countries have controls on flow of capital and central bank intervention is a common tool to contain sharp volatility and direction of currency movement - True or False ? TRUE FALSE

FIFO method If more than one contract in a series are outstanding at the time of expiry/ squaring off, the contract price of the contract so squared off should be determined using First-in, First-out (FIFO) method for calculating profit/loss on squaring-up. TRUE

NISM SERIES 1 – CURRENCY DERIVATIVES CERTIFICATION V.IMP LAST DAY REVISION EXAM 1

Question 7 (a) (b) (c) (d)

Question 8

(a) (b) (c) (d)

Correct Answer 7 Answer Explanation Correct Answer 8 Answer Explanation

A _____________ can trade in his own account as well as on account of its client. Participant Custodian Trading cum clearing member Trading Member

In the OTC market, one month GBPINR is quoting at 76.50 / 76.70 and futures for same maturity is quoting at 77.35 / 77.45. Which of the following describes possible arbitrage trade and possible arbitrage profit per GBP if the arbitrage trade is carried until maturity? Buy USDINR in OTC and sell in futures, 85 paise Sell USDINR in OTC and buy in futures, 85 paise Sell USDINR in OTC and sell in futures, 60 paise Buy USDINR in OTC and sell in futures, 65 paise

Trading Member Trading members are members of an authorized Exchange. They can trade either on their own account or on behalf of their clients including participants. Buy USDINR in OTC and sell in futures, 65 paise Arbitrageurs take advantage of a discrepancy between prices in two different markets. ie. buy in one market at a lower price and sell in another at a higher price. Here, in the OTC Market the Bid Ask price is 76.50 / 76.70. So an arbitrageur will buy at 76.70. In Futures Market the Bid Ask price is 77.35 / 77.45. So the arbitrageur will sell at 77.35. Thus he will make an arbitrage profit of Rs 0.65 ( 77.35 - 76.70 )

NISM SERIES 1 – CURRENCY DERIVATIVES CERTIFICATION V.IMP LAST DAY REVISION EXAM 1

Question 9

(a) (b) (c) (d)

Question 10

(a) (b) (c) (d)

Correct Answer 9 Answer Explanation

Correct Answer 10 Answer Explanation

Mr. Shastri invested Rs 200000 in US Shares when the USDINR rate was 60 After three years his investments were down by 6%. He sold of these shares and repatriated the money back to India at the then existing rate of USDINR at 63. What would be his real yearly returns in INR. 1.30% Loss 0.43 % Loss 1.30 % Profit 0.43 % Profit

A trading member buys 12 lots of two month GBPINR future in his proprietary account. What is his open position at the end of that day in GBP ? 12000 6000 1200 NIL

0.43 % Loss Mr Shastri invested Rs 200000 at GBRINR 60. So he invested 200000 / 60 = 3333.33 USD His investment fell by 6 % ie.200 less 6% = 3133.33 USD He repatriated this amount at USDINR 63 = 3133.33 X 63 = 197399.79 So his money has gone down from 200000 to 197399.79 in two years = 1.30 % loss On a yearly basis its 1.30 / 3 = 0.43 % Loss

12000 The lot size for GBPINR future contract is 1000 So 12 Lots X 1000 = 12000 GBP

NISM SERIES 1 – CURRENCY DERIVATIVES CERTIFICATION V.IMP LAST DAY REVISION EXAM 1

Question 11

(a) (b) (c) (d)

Question 12

(a) (b) (c) (d)

In the morning trades GBPINR was trading at 72.50 / 72.75 and GBPUSD was trading at 1.6525 - 1.6550. At 2 pm on the same day GBPINR moves to 72.00 / 72.25 and GBPUSD moves to 1.5050 / 1.5075. What would best describe these movements ? GBP has appreciated against INR and appreciated against USD GBP has appreciated against INR and depreciated against USD GBP has depreciated against INR and appreciated against USD GBP has depreciated against INR and depreciated against USD

One year interest rate in US is 2 % and in India its 10 %. Assume current USDINR spot rate is 58 and one year future price is 62. Assuming other things remaining the same, what would be the one year future value of USDINR if the interest rate gap widens between US and India ? Higher than 62 Lower than 62 Lower than 58 Equal to 58

Correct Answer 11

GBP has depreciated against INR and depreciated against USD

Correct Answer 12

Higher than 62

Answer Explanation

There was a 8 % ( 10 - 2 % ) gap in the interest rates and as per this gap the spot and future price were 58 and 62 respectively. If the interest rate gap widens, the gap between spot rate and future rate will also widen and so the future rate will be above 62. (And if the interest rate gap becomes less, the future price will come down accordingly)

NISM SERIES 1 – CURRENCY DERIVATIVES CERTIFICATION V.IMP LAST DAY REVISION EXAM 1

Question 13

(a) (b)

Question 14

(a) (b) (c) (d)

Correct Answer 13 Answer Explanation

Correct Answer 14 Answer Explanation

The minimum networth required for a company for applying to become a authorised exchange of currency futures is Rs 200 crores - True or False ? TRUE FALSE

A trader buys 20 lots of USDINR at 54.50 and sells 6 lots the same day at 54.60. The settlement price for the day was 54.40. What would be his mark to market margin ? -800 -1400 -1000 NIL

FALSE The minimum networth required for a company for applying to become an authorised exchange of currency futures is Rs 100 crores.

-800 Mark to Market margin is calculated on three positions - Squared up, Not Squared up and Bought forward. In the above example : Squared Up : 6 lots 54.60 -54.50 = 0.10 x 6 lots x 1000 lot size = Rs 600 profit Not Squared up : 14 lots ( 20 - 6 ) Settlement Price - Contract Price = 54.40 - 54.50 = - 0.10 - 0.10 x 14 lots x 1000 lot size = Rs 1400 loss Bought Forward : NIL So Mark to Market Margin = -1400 + 600 = -800

NISM SERIES 1 – CURRENCY DERIVATIVES CERTIFICATION V.IMP LAST DAY REVISION EXAM 1

Question 15

(a) (b) (c) (d)

Question 16

(a) (b) (c) (d)

Correct Answer 15 Answer Explanation

Correct Answer 16 Answer Explanation

Mr. Sumer purchased US Securities worth USD 6000 when the USDINR rate was 48. After one year he sold those securities for USD 5900 and the USDINR rate was 52. What was his profit / loss for the year? -6.52% 6.52% -10.59% 10.59%

According to SEBI guidelines, the currency exchanges have to offer some monthly series and some quarterly maturity currency future options contract. How many series have they to offer ? 2,2 3,2 3,4 3,3

6.52% Investment of Mr Sumer = 6000 X 48 = Rs 288000 Sale Price of this investment = 5900 X 52 = 306800 Profit : 306800 - 288000 = 18800 So on a investment of Rs 288000 he has made a profit of Rs 18800 In % terms 18800 x 100 / 288000 = 6.52 % in a year

3,3 The Exchanges have to offer three serial monthly contracts followed by three quarterly contracts of the cycle March/June/September/December.

NISM SERIES 1 – CURRENCY DERIVATIVES CERTIFICATION V.IMP LAST DAY REVISION EXAM 1

Question 17

(a) (b)

Question 18 (a) (b) (c) (d)

Correct Answer 17 Answer Explanation

Correct Answer 18 Answer Explanation

Currently American options ie. options which can be exercised by the buyer on or before maturity, are not allowed in currencies in India True or False ? TRUE FALSE

A trader sells USDINR call option at premium of 40 paise per contract. What is the maximum profit he may gain ? NIL Unlimited 40 paise per contract 120 paise per contract

TRUE Options are of two types - European and American. European options can be exercised by the buyer of the option only on the expiration date. American options can be exercised by the buyer any time on or before the expiration date. IN INDIA, ALL CURRENCY OPTIONS ARE OF EUROPEAN TYPE IE. EXERCISED BY THE BUYER ONLY ON THE EXPIRATION DATE. 40 paise per contract For an Option seller ( for both Call or Put options ), the maximum profit is the premium he receives. In the above case its 40 paise per contract. For an Option buyer, the profits can be unlimited.

NISM SERIES 1 – CURRENCY DERIVATIVES CERTIFICATION V.IMP LAST DAY REVISION EXAM 1

Question 19 (a) (b) (c) (d)

Question 20

(a) (b) (c) (d)

Correct Answer 19 Answer Explanation

Correct Answer 20 Answer Explanation

Of the below - which currency pair is allowed in Currency OPTION trading in India ? USDINR USDEUR GBPINR USDJPY

A trader wants to buy EURINR one month future at 66.70 when the current price is 66.80. When he is entering the limit order, the price is fluctuating between 66.50 to 66.90. At what price is the order likely to get executed ? At or below 66.70 Any price below 66.70 66.8 Any price above 66.70

USDINR Only USDINR is allowed in currency option trading in India.

At or below 66.70 When a person enters a limit buy order, his order cannot get executed above the limit price. However if the price falls while entering the order, he can get it at a lower price. So in the above case, he can get EURINR at the limit price of 66.70 or lower if the price falls while entering the order.

NISM SERIES 1 – CURRENCY DERIVATIVES CERTIFICATION V.IMP LAST DAY REVISION EXAM 1

Question 21

(a) (b) (c) (d)

Question 22

(a) (b)

Correct Answer 21 Answer Explanation

Correct Answer 22 Answer Explanation

An exporter and importer of India does his trade in USD. His imports are about 30% more than the exports. Which of the below risk should he manage ? Widening trade deficit between USE and China INR depreciating against USD INR appreciating against USD Break out of wars in the world

With respect to settlement in OTC forward market, the market participant can decide to settle it via gross settlement mechanism or net settlement mechanism - True or False ? TRUE FALSE

INR depreciating against USD If INR depreciates against USD ( for eg - USD appreciates to 60 from 55 ), the imports will become more expensive. So he has to do proper hedgeing to mitigate this risk.

False It is always delivery based

NISM SERIES 1 – CURRENCY DERIVATIVES CERTIFICATION V.IMP LAST DAY REVISION EXAM 1

Question 23

(a) (b) (c) (d)

A trading member sells 30 lots of USDINR of August futures on day 1. On the same day he also buys 16 lots of September USDINR futures. What would be his position in his proprietary book at the end of the day in USD ? 14,000 16,000 30,000 46,000

Question 24

Which of the following best describes the key aspect of discretionary trading done by trading member in account of its client ?

(a)

Trading member can use his discretionary power to trade to the extent of 1000 lots on behalf of his clients per day.

(b)

The clients has given prior written authorization to a stated individual or individuals to use discretionary power

(c)

Trading member can use his discretionary power to trade to the extent of 10 % of clients networth on behalf of his clients per day.

(d)

The clients has given prior written authorization to a stated individual or individuals to use discretionary power and the account has been accepted by the Trading Member

Correct Answer 23 Answer Explanation

46,000 For contracts of different maturity, each maturity is taken as a separate contract and there is no netting off done across contracts. So to get the Open position, both the contracts will added up. 30 + 16 = 46 X 1000 ( Lot size for USDINR) = 46,000

Correct Answer 24

The clients has given prior written authorization to a stated individual or individuals to use discretionary power and the account has been accepted by the Trading Member

Answer Explanation

As per the Trading Principles - No Trading Member shall exercise any discretionary power in a constituent’s account unless such constituent has given prior written authorization to a stated individual or individuals and the account has been accepted by the Trading Member, as evidenced in writing by the Trading Member.

NISM SERIES 1 – CURRENCY DERIVATIVES CERTIFICATION V.IMP LAST DAY REVISION EXAM 1

Question 25

(a) (b) (c)

Question 26

(a) (b) (c) (d)

Correct Answer 25 Answer Explanation

Correct Answer 26 Answer Explanation

If everything else remaining the same, any policy matters which may give a boost to inflow of foreig capital in India may result in what kind of movement of INR against JPY ? No change INR appreciating against JPY INR depreciating against JPY

Mr Mehta invested Rs 1.00,000 in UK Stock Markets when the GBPINR rate was 75. After one year his investment appreciated by 20% in GBP terms. He sold of his investments and repatriated the money to India at the then existing rate of 80. What is his real returns in INR ? He has made a Profit of 20% He has made a Loss of 20% He has made a profit of 28% He has made a Loss of 28%

INR appreciating against JPY An increase in capital inflows will cause the local currency to appreciate generally against all currencies since there is a higher demand for that local currency. Alternately if there is outflow of foreign capital, the local currency will weaken.

He has made a profit of 28% Mr. Mehta invested Rs1,00,000 in UK Stock when the GBPINR rate was 75. So he had invested 1,00,000 / 75 = 1333.33 pounds in UK Stocks. His investment grew by 20% : 1333.33 x 20% = 1333.33 + 266.66 = 1600 He is repatriating at GBPINR rate of 80 : 1600 x 80 = 128000 Therefore his investment in INR terms have grown from Rs 1,00,000 to Rs 1,28,000 128000 x 100 / 100000 = 128 This is an increase of 28 %

NISM SERIES 1 – CURRENCY DERIVATIVES CERTIFICATION V.IMP LAST DAY REVISION EXAM 1

Question 27

(a) (b) (c) (d)

Question 28 (a) (b) (c)

A person who works in a currency broking firm is an expert in analyzing the trends in currency futures. He has studied GBPINR movements very carefully and is of a very strong opinion that GBP will appreciate against INR in the next few months. So he has advised his clients to go long in GBPINR and also guaranteed them against any losses. His actions have violated some trading guidelines. What should this person have done so that he would not have broken the trading guidelines ? He should have as asked his clients to take a calendar spread to avoid big risks He should not have guaranteed against any losses He should have asked his clients to take short positions He should have asked his clients to go long in 3 months future and short in 1 year future

If the spot price of EURINR is 70, what will be the moneyness of a short EUR put option on a strike price of 68 ? In the money At the money Out of the money

Correct Answer 27

He should not have guaranteed against any losses

Correct Answer 28

In the money

Answer Explanation

When we short a Put option, we are of the belief that the underlying will rise. Here EURINR spot is above the strike price ( it has risen) so it will be In the Money. In the Money option - Profitable Out of the Money option - Loss At the money option - No P/L Simple Facts : Buying a Call - Bullish , Selling a Call - Bearish Buying a Put - Bearish, Selling a Put - Bullish

NISM SERIES 1 – CURRENCY DERIVATIVES CERTIFICATION V.IMP LAST DAY REVISION EXAM 1

Question 29

(a) (b) (c) (d)

Question 30

(a) (b) (c) (d)

A member with a right to trade on its own account as well as on account of its clients and who can clear and settle the trades for self and for others through the Clearing House is called a _______________. Professional Clearing Member Trading Member Clearing Member Trading cum Clearing Member

An importer has to make payments in USD while most of its revenue is in INR. The importer is concerned about USDINR risk. Which of the following strategy should it consider to mitigate this risk ? USD appreciating against INR - Long USDINR futures USD appreciating against INR - Short USDINR futures USD depreciating against INR - Long USDINR futures USD depreciating against INR - Short USDINR futures

Correct Answer 29

Trading cum Clearing Member

Correct Answer 30

USD appreciating against INR - Long USDINR futures

Answer Explanation

The risk which the importer faces is the rise of USDINR as he has to make import payments in USD. So to hedge this risk, he will go long in USDINR futures.

NISM SERIES 1 – CURRENCY DERIVATIVES CERTIFICATION V.IMP LAST DAY REVISION EXAM 1

Question 31

(a) (b) (c) (d)

Question 32 (a) (b)

Correct Answer 31 Answer Explanation

Correct Answer 32

Mr Rohit is very bullish on GBPINR and thinks that this pair will trade at 80 in the next few weeks. The current price of GBPINR is 75. Mr. Rohit wants to maximize his profits if this view turns out to be correct. Which of the below strategies should he consider ? Buy GBPINR Call option Sell GBPINR Call option Buy GBPINR Put option Sell GBPINR Put option

State True or False - An option seller or writer shall always be obliged to perform but never gets the right to demand ? FALSE TRUE

Buy GBPINR Call option Buy a Call option or Selling a Put option - both signify bullish view. Buy when you sell a Put option, the profits are limited to the extent of premium received. So to maximise his profits, he will buy a Call Option where the profit potential is unlimited. TRUE

NISM SERIES 1 – CURRENCY DERIVATIVES CERTIFICATION V.IMP LAST DAY REVISION EXAM 1

Question 33 (a) (b)

Question 34 (a) (b) (c) (d)

Correct Answer 33 Answer Explanation

Correct Answer 34

Future contracts give the seller both the right and obligation which is not the case in Options - True or False ? TRUE FALSE

At what time does the GBPINR and USDINR futures contract stops trading on the contract expiry day ? 11:00 AM 12 noon 2:00 PM 5

TRUE Futures give the buyer and seller both the right and the obligation to fulfill the contract’s obligations. Options give the holder the right (or option) but not the obligation to exercise the contract. The seller of the option, on the other hand, is required to fulfill the contract’s obligations if the holder chooses to exercise the contract.

12 noon

NISM SERIES 1 – CURRENCY DERIVATIVES CERTIFICATION V.IMP LAST DAY REVISION EXAM 1

Question 35

(a) (b) (c)

Question 36

(a) (b) (c) (d)

Correct Answer 35 Answer Explanation

Correct Answer 36 Answer Explanation

Assume that USDINR spot price to remain the same in the next 30 days and premium on USD to INR to continue. So which of the below actions will result in losses ? Selling USDINR futures Selling USDINR OTC forward Buying USDINR futures

As per SEBI rules, the currency exchanges have to offer ____ series monthly contracts and ____ quarterly maturity currency futures options contract. 4,4 3,3 3,4 4,3

Buying USDINR futures The buyer of future contract suffers a loss if there is no movement in the underlying due to the concept of time decay.

3,3 Exchanges have to offer three serial monthly contracts followed by three quarterly contracts of the cycle March / June / September / December.

NISM SERIES 1 – CURRENCY DERIVATIVES CERTIFICATION V.IMP LAST DAY REVISION EXAM 1

Question 37

(a) (b) (c) (d)

Question 38

(a) (b) (c) (d)

Correct Answer 37 Answer Explanation

Correct Answer 38 Answer Explanation

Mr. Swami entered in a spread trade. He bought 20 lots October USDINR at Rs 59.70 and sold 20 lots November USDINR at 59.90. After a month he reverses his spread by selling 20 lots October USDINR at 59.30 and buying 20 lots of November USDINR at 59.20. How much profit or loss has he made in this spread trading ? Profit of Rs 60 Profit of Rs 6000 Loss of Rs 60 Loss of Rs 6000

Mr A believes that USDJPY will move from 87 to 82 in the next 2-3 months. Since USDJPY contracts are not traded in India, which of the following would Mr A do using future contracts of USDINR and JPYINR Long JPYINR Long USDINR Long USDINR and Short JPYINR Long JPYINR and Short USDINR

Profit of Rs 6000 In the first leg of the spread trade : Bought at 59.70 and sold at 59.90. Here he has made a profit of 0.20 In the second leg he bought at 59.20 and sold at 59.30. Here he has made a profit of 0.10 So overall he has made a profit of 0.20 + 0.10 = 0.30 X 20 lots x 1000 lot size of USDINR = Rs 6000 profit Long JPYINR and Short USDINR Since Mr. A believes that USDJPY will fall from 87 to 82, he is assuming that USD will weaken against JPY. So in India he will short USDINR and long JPYINR.

NISM SERIES 1 – CURRENCY DERIVATIVES CERTIFICATION V.IMP LAST DAY REVISION EXAM 1

Question 39

(a) (b) (c)

Question 40

(a) (b) (c) (d)

Correct Answer 39 Answer Explanation

Correct Answer 40

If one year interest rate in US is 1% and 4 % in Great Britain and the current GBPUSD spot rate is 1.74. What would be the one year futures of GBPUSD ? Lower than 1.74 Higher than 1.74 1.74

As per the Foreign Exchange Management Act an 'AD Category 1' bank can have a maximum net NPA of _____ % to become a Trading and Clearing Member of currency futures segment at a recognised stock exchange. 4% 4.80% 3% 2.50%

Lower than 1.74 The formula for Interest Rate Parity is : Future Rate = Spot Rate X (1 + Interest Rate of Quoted Currency) / ( 1 + Interest Rate of Base Currency) = 1.74 X ( 1 + 0.01 ) / ( 1 + 0.04 ) = 1.74 X ( 1.01 / 1.04) = 1.74 x 0.9711 = 1.689 Thus the future rate will be at a discount as Quoted Currency interest rates are less than base currency interest rates. 3%

NISM SERIES 1 – CURRENCY DERIVATIVES CERTIFICATION V.IMP LAST DAY REVISION EXAM 1

Question 41 (a) (b) (c) (d)

Which of the following is true? Exchange rates are quoted in per unit of quotation currency Quotation currency is the first currency in a currency pair Base currency is the second currency in a currency pair Base currency is the first currency in a currency pair

Question 42

At 11 am, USDINR was quoting at 56.40/56.60. At 3 pm it was quoting at 56.50/56.70. What would best describe currency move during the day ? INR has appreciated against USD by 10 paise USD has appreciated against INR by 10 paise INR has appreciated USD has appreciated

(a) (b) (c) (d)

Correct Answer 41 Answer Explanation

Correct Answer 42

Base currency is the first currency in a currency pair For eg, in the currency pair USDINR, USD is the Base Currency and INR is the quoted currency.

USD has appreciated against INR by 10 paise

NISM SERIES 1 – CURRENCY DERIVATIVES CERTIFICATION V.IMP LAST DAY REVISION EXAM 1

Question 43

(a) (b) (c) (d)

Question 44 (a) (b) (c) (d)

Correct Answer 43 Answer Explanation

Correct Answer 44 Answer Explanation

Mr Khan buys May USDINR contract which cost him Rs 49000. The RBI reference rate for final settlement is fixed at 48.70. How much profit / loss did he make ? Rs 300 Profit Rs 300 Loss Rs 30 Profit Rs 30 Loss

Which term best describes EUR currency? Free floating Managed float Pegged to gold Pegged to USD

Rs 300 Loss USDINR contract lot is 1000. Mr. Khan has bought one lot for a cost of Rs 49000 So 49000 / 1000 = 49 Buying Price Settlement Price is 48.70 48.70 - 49.00 = (-) 0.30 loss x 1000 lot size = Rs 300 Loss Free floating All popular currencies of the world like USD, EYR are free flaoting.

NISM SERIES 1 – CURRENCY DERIVATIVES CERTIFICATION V.IMP LAST DAY REVISION EXAM 1

Question 45

(a) (b) (c) (d)

Question 46

(a) (b) (c) (d)

Correct Answer 45 Answer Explanation

Correct Answer 46 Answer Explanation

A trader sells 20 lots of USDINR September futures at 53.20 and squares off this position after INR depreciates by 60 ticks. What is his profit / loss for this trade ? Profit of Rs 3000 Loss of Rs 3000 Profit of Rs 300 Loss of Rs 300

In OTC market, one month USDINR is quoting at 47.75/48.00 and futures for same maturity is quoting at 48.50/48.70. Which of the following describes possible arbitrage trade and possible arbitrage profit per USD if the arbitrage trade is carried until maturity? Buy USDINR in OTC and sell in futures, 60 paise Sell USDINR in OTC and buy in futures, 85 paise Buy USDINR in OTC and sell in futures, 50 paise Buy USDINR in OTC and sell in futures, 75 paise

Loss of Rs 3000 INR has depreciated which means the price of USDINR will rise. As the trader has sold USDINR he will face losses in this situation. Tick Size is Rs .0025 60 Ticks X .0025 = 0.15 X 20 lots X 1000 ( Lot size of USDINR) = Rs 3000 loss.

Buy USDINR in OTC and sell in futures, 50 paise Arbitrageurs make profits by simultaneously entering opposite side transactions in two or more markets ie. buy in one market at a lower price and sell in another at a higher price. Here, in the OTC Market the Bid Ask price is 47.75 / 48.00. So an arbitrageur will buy at 48.00. In Futures Market the Bid Ask price is 48.50 / 48.70. So the arbitrageur will sell at 48.50. Thus he will make an arbitrage profit of Rs 0.50 ( 48.50 - 48.00 )

NISM SERIES 1 – CURRENCY DERIVATIVES CERTIFICATION V.IMP LAST DAY REVISION EXAM 1

Question 47

(a) (b) (c) (d)

Question 48 (a) (b)

Correct Answer 47 Answer Explanation

Correct Answer 48 Answer Explanation

A trader in currencny markets believes that GBPUSD will move from 1.75 to 1.79 in next 1 months. Which of the following would you do to execute this view using currency futures contract of GBPINR and USDINR? Short GBPINR, Long USDINR Long GBPINR, Short USDINR Long GBPINR Short GBPINR

Volatility is the measure of uncertainty in prices of the underlying asset True or False ? TRUE FALSE

Long GBPINR, Short USDINR GBPUSD moving from 1.75 to 1.79 means GBP becoming stronger against USD. So he will buy GBPINR and Sell USDINR.

TRUE Volatility measures the magnitude of the change of prices (up or down) of the underlying asset. Higher the volatility, higher is the option premium and vice versa.

NISM SERIES 1 – CURRENCY DERIVATIVES CERTIFICATION V.IMP LAST DAY REVISION EXAM 1

Question 49 (a) (b) (c) (d)

Question 50

(a) (b) (c) (d)

Correct Answer 49 Answer Explanation

Correct Answer 50 Answer Explanation

The initial deposit which is required for initiating a currency future position is known as ___________. Mark to Market Margin Special Margin Initial Margin VaR Margin

A trader wants to SELL GBPINR one month future at 70.60 when the current price is 70.50. When he is entering the limit order, the price is fluctuating between 70.40 to 70.80. At what price is the order likely to get executed ? Any price between 70.40 to 70.80 Any price above 70.60 Any price below 70.60 At or above 70.60

Initial Margin The initial security deposit paid by a member is considered as his initial margin for the purpose of allowable exposure limits. Initially, every member is allowed to take exposures up to the level permissible on the basis of the initial deposit. At or above 70.60 When a person enters a limit SELL order, his order cannot get executed below the limit price. However if the price rises while entering the order, he can sell it at a higher price. So in the above case, he can sell GBPINR at the limit price of 70.60 or higher if the price rises while entering the order.

NISM SERIES 1 – CURRENCY DERIVATIVES CERTIFICATION V.IMP LAST DAY REVISION EXAM 1

Question 51

As per the giudelines issued with respect to permissions for trading in 'PRO ACCOUNT' by the trading member, which of the below is true ?

(a)

Pro Account orders can be entered from many locations as approved by the trading member / broker.

(b)

Pro Account orders can be entered from any five locations as approved by the Exchange

(c)

Pro Account orders can be entered from more than one locations as approved by the Exchange

(d)

Pro Account orders can be entered from any ten locations as approved by the trading member / broker.

Question 52

A trader in India expects international gold prices to appreciate from USD 1500 per ounce to USD 1800 in next six months. To benefit from the view, he buys 30 grams of gold at Rupees 22,000 per gram and also sold 6 month USDINR futures at 46. After six months, gold prices appreciated to USD 1800 per ounce and the trader sold gold at Rupees 24,000 per gram and unwinds currency futures contract at 44. Assuming 1 ounce is equal to 3 grams, how many lots of currency futures would he have used to hedge the currency risk and how much was the real return for the investor? 18 lots, 13% 15 lots, 13.6% 15 lots, 13% 18 lots, 13.6%

(a) (b) (c) (d)

Correct Answer 51

Pro Account orders can be entered from more than one locations as approved by the Exchange

Answer Explanation

When a Trading Member requires the facility of using ‘Pro-account’ through trading terminals from more than one location, such Trading Member shall request the Exchange stating the reason for using the ‘Pro-account’ at multiple locations. The Exchange may, on a case to case basis after due diligence, consider extending the facility of allowing use of ‘Pro-account’ from more than one location.

NISM SERIES 1 – CURRENCY DERIVATIVES CERTIFICATION V.IMP LAST DAY REVISION EXAM 1

Correct Answer 52 Answer Explanation

15 lots, 13.6% Part 1 - 3 grams = 1 ounce 30 grams = 10 ounce So he has to hedge 10 ounce worth of USD = 1500 x 10 = 15000 USD. One lot is of 1000 USD, So he has to sell 15 lots. Part 2 : He bought 30 grams gold at Rs 22,000 per gram and sold at Rs 24,000 So the profit is 2000 X 30 = Rs 60000 He also makes a profit in futures where he sell 15 lots at 46 and buys them back at 44. So Rs 2 profit x 15 lots X 1000 lot size = Rs 30000 Total profit Rs 60000 + Rs 30,000 = Rs 90,000 His investments was 30 grams gold at Rs 22000 per gram = Rs. 6,60,000 So on investment of Rs 660000 he has made a profit of Rs 90,000 So his profit rate of return is 90,000 x 100 / 660000 = 13.6 %

NISM SERIES 1 – CURRENCY DERIVATIVES CERTIFICATION V.IMP LAST DAY REVISION EXAM 1

Question 53

(a) (b) (c) (d)

Question 54 (a) (b) (c) (d)

Correct Answer 53 Answer Explanation

Correct Answer 54 Answer Explanation

If one year interest rate is 1% in US and 9% in India. If current USDINR spot rate is 56, which of the following could be closest to the six month future rate of USDINR? 59.63 58.21 55.8 53.76

_______________ recommended introduction of exchange traded currency futures in India. NSE Currency Futures Committee RBI-SEBI Standing Technical Committee Ministry of Finance Currency Futures Standing Committee

58.21 The formula for Interest Rate Parity is : Future Rate = Spot Rate X (1 + Interest Rate of Quoted Currency) / ( 1 + Interest Rate of Base Currency) = 56 X ( 1 + 0.09 ) / ( 1 + 0.01 ) = 56 X ( 1.09 / 1.01) = 56 x 1.0792 = 60.435 So the interest cost is 60.435 - 56 = 4.435 for one year For six months it will be 4.435 / 2 = 2.217 So the six month future rate will be 56 + 2.217 = 58.21 ANOTHER EASIER WAY OF SOLVING THIS IS BY APPROXIMATE METHOD : The difference betwwen the interest rates is 8% ( 9% - 1%) 8% of 56 = 4.48 per year for six months : 4.48 / 2 = 2.24 So the appx. six month future rate for USDINR = 56 + 2.24 = 58.24

RBI-SEBI Standing Technical Committee On February 28, 2008 in a joint meeting of RBI and SEBI it was decided that an RBI-SEBI Standing Technical Committee on Exchange Traded Currency and Interest Rate Derivatives would be constituted. Based on the recommendations of this committee, exchange traded currency futures started in India.

NISM SERIES 1 – CURRENCY DERIVATIVES CERTIFICATION V.IMP LAST DAY REVISION EXAM 1

Question 55

(a) (b) (c) (d)

Question 56

(a) (b) (c) (d)

Correct Answer 55 Answer Explanation

Correct Answer 56 Answer Explanation

An export firm is expecting to receive USD 50,000 after one month. It wants to hedge the same but it finds that different banks are giving different pricing. The firm however wants a transparent pricing - so what type of contract it should use ? Long OTC USD. Short OTC USD Long Exchange Traded USD Short Exchange Traded USD

Mr.Mohit buys 35 lots of USD INR 1 month future when the price was 45.50/45.65 and squares off 20 lots when the price was 46.30/46.50. How much profit or loss does he make on the trades that were squared off ? Loss of 11500 Profit of 12300 Profit of 13000 Profit of 11750

Short Exchange Traded USD Trading in Exchange Traded Currency Futures is tranparent and safe. So it will prefer this mode. Since it is getting USD after two months, it will sell / short one month USD futures as a hedge against fluctuations. Profit of 13000 When the price was 45.50/45.65, Mr Mohit bought USDINR - so he bought at 45.65 as that is the Ask (Sellers) price When the price was 46.30/46.50, he sold USDINR, so he sold at 46.30 as that is the Bid (Buyers) price. 46.30 - 45.65 = 0.65 ( Profit) Out of the 35 lots bought, he has squared off only 20 lots. Total Profit = 0.65 x 20 lots x 1000 (each lot of USDINR) = 13000

NISM SERIES 1 – CURRENCY DERIVATIVES CERTIFICATION V.IMP LAST DAY REVISION EXAM 1

Question 57 (a) (b) (c) (d)

Question 58

(a) (b) (c) (d)

Correct Answer 57 Answer Explanation

Correct Answer 58 Answer Explanation

Which of the following acts is mainly responsible for governing the securities trading in India? SC(R)A, 1956 FEMA, 1999 SEBI Act RBI Act

A trader executes following currency futures trade: buys one lot of EUR/INR and sells one lot of JPY/INR. What is the view that he has executed? JPY strengthening against EUR JPY weakening against EUR INR strengthening against EUR INR weakening against JPY

SC(R)A, 1956 Securities Contract ( Regulation ) Act - 1956.

JPY weakening against EUR Buying EURINR - view is strengthening of EUR against INR Selling JPYINR - view is weaking of JPY against INR Taking a collective view - JPY weakening against EUR.

NISM SERIES 1 – CURRENCY DERIVATIVES CERTIFICATION V.IMP LAST DAY REVISION EXAM 1

Question 59

(a) (b) (c) (d)

Question 60

(a)

An exporter receives USD as export remittance and wants to sell the same. The bank quotes a price of 54.20/ 54.30 for USDINR. At what price can you sell one unit of USD? 54.25 54.2 54.3 54.5

An multinational company has export revenue in USD and it uses part of it to make import payments in JPY. The company is concerned about JPYUSD risk for its import payments. What should the company do by using currency futures strategy to mitigate the risk? USD appreciating against JPY; Short USDINR and long JPYINR for same maturity

(b)

USD depreciating against JPY; Short USDINR and long JPYINR for same maturity

(c)

USD depreciating against JPY; Short JPYINR and long USDINR for same maturity

(d)

USD appreciating against JPY; Short JPYINR and long USDINR for same maturity

Correct Answer 59

54.2

Answer Explanation

54.20 and 54.30 are the BID and ASK price. This means there are buyers at 54.20 and sellers at 54.30. So if the exporter wants to sell, he has to sell them to the buyer at 54.20

Correct Answer 60

USD depreciating against JPY; Short USDINR and long JPYINR for same maturity

Answer Explanation

Since the company is getting USD against its exports and giving JPY against its import - it will be adversely effected if USD falls and JPY rises ie. USD depreciating against JPY. So it should short USD and long JPY as a hedgeing strategy.

NISM SERIES 1 – CURRENCY DERIVATIVES CERTIFICATION V.IMP LAST DAY REVISION EXAM 1

Question 61

(a) (b) (c) (d)

Question 62

(a) (b) (c) (d)

Correct Answer 61 Answer Explanation

Correct Answer 62 Answer Explanation

A trading member (TM) has two clients "A" and "B" and he also does proprietary trading in currency futures. On day 1, TM buys 12 lots of USDINR one month futures and also sells 2 lots of the same contract on the same day in his proprietary book. On the same day, client "A" buys 12 lots of USDINR one month futures and also sells 2 lots of the same contract while client "B" buys 12 lots and sells 2 lots. What would be the open position (in USD) of the trading member, client "A" and client "B" respectively at the end of day 1? 30,000; 10,000; 10,000 10,000; zero; zero zero, 10,000; 10,000 10,000; 10,000; 10,000

A expert currency trader feels that EUR should strengthen against JPY in the next few months. Assuming JPYINR remaining same during this period, what currency future trade should be most profitable for him if his calculations come out correct ? Buy EURINR Buy JPYINR Sell EURINR Sell JPYINR

30,000; 10,000; 10,000 TM open position : 12 -2 Lots = 10 lots x 1000 (Lot size) = 10,000 Client A : 12 -2 Lots = 10 lots x 1000 (Lot size) = 10,000 Client B : 12 -2 Lots = 10 lots x 1000 (Lot size) = 10,000 TM open position is the sum of all open position = 10,000 + 10,000 + 10,000 = 30,000

Buy EURINR If EUR is to appreciate against JPY and JPY is to remain same against INR then EUR will appreciate against INR. So he will buy EURINR.

NISM SERIES 1 – CURRENCY DERIVATIVES CERTIFICATION V.IMP LAST DAY REVISION EXAM 1

Question 63

(a) (b) (c) (d)

Question 64

(a) (b) (c) (d)

Correct Answer 63 Answer Explanation

Correct Answer 64 Answer Explanation

Which of the following best describes the SEBI prescribed open position limit for EURINR contracts for a Proprietary positions of non-bank stock brokers, Clients & Category III FPIs ? 15% of total open interest or EUR100 mn, whichever is higher 15% of total open interest or EUR 25 mn, whichever is higher 6% of total open interest or EUR 5 mn, whichever is higher 6% of total open interest or EUR 100 mn, whichever is higher

A trading cum clearing member buys 10 lots of GBPINR one month futures on day 1 and also sells 4 lots of this contract on that day in his proprietary account. What would be his open position at the end of day in GBP ? 14000 6000 10000 4000

6% of total open interest or EUR 5 mn, whichever is higher V.IMP Note - Please memorise the open position limits which have been prescribed by SEBI for different currency pairs and different market participants from the NISM book.

6000 10 lots less 4 lots X 1000 (lot size of GBP) = 6000

NISM SERIES 1 – CURRENCY DERIVATIVES CERTIFICATION V.IMP LAST DAY REVISION EXAM 1

Question 65 (a) (b)

The Profit or Loss for an Option Writer is unlimited - True or False ? TRUE FALSE

Question 66

Guidelines for accounting of currency futures contracts are issued by ___________.

(a) (b) (c) (d)

RBI ICWAI ICAI FX- CA

Correct Answer 65

FALSE

Answer Explanation

Correct Answer 66 Answer Explanation

The Profits for a Option Writer is limited to the extent of premium received but his losses can be unlimited. For eg if he sells a call option ( as he belives that the underlying will fall ) he collects the premium (limited profit). But in case the underlying rises to a great extent, his losses can be huge / unlimited. ICAI The Institute of Chartered Accountants of India (ICAI) has issued guidance notes on accounting of currency futures contracts.

NISM SERIES 1 – CURRENCY DERIVATIVES CERTIFICATION V.IMP LAST DAY REVISION EXAM 1

Question 67

(a) (b) (c) (d)

Question 68

(a) (b) (c) (d)

Correct Answer 67 Answer Explanation

Correct Answer 68 Answer Explanation

An exporter buys a house for INR 500,000 for which payment has to be made after three months. As he is expecting to receive USD 10,000 in three months, he executes 10 USDINR futures contracts to hedge currency risk at a price of 50. When he received the payment, he converted USD into INR with his bank at a price of 51 for making the payment for the house and also settles the contract at a price of 49. Given this situation, would he have sold/ bought USDINR futures and would the effective price for house be lower than or higher than USD 10,000? Bought, Lower Sold, Lower Sold, Higher Bought, Higher

A trader in currency markets buys a long position in EURINR futures contract at a price of 65.40 and he buys 40 lots of the same. On expiry the settlement price is announced at 65.60. How much profit (+) or loss (-) does he make ? Profit of 8 Profit of 800 Profit of 8000 Loss of 800

Sold, Lower Since the exporter is expecting USD in three months and to safe gaurd against any USD depreciation against INR, he will hedge this by selling USDINR 3 month future at 50. So the answer to the firat part is SELL. When he received the USD after three months he sold it to a bank and got a rate of 51 - so here he made a profit of 1 USD per dollar received. Also when he sqaued up his future trade at 49, he made a profit of 1 USD per dollar received ( 50 - 49 ). So he has made profits which will bring down the effective price of the house. Profit of 8000 The trader buys at 65.40 and the settlement price is 65.60. So he makes a profit of 0.20 He has bought 40 lots and each lot of EURINR is of 1000. So his total profit is 0.20 X 40 X 1000 = 8000.

NISM SERIES 1 – CURRENCY DERIVATIVES CERTIFICATION V.IMP LAST DAY REVISION EXAM 1

Question 69

(a) (b) (c) (d)

Question70 (a) (b) (c) (d)

Correct Answer 69 Answer Explanation

Correct Answer 70

An importer takes a long position in USDINR futures contract at a price of 53 by buying 20 lots. At the expiry, the settlement price is 54.3. How much Profit or Loss did the importer make ? Profit of 2600 Profit of 26000 Loss of 2600 Loss of 26000

Of the following what best describes the guidelines for brokers with respect to execution of client orders? Intimate the execution or non-execution by the end of the day Intimate the execution or non-execution within three hour of deal execution Promptly intimate the execution or non-execution of the order Intimate the execution or non-execution within two hour of deal execution

Profit of 26000 The importer went long which means he bought USDINR at 53. Settlement price is 54.30 P/L = Selling Price - Buying Price = 54.30 - 53 = 1.30 Profit 1.30 x 20 Lots X 1000 ( lot size of USDINR ) = 26000 Promptly intimate the execution or non-execution of the order

NISM SERIES 1 – CURRENCY DERIVATIVES CERTIFICATION V.IMP LAST DAY REVISION EXAM 1

Practice Question Banks also available for :

NISM NISM Series I: Currency Derivatives Certification Exam NISM Series V A: Mutual Fund Distributors Certification Exam NISM Series VI: NISM Series VI - Depository Operations Certification Exam NISM Series VII: Securities Operations and Risk Management NISM Series VII: Equity Derivatives Certification Exam NISM Series III A: Securities Intermediaries Compliance certification Exam NISM Series X A : Investment Adviser (Level 1) Certification Exam NISM Series X B: Investment Adviser (Level 2) Certification Exam

NCFM NCFM Financial Markets: A Beginners Module NCFM Capital Market (Dealers) Module NCFM Derivative Market (Dealers) Module

BSE Certificate on Security Market (BCSM)

NISM SERIES 1 – CURRENCY DERIVATIVES CERTIFICATION V.IMP LAST DAY REVISION EXAM 1