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Unit ko samjho · NISM Series I

Exchange Traded Currency Options

20 questions is unit mein

Sawaal aur jawaab English mein hain, kyunki NISM ka exam paper bhi English mein hota hai.

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Practice bank se · 1

NSE exchange-traded currency options on INR pairs have which exercise style and settlement mode?

This answer states both European exercise and cash settlement in INR. The NSE specification describes INR-pair currency options as European style. Exercise is therefore at , not at any earlier time chosen by the holder. These contracts are cash settled in Indian rupees rather than settled by delivering the foreign currency. A European option can still be traded or its position closed before expiry, subject to market conditions. Restricting exercise does not prohibit secondary-market trading. Remember: Keep exercise timing separate from trading before expiry and from the method of settlement.

Hint Common mistake: Assuming that a European option cannot be sold or closed before expiry.

I-014

Practice bank se · 2

A USD-INR call has a strike of ₹88.00 per USD while the underlying exchange rate is ₹88.60 per USD. Which statement is correct?

The call is and the rate difference is ₹0.60 per USD. Compare the underlying rate of 88.60 with the of 88.00. The underlying is higher. Call = maximum of (88.60 − 88.00) and zero = ₹0.60 per USD. This determines moneyness and intrinsic value, not the buyer’s net profit. The premium paid is not given. Remember: For a call, compare the underlying rate with the strike, then take the positive difference.

Hint Common mistake: Equating in-the-money status with a profitable trade after premium.

I-015

Practice bank se · 3

A trader buys one USD-INR call covering USD 1,000. The strike is ₹88.50 per USD and premium is ₹0.4500 per USD. At expiry, the final settlement rate is ₹89.2000. Ignoring costs and interest on the premium, the net profit is:

The ₹700 payoff exceeds the ₹450 premium by ₹250. Call payoff per USD = maximum of (89.20 − 88.50) and zero = ₹0.70. Gross payoff = ₹0.70 × 1,000 = ₹700. Premium paid = ₹0.45 × 1,000 = ₹450. Net profit = ₹700 − ₹450 = ₹250. The premium must be deducted once, not omitted or added. Remember: Calculate the option payoff first, then deduct the premium to obtain net profit.

Hint Common mistake: Calling the exercise payoff the net profit.

I-016

Practice bank se · 4

Which option Greek measures the sensitivity of an option’s value to the passage of time, with other pricing inputs unchanged?

is the sensitivity associated with the passage of time, all other inputs held constant. The question changes only the passage of time. The relevant sensitivity is theta. A long option often loses as expiry approaches, but theta should be understood as a sensitivity rather than an unconditional claim that every option loses a fixed amount each day. relates to the underlying price, to changes in delta, and vega to volatility. Remember: Match the changing input to its Greek. Time corresponds to theta.

Hint Common mistake: Assuming time decay is a fixed daily amount or confusing it with changes caused by volatility.

I-017

Practice bank se · 5

A USD-INR put is bought at a strike of ₹87.00 per USD for a premium of ₹0.6000 per USD. Ignoring other costs and interest, its break-even final settlement rate at expiry is:

At 86.40, the put pays 87.00 − 86.40 = 0.60, equal to the premium paid. For an in-the-money put, payoff per USD = strike − settlement rate. At break-even, 87.00 − settlement rate = 0.60. Settlement rate = 87.00 − 0.60 = ₹86.40 per USD. At that rate the ₹0.60 payoff exactly recovers the premium. Remember: At expiry, a long put’s break-even is strike minus premium when other costs are ignored.

Hint Common mistake: Adding the premium to the strike for both calls and puts.

I-018

Practice bank se · 6

For an NSE USD-INR option, the premium is quoted and the premium payment is settled in which currencies, respectively?

Both the premium quotation and premium payment use INR. For the specified USD-INR option, NSE quotes the premium in INR. The premium payment is also settled in INR. The USD contract quantity is used to scale the per-unit premium. It does not make the premium payable in USD. This question does not test a premium-settlement timetable. Remember: Do not infer the premium-payment currency solely from the base currency of the underlying pair.

Hint Common mistake: Assuming USD-INR option buyers must pay the option premium in dollars.

I-019

Practice bank se · 7

For a sensitivity exercise, a portfolio contains 8 long USD-INR puts with delta −0.35 each and 5 long calls with delta +0.60 each. Every contract is USD 1,000. If USD-INR rises by ₹0.10, what is the approximate portfolio value change? Keep deltas and all other inputs constant.

The ₹300 call gain exceeds the ₹280 put loss by ₹20. Put contribution to the value change = 8 × (−0.35) × 1,000 × ₹0.10 = −₹280. Call contribution = 5 × 0.60 × 1,000 × ₹0.10 = ₹300. Net first-order change = −₹280 + ₹300 = ₹20. This is a local approximation under constant deltas, not an exact repricing after a large market move. Remember: Add signed option sensitivities before interpreting the direction and size of the portfolio response.

Hint Common mistake: Adding absolute deltas or forgetting that the underlying change is ₹0.10 rather than ₹1.

I-044

Practice bank se · 8

An analyst keeps spot, strike, time and interest-rate inputs fixed in a currency-option pricing model. A volatility input of 15% makes the model price equal the observed premium. What does this 15% represent?

This is the model-consistent annualised implied-volatility input described by the procedure. The analyst is solving from the observed option premium back to the volatility input, while holding the model’s other inputs fixed. The resulting 15% is therefore the model-consistent implied volatility. It is not calculated from a history of returns and does not promise that future realised volatility will equal 15%. Remember: Read implied volatility as information embedded in an option price under a model, not as a certain market outcome.

Hint Common mistake: Confusing implied volatility with realised volatility or with the expected direction of the exchange rate.

I-050

Practice bank se · 9

Before expiry, a USD-INR call has strike 89.00, spot rate 88.00 and premium ₹0.35 per USD. What is its time value per USD?

With zero intrinsic value, the stated ₹0.35 premium is entirely time value. Call intrinsic value = max(spot − strike, 0) = max(88 − 89, 0) = ₹0 per USD. Time value = premium − intrinsic value = ₹0.35 − ₹0 = ₹0.35 per USD. Being out of the money does not force a pre-expiry premium to zero. Remember: An out-of-the-money option can have time value even though its intrinsic value is zero.

Hint Common mistake: Applying the zero-at-expiry result to an option that has not expired.

I-058

Practice bank se · 10

A USD-INR call has delta 0.40 and gamma 0.10 per ₹1 change in spot. Spot rises by ₹0.50. Assuming gamma remains constant over this move and other inputs are unchanged, what is the estimated new delta?

The estimated increase of 0.05 is added to the original delta of 0.40. Estimated change in delta = gamma × change in spot = 0.10 × 0.50 = 0.05. Add the change to the starting delta: 0.40 + 0.05 = 0.45. This is a local estimate under the constant-gamma assumption, not a full option repricing. Remember: First calculate gamma × underlying change, then add that amount to the initial delta.

Hint Common mistake: Confusing the change in delta with delta itself, or applying a full-unit gamma adjustment to a half-unit move.

I-059

Practice bank se · 11

For payoff analysis, a written USD-INR put covers USD 1,000, has strike 84.00 and earns premium ₹0.30 per USD. The expiry settlement rate is 82.80. Ignoring costs, what is the writer’s net result?

Premium of ₹300 less settlement payable of ₹1,200 leaves a ₹900 loss. The put finishes in the money by 84.00 − 82.80 = ₹1.20 per USD. Gross settlement payable is ₹1.20 × 1,000 = ₹1,200. Premium received is ₹0.30 × 1,000 = ₹300. Net result = ₹300 − ₹1,200 = −₹900. The exercise choice belongs to the buyer. The writer cannot ignore an in-the-money settlement obligation merely because it causes a loss. Remember: For a written put, net result = premium received − max(strike − settlement rate, 0), multiplied by quantity.

Hint Common mistake: Using the option buyer’s payoff sign or forgetting the premium when calculating the writer’s net result.

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Practice bank se · 12

In a no-arbitrage binomial valuation of a European currency option, which probabilities are used when expected model payoffs are discounted at the appropriate risk-free rate?

These valuation weights are chosen consistently with replication and financing, rather than taken from an analyst’s price forecast. The binomial model represents future underlying values through upward and downward moves. Replication and no-arbitrage conditions determine the valuation weights. For currency options, the financing treatment must reflect the two currencies. The discounted risk-neutral expected payoff is a model value. The probabilities should not be interpreted as an analyst’s real-world forecast of appreciation or depreciation. Remember: Risk-neutral probabilities are pricing weights, not necessarily real-world event probabilities.

Hint Common mistake: Using a bullish price forecast directly as the probability input to a no-arbitrage option valuation.

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Practice bank se · 13

A currency option premium is ₹0.60 per USD. Its vega is ₹0.08 per USD for a one-percentage-point change in implied volatility. If volatility rises from 10% to 12.5%, what is the estimated premium? Keep vega and all other inputs unchanged.

Volatility increases by 2.5 percentage points. The premium increases by 0.08 × 2.5 = ₹0.20 per USD. Volatility change = 12.5% − 10% = 2.5 percentage points, not 0.025 percentage points and not 25 points. Estimated premium change = vega × volatility-point change = 0.08 × 2.5 = ₹0.20 per USD. Estimated new premium = 0.60 + 0.20 = ₹0.80 per USD. This is the expressly assumed constant-vega approximation, not a claim that vega stays fixed in live markets. Remember: Match the volatility change to the units of vega before multiplying.

Hint Common mistake: Confusing a percentage-point change with a decimal change or a relative percentage change.

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Practice bank se · 14

A company has paid the premium on a bilateral OTC currency option with no central clearing. The option is in the money at expiry, but the seller defaults on the amount due. Which risk has directly caused the loss?

The loss arises because the party owing the option settlement fails to perform its obligation. The in-the-money option creates a payment claim against the seller under the stated bilateral arrangement. The seller’s default prevents collection of that claim. This is a counterparty credit loss, even though the currency movement produced a favourable option payoff. Central clearing changes the counterparty structure. It should not be described as making all market or credit risks disappear. Remember: Separate the value of a contractual claim from the ability of the counterparty to pay it.

Hint Common mistake: Assuming that paying an option premium eliminates exposure to the option seller’s failure to perform.

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Practice bank se · 15

A portfolio is short 40 calls and long 20 puts, each on USD 1,000. Long-call delta changes from +0.60 to +0.70 and long-put delta from −0.40 to −0.30. It already holds 32 long futures. For one common price risk factor, each long future has delta +1,000 and option delta is multiplied by USD 1,000. Which additional futures trade restores delta neutrality?

Adding +2,000 of futures delta offsets the remaining −2,000 exposure. Initial option delta = −40 × 1,000 × 0.60 + 20 × 1,000 × (−0.40) = −32,000. The existing 32 long futures contribute +32,000. New option delta = −40 × 1,000 × 0.70 + 20 × 1,000 × (−0.30) = −34,000. With the existing futures, new total delta is −34,000 + 32,000 = −2,000. An additional 2 long futures supply +2,000 and restore total delta to zero. This is a local sensitivity hedge, not elimination of every option risk. Remember: Recalculate signed option delta and subtract the hedge already held before trading the difference.

Hint Common mistake: Confusing the required total hedge with the incremental rebalancing trade.

I-107

Practice bank se · 16

In a one-period currency option model, USD-INR at expiry is either 92 or 86. The supplied risk-neutral probability of 92 is 0.60 and the discount factor is 0.98. What is the value per USD of a call with strike 90? Round to three decimals.

This answer applies the given probability to the correct state payoffs and then discounts once. Call payoff in the up state is max(92 − 90, 0) = ₹2 per USD. In the down state it is max(86 − 90, 0) = ₹0. Risk-neutral expected payoff = 0.60 × ₹2 + 0.40 × ₹0 = ₹1.20 per USD. Present value = ₹1.20 × 0.98 = ₹1.176 per USD. The supplied probability is a valuation input, not a claim about the actual likelihood of the exchange rate rising. Remember: Calculate each state’s option payoff before taking the risk-neutral expectation and discounting.

Hint Common mistake: Averaging underlying exchange rates instead of option payoffs, or forgetting the discount factor.

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Practice bank se · 17

A trader buys a USD-INR call and sells a USD-INR put with the same strike 88, expiry and currency amount. Considering only their combined expiry payoff before premiums, which position has the same payoff?

Its linear payoff S − 88 matches the two option legs both above and below the strike. Let S be the USD-INR settlement rate. The long call pays max(S − 88, 0), while the short put pays −max(88 − S, 0), per USD. When S is at least 88, only the call contributes and the total is S − 88. When S is below 88, only the written put contributes and the total is −(88 − S) = S − 88. A long forward contracted at 88 also has payoff S − 88 per USD. Any difference between call premium paid and put premium received is excluded as instructed. Remember: Prove a synthetic position on both sides of the strike and keep premiums separate from expiry payoff.

Hint Common mistake: Claiming identical net profit or identical initial cost merely because expiry payoffs match.

I-109

Practice bank se · 18

A trader buys 40 USD-INR puts, each on USD 1,000, for ₹0.45 per USD. Before expiry, the puts are out of the money but can be sold at a premium bid of ₹0.72. The trader sells all of them at that bid. With ₹200 total entry-and-exit charges, what is the net trading profit?

This answer deducts both the initial premium and all stated charges from the actual sale proceeds. Purchase premium = 40 × 1,000 × ₹0.45 = ₹18,000. Sale proceeds = 40 × 1,000 × ₹0.72 = ₹28,800. Net trading profit = ₹28,800 − ₹18,000 − ₹200 = ₹10,600. Being out of the money identifies zero immediate exercise value, not necessarily zero market premium before expiry. A restriction on early exercise does not, by itself, prohibit selling an existing position. Remember: Use the actual closing premium for an option sold before expiry, not its immediate intrinsic value.

Hint Common mistake: Confusing an out-of-the-money or European-style option with an option that cannot be sold before expiry.

I-121

Practice bank se · 19

Two European USD-INR calls have identical expiry and USD 1,000 size. The 88-strike call can be bought for ₹0.30 per USD, while the 89-strike call can be sold for ₹0.50 per USD. With zero costs and financing effects and full contract performance, which paired trade gives an initial credit and a non-negative expiry payoff?

This answer collects ₹200 and holds the call with the larger payoff against the obligation on the smaller-payoff call. Buying the 88 call and selling the 89 call collects a net premium of (0.50 − 0.30) × 1,000 = ₹200. Its expiry payoff per USD is max(S − 88, 0) − max(S − 89, 0). For S at or below 88, the payoff is zero. Between 88 and 89 it is S − 88. At or above 89 it is 1. All three regions are non-negative. Thus the stated executable prices violate the normal call strike ordering. This is a theoretical dominance check, not a claim that such cost-free execution is available in practice. Remember: Compare both the initial cash flow and the payoff across every relevant strike region.

Hint Common mistake: Calling a premium receipt an arbitrage without checking the written option’s future liability.

I-134

Practice bank se · 20

A trader holds 20 calls of USD 1,000 each. Per USD, delta is 0.55, vega is ₹0.04 per one volatility percentage point, and theta is −₹0.015 per day. The underlying rises ₹0.20, implied volatility falls four percentage points, and one day passes. Using constant Greeks and ignoring other effects, what is the approximate position-value change?

All three signed contributions are included using the units given in the question. Underlying-price contribution per USD = 0.55 × ₹0.20 = +₹0.11. Volatility contribution per USD = ₹0.04 × (−4) = −₹0.16. A percentage point, not a decimal fraction, is the given vega unit. Time contribution per USD = −₹0.015 × 1 = −₹0.015. Combined change per USD = 0.11 − 0.16 − 0.015 = −₹0.065. Position change = −0.065 × 20 × 1,000 = −₹1,300. The favourable underlying move is outweighed by volatility and time effects. Remember: Combine signed Greek contributions in matching units before multiplying by the position size.

Hint Common mistake: Assuming a call must gain whenever its underlying rises, or mixing percentage points with decimal volatility.

I-135

Is topic ka lesson padho

Expiry Day

Expiry day is the last day on which a derivative contract can be traded.

Aage padho
Moneyness (ITM, ATM, OTM)

Moneyness describes where an option's strike sits relative to the current level of the underlying.

Aage padho
Strike Price

The strike price is the level at which an option can be exercised.

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Intrinsic Value

Intrinsic value is the part of an option's premium that would survive if the contract expired at this instant.

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Theta

Theta is the rate at which an option's premium erodes as one day passes.

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Time Value

Time value is the part of an option's premium that is left after intrinsic value is taken out.

Aage padho
Delta

Delta is the rate at which an option's premium changes for a one-unit change in the underlying.

Aage padho
Gamma

Gamma is the rate at which an option's delta changes as the underlying moves.

Aage padho