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Unit ko samjho · NISM Series I

Strategies Using Exchange Traded Currency Derivatives

19 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

An importer must pay USD 4,50,000 in two months. Each USD-INR futures contract covers USD 1,000. For a full one-for-one hedge using a suitable maturity, which position should the importer take?

Buying matches the payable’s risk direction and 450 contracts cover USD 4,50,000. The importer will need to acquire USD. If USD-INR rises, the rupee payment becomes larger. A long USD-INR future gains when USD-INR rises, so buying futures is the matching hedge direction. Contract count = USD 4,50,000 ÷ USD 1,000 per contract = 450 contracts. This is a simplified full-notional hedge, not an assertion that every basis or timing risk disappears. Remember: For a USD payable, first identify the need for a long hedge, then divide the exposure by the .

Hint Common mistake: Getting the correct number of contracts but choosing the exporter’s hedge direction.

I-020

Practice bank se · 2

An exporter expects a USD receivable in three months. Which position is the conventional futures hedge against a fall in the receivable’s rupee value?

A short USD-INR future gains when the exporter’s dollar receipt converts into fewer rupees. The exporter will receive dollars. If each dollar converts into fewer rupees, the receipt’s rupee value falls. A short future gains when its settlement rate is below its selling rate. Selling a suitably sized futures position therefore offsets the direction of the exporter’s currency exposure. The hedge and the underlying receivable still need to be assessed together. Remember: A USD receivable is normally matched with a short USD-INR futures hedge against rupee appreciation.

Hint Common mistake: Choosing the hedge from the word exporter alone without identifying the currency being received.

I-021

Practice bank se · 3

An exporter sells 200 USD-INR futures contracts at ₹88.6000 per USD. Each contract covers USD 1,000. The position is held to expiry at a final settlement rate of ₹87.9000. Ignoring costs and interest, what is the cumulative result on the futures leg alone?

A ₹0.70 gain per USD on USD 2,00,000 gives ₹1,40,000. Short futures gain per USD = sale rate − final rate = 88.60 − 87.90 = ₹0.70. Total exposure = 200 × USD 1,000 = USD 2,00,000. Cumulative gain = ₹0.70 × 2,00,000 = ₹1,40,000. This is the derivative leg’s result, not the exporter’s overall business profit. If daily mark-to-market amounts have already been totalled, do not add this same cumulative gain a second time. Remember: For short futures, use entry minus final rate and multiply by both lot size and contract count.

Hint Common mistake: Treating a profitable hedge leg as proof of profit on the combined commercial exposure.

I-022

Practice bank se · 4

In a theoretical USD-INR payoff exercise, a call and a put have the same ₹88.00 strike and expiry. Their premiums are ₹0.30 and ₹0.20 per USD. Which position makes a net profit at every expiry rate strictly between ₹87.50 and ₹88.50 per USD? Ignore costs and interest.

Selling both creates a short straddle with positive net profit throughout the open interval and zero profit at its two endpoints. Selling both options collects ₹0.30 + ₹0.20 = ₹0.50 per USD. At , only the call or the put can have positive at a given rate. Their combined exercise amount is the absolute value of (settlement rate − 88.00). Short straddle net profit per USD = 0.50 − |settlement rate − 88.00|. It is positive whenever the absolute difference is less than 0.50. The rates are ₹87.50 and ₹88.50. Profit is zero at those endpoints and positive strictly between them. Losses arise outside that interval and can be substantial. This is a payoff analysis, not a recommendation or a statement of permission to trade unhedged. Remember: For a short straddle, the break-even rates are the common minus and plus the total premium received.

Hint Common mistake: Assuming a narrow-range view guarantees profit, or forgetting that premium defines the break-even interval.

I-023

Practice bank se · 5

An importer matches the USD amount of a payable exactly with USD-INR futures. The payment date falls between the available futures expiry dates. Which limitation remains despite the exact quantity match?

Standardised expiry dates can leave a timing mismatch and a residual spot-futures basis exposure. The payable and the hedge have the same currency and amount, so those two mismatches are excluded by the question. The payment date differs from the available futures expiries. The hedger may need to close a futures position before expiry or use another maturity. The spot exchange rate used for the payment and the futures price used to close the hedge need not change identically over that period. That can leave basis risk associated with the date mismatch. Remember: Check currency, quantity and maturity separately when assessing how closely a futures hedge matches an exposure.

Hint Common mistake: Assuming an exact lot-count match makes every aspect of the hedge exact.

I-024

Practice bank se · 6

A hypothetical USD-INR bull call spread buys one 88.00-strike call for ₹0.50 per USD and sells one 89.00-strike call for ₹0.20 per USD. Both expire together and each represents USD 1,000. What is the maximum net profit at expiry, ignoring charges and financing?

The ₹1,000 strike-width payoff less the ₹300 debit leaves ₹700. Net premium paid per USD = ₹0.50 − ₹0.20 = ₹0.30. For USD 1,000 the initial debit is ₹300. At or above 89.00, the two call intrinsic values differ by 89.00 − 88.00 = ₹1 per USD. The maximum gross payoff is therefore ₹1,000. Maximum net profit = ₹1,000 − ₹300 = ₹700. Above the upper strike, further gains on the long call are offset by losses on the short call. Remember: For a debit call spread, maximum expiry profit is strike width times quantity minus the net premium paid.

Hint Common mistake: Forgetting the premium debit or assuming the long call still has uncapped upside after the short call is added.

I-045

Practice bank se · 7

An importer must pay USD 40,000 and buys matching USD-INR calls at strike 84.00 for ₹0.25 per USD. At expiry, both the spot purchase rate and the option settlement rate are 85.30. Ignoring fees and financing, what is the total rupee cost after the option settlement and premium?

This answer includes all three cash flows with the option receipt reducing the payment and premium increasing it. Buying USD 40,000 at spot costs 40,000 × ₹85.30 = ₹34,12,000. The calls pay (85.30 − 84.00) × 40,000 = ₹52,000. Premium paid is ₹0.25 × 40,000 = ₹10,000. Net rupee cost = ₹34,12,000 − ₹52,000 + ₹10,000 = ₹33,70,000. Dividing by USD 40,000 gives an effective cost of ₹84.25 per USD. It is strike plus premium here because the calls finish and the settlement and purchase rates match. Remember: For an importer’s purchased-call hedge, calculate spot cost minus call receipt plus premium.

Hint Common mistake: Quoting the strike as the all-in cost or treating the call receipt as another payment.

I-061

Practice bank se · 8

A spread position is short 10 near-month USD-INR futures at 84.00 and long 10 far-month futures at 84.30. Both are closed when near-month is 84.50 and far-month is 84.70. Each contract covers USD 1,000. Ignoring costs and interest on MTM, what is the combined result?

The two legs combine to a ₹1,000 loss, equal to −₹0.10 × USD 10,000. The far-month long gains (84.70 − 84.30) × 10 × 1,000 = ₹4,000. The near-month short loses (84.00 − 84.50) × 10 × 1,000 = −₹5,000. Combined result = ₹4,000 − ₹5,000 = −₹1,000. The far-minus-near spread narrowed from ₹0.30 to ₹0.20. A long-far, short-near position loses when that spread narrows. Remember: Write down both leg directions before interpreting whether spread widening or narrowing helps.

Hint Common mistake: Assuming that two rising futures prices must make a two-leg position profitable.

I-062

Practice bank se · 9

An exporter hedges USD 1,00,000 by selling the same amount of USD-INR futures at 84.20. Before expiry, it receives and converts the dollars at spot 83.70 and closes the futures at 83.80. Ignoring costs and financing, what is its effective rupee receipt per USD?

This answer combines the actual spot conversion with the profit on the matched short futures. The exporter receives ₹83.70 per USD from converting the underlying dollars. The short futures gains 84.20 − 83.80 = ₹0.40 per USD. Combined receipt is ₹83.70 + ₹0.40 = ₹84.10 per USD. Using basis defined here as spot minus futures, the closing basis is 83.70 − 83.80 = −₹0.10. Effective receipt = initial futures price + closing basis = ₹84.10. Total receipts reconcile to ₹83,70,000 from the dollars plus ₹40,000 from futures, or ₹84,10,000. Remember: Before expiry, use actual spot conversion plus actual futures P&L rather than assuming the initial futures rate is exactly realised.

Hint Common mistake: Assuming expiry convergence already holds at an earlier hedge-unwind date.

I-063

Practice bank se · 10

For an expiry-payoff exercise, a long USD-INR strangle buys a put at strike 87 for ₹0.25 per USD and a call at strike 89 for ₹0.35 per USD. Both cover equal amounts and expire together. Ignoring costs and interest, when is the combined net profit strictly positive?

Both premiums total ₹0.60 per USD. The put must earn more than 0.60 below 87, or the call more than 0.60 above 89. Total premium = 0.25 + 0.35 = ₹0.60 per USD. Net expiry profit per USD = max(87 − S, 0) + max(S − 89, 0) − 0.60. Below 87, only the put pays. Positive profit requires 87 − S > 0.60, so S < 86.40. Above 89, only the call pays. Positive profit requires S − 89 > 0.60, so S > 89.60. At 86.40 and 89.60 the position breaks even. Between the two strikes, both options expire without intrinsic value and the loss equals the total premium. Remember: Use the total premium of both purchased options to find either break-even boundary.

Hint Common mistake: Subtracting only the put premium for the lower boundary and adding only the call premium for the upper boundary.

I-086

Practice bank se · 11

An exporter fully covers a USD receivable with a USD-INR put at strike 88, paying ₹0.30 per USD. At expiry, spot equals the option settlement rate. What are net INR receipts per USD when that rate is 86 and 90, respectively? Ignore other costs and interest.

At 86 the ₹2 put payoff lifts gross receipts to ₹88, then the premium is deducted. At 90 the put expires worthless and only the premium reduces the spot receipt. Net receipt per USD = spot receipt + put payoff − premium = S + max(88 − S, 0) − 0.30. At S = 86, net receipt = 86 + 2 − 0.30 = ₹87.70 per USD. At S = 90, put payoff is zero and net receipt = 90 − 0.30 = ₹89.70 per USD. Under the matching-rate assumptions, the effective floor is 88 − 0.30 = ₹87.70. Above the strike, receipts still increase with the spot rate. Remember: Combine the underlying receipt, option settlement and premium before judging the hedge.

Hint Common mistake: Treating a protective put like a futures hedge that fixes both favourable and unfavourable outcomes.

I-087

Practice bank se · 12

In a frictionless six-month exercise, USD-INR spot is 80 and the forward is 81.20. A participant borrows ₹80,000 at 6% annual simple interest, buys USD and invests it at 4% annual simple interest. All maturity USD are sold forward. For exactly 0.5 year, what surplus remains after repaying the INR loan?

USD 1,000 grows to USD 1,020. Its forward proceeds are ₹82,824, while the INR loan repayment is ₹82,400. Initial USD purchased = 80,000 ÷ 80 = USD 1,000. The initial INR borrowing and spot purchase offset. USD at maturity = 1,000 × (1 + 0.04 × 0.5) = USD 1,020. The forward covers this full amount, including the foreign interest. Forward INR proceeds = 1,020 × 81.20 = ₹82,824. INR loan repayment = 80,000 × (1 + 0.06 × 0.5) = ₹82,400. Net maturity surplus = 82,824 − 82,400 = ₹424. The exact parity forward would be 80 × 1.03 ÷ 1.02, so the offered forward is higher. The positive result follows from the explicitly frictionless hypothetical prices. Actual participation permissions, credit costs, bid-ask spreads and funding constraints can change feasibility. Remember: Cover the foreign investment’s maturity amount and subtract the domestic loan’s maturity amount.

Hint Common mistake: Hedging only the initial foreign principal or subtracting only the original domestic loan.

I-088

Practice bank se · 13

A trader buys 10 USD-INR puts with strike 90 for ₹0.80 per USD and sells 10 puts with strike 88 for ₹0.25 per USD. All expire together, each covers USD 1,000, and settlement is 87. What is the net profit after premiums, ignoring charges and financing?

This answer deducts the net premium from the payoff of both legs, including the short-put liability. Purchased puts pay (90 − 87) × 10,000 = ₹30,000. Written puts require (88 − 87) × 10,000 = ₹10,000. Gross combined payoff = ₹30,000 − ₹10,000 = ₹20,000. Net premium paid = (0.80 − 0.25) × 10,000 = ₹5,500. Net profit = ₹20,000 − ₹5,500 = ₹14,500. This is also the maximum expiry profit: [(90 − 88) − 0.55] × 10,000. The maximum loss is the ₹5,500 net debit and break-even is 90 − 0.55 = 89.45. Remember: Below the lower strike, a debit put spread earns the strike width less the net premium paid.

Hint Common mistake: Keeping the short option’s premium but forgetting its settlement obligation.

I-110

Practice bank se · 14

An exporter shorts currency futures solely to offset a matching contracted dollar receipt. A rise in USD-INR causes a futures loss and increases the receipt’s rupee value. Based on the stated purpose, how should this participant be classified?

The derivative is explicitly used to offset the matching business exposure. The exporter already has a commercial dollar receivable and takes the short futures position to offset its currency sensitivity. A higher rate helps the receivable and hurts the short futures. Those opposite effects are consistent with hedging. No riskless price discrepancy, customer two-way quotation or unrelated directional objective is stated. The participant is a hedger. Remember: Identify the exposure being offset and the purpose of the derivative before classifying the participant.

Hint Common mistake: Judging whether a trade is a hedge by its standalone profit or loss.

I-111

Practice bank se · 15

In a payoff-only comparison, which standalone position benefits from a sufficiently large fall in EUR-USD while limiting its maximum expiry trading loss to the premium paid? Ignore charges and financing.

This answer combines the required bearish expiry payoff with loss limited to the premium paid. When the exchange rate falls sufficiently below the put strike, the purchased put’s payoff exceeds its premium. If the put expires without exercise value, the purchaser loses the premium but has no writer’s settlement obligation. A short future also benefits from a fall, but has no premium-defined maximum loss. A written call has an obligation if the rate rises, while a purchased call benefits from a rise rather than a fall. Remember: A strategy must match both the directional view and the requested loss constraint.

Hint Common mistake: Selecting a bearish futures position without checking whether its risk matches the option-premium limit.

I-112

Practice bank se · 16

An importer hedges a USD 25,000 payable with a purchased USD-INR call at strike 89 and a written put at strike 87, both covering the payable at its due date. Each premium is ₹0.45 per USD. What are the net rupee costs of meeting the payable if expiry USD-INR is 85 and 91, respectively? Ignore financing and charges.

This answer includes the written-put payment below 87 and the call receipt above 89, with no net initial premium. Net initial premium = (0.45 − 0.45) × 25,000 = ₹0. At 85, buying the dollars costs 85 × 25,000 = ₹21,25,000. The call pays zero and the written put requires (87 − 85) × 25,000 = ₹50,000. Net cost is ₹21,75,000. At 91, buying the dollars costs ₹22,75,000. The call pays (91 − 89) × 25,000 = ₹50,000 and the put pays zero. Net cost is ₹22,25,000. Within 87 to 89 neither option pays, so the importer pays spot. In this equal-premium illustration the effective cost is bounded between 87 and 89 INR per USD. Remember: For a collar, include both option settlements and the underlying currency purchase.

Hint Common mistake: Calling an equal-premium collar costless while overlooking the obligation created by the written option.

I-113

Practice bank se · 17

An importer buys USD-INR futures at 88.10 for a USD 30,000 payable. When payment is deferred, it closes that hedge at 88.55 and buys the same amount in the later contract at 88.80. At payment, spot and the later contract’s final settlement are both 89.20. Ignoring charges and financing, what is the effective INR cost per USD after both futures legs?

This answer includes the gains from both holding periods and reconciles to the initial rate plus the roll spread. First futures-leg gain = (88.55 − 88.10) × 30,000 = ₹13,500. Second futures-leg gain = (89.20 − 88.80) × 30,000 = ₹12,000. Total futures gain is ₹25,500. Buying the dollars costs 89.20 × 30,000 = ₹26,76,000. Net cost after the hedge gains is ₹26,76,000 − ₹25,500 = ₹26,50,500. Effective cost = ₹26,50,500 ÷ 30,000 = 88.35 INR per USD. Independently, original entry plus the roll spread is 88.10 + (88.80 − 88.55) = 88.35. Remember: For a rolled hedge, reconcile the underlying payment with every closed and final futures leg.

Hint Common mistake: Resetting the economic history when rolling and losing the profit or loss on the old contract.

I-122

Practice bank se · 18

An exporter expects EUR 10,000. Initially EUR-USD is 1.10 and USD-INR is 80.00. In a hypothetical proxy hedge, the exporter sells USD 11,000 of USD-INR futures. At receipt, EUR-USD is 1.05, USD-INR is still 80.00, and the futures are closed at their entry price. Ignoring costs, what is the change in combined INR value from the initial receipt valuation?

The receipt loses ₹40,000 and the expressly unchanged futures price produces no offsetting result. Initial receipt value = EUR 10,000 × 1.10 USD/EUR × ₹80/USD = ₹8,80,000. Final receipt value = 10,000 × 1.05 × 80 = ₹8,40,000. The USD-INR futures are closed at their entry price, so their cumulative result is zero. Combined change = 8,40,000 − 8,80,000 + 0 = −₹40,000. The EUR-USD movement is the unoffset risk. Remember: Matching a starting notional does not remove exchange-rate risk between two different foreign currencies.

Hint Common mistake: Treating a USD hedge as a complete hedge of a EUR cash flow just because their initial values match.

I-136

Practice bank se · 19

A trader sells one 88-strike USD-INR call for ₹0.70 per USD and buys one 89-strike call for ₹0.25 per USD. Both cover USD 1,000 and expire together. What is the maximum net loss at expiry, including premiums and ignoring costs and interest?

The capped settlement loss of ₹1,000 is reduced by the ₹450 credit already received. Net credit per USD = 0.70 − 0.25 = ₹0.45, or ₹450 for USD 1,000. At a settlement rate of 89 or higher, the short 88 call’s liability exceeds the long 89 call’s receipt by ₹1 per USD. The gross settlement loss is capped at ₹1,000. Maximum net loss = 1,000 − 450 = ₹550. At rates at or below 88, both calls expire without settlement and the ₹450 credit is retained. Remember: For a credit spread, subtract the net credit from the maximum adverse settlement difference.

Hint Common mistake: Mixing the maximum payoff loss with net loss after premium, or treating a received credit as an expense.

I-137
Lot Size

Lot size is the number of units of the underlying that one derivatives contract stands for.

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Expiry Day

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

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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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Breakeven

Breakeven is the point at which a defined result is exactly zero.

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Strike Price

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

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Moneyness (ITM, ATM, OTM)

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

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