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Unit ko samjho · NISM Series X-A

Understanding Derivatives

25 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

A contract’s cash settlement is linked to the change in a specified equity index. Neither party receives ownership of the companies in that index through this contract. What is the underlying reference for the derivative?

The named equity index is the reference expressly used to calculate the derivative cash flow. The question explicitly links cash settlement to movement in an equity index. That index is therefore the relevant underlying reference. The derivative is a contract on index movement, not a transfer of ownership in every constituent company. The distinction matters when considering dividends or voting rights. A margin balance may change as the position gains or loses, but that balance is not what defines the index-linked exposure. Remember: Identify the payoff-driving reference separately from collateral, account balances and ownership rights.

Hint Common mistake: Assuming that index-linked exposure automatically means direct ownership of the index constituents.

X-A-101

Practice bank se · 2

A business needs a contract for an unusual quantity and a delivery date negotiated with one counterparty, rather than an exchange’s standard contract specifications. Which instrument most directly fits that description?

A privately negotiated forward directly fits the customised amount and date. The business explicitly requires a non-standard quantity and a negotiated delivery date. Those features point to bilateral customisation. A forward can specify the required amount, date and agreed transaction price. Counterparty performance remains an issue to evaluate. Customisation does not remove it. A standard listed contract might sometimes approximate the exposure, but it does not itself provide the individually negotiated terms requested here. Remember: Distinguish a contract’s payoff type from the way its quantity, date and other terms are standardised.

Hint Common mistake: Treating every future-dated agreement as an exchange-traded futures contract.

X-A-102

Practice bank se · 3

An investor owns a stock and wants to offset part of the loss from a near-term fall in its price without immediately selling the shares. Assume an appropriately matched futures contract is available. Which additional position has the required directional effect?

Selling futures supplies the opposite price exposure needed to offset a fall in the shares. The existing shares create positive exposure to price: lower price reduces their value. A short futures position gains when its settlement or closing price is below its sale price. This is the opposite direction to the stock holding. The hedge’s size, maturity and price relationship still matter. This directional answer does not claim that all risks, cash-flow demands or imperfect matching disappear. Remember: Choose the hedge direction from the exposure already owned, not from the market view alone.

Hint Common mistake: Adding a second long position and calling the extra exposure a hedge.

X-A-103

Practice bank se · 4

An investor buys one hypothetical futures contract at ₹350 per unit and closes it at ₹362 per unit. The contract covers 400 units. Ignoring costs and any interest on settlement cash flows, what is the cumulative profit or loss?

₹4,800 correctly applies the positive price difference to all units. Price change for the long position = ₹362 − ₹350 = +₹12 per unit. Cumulative profit = ₹12 × 400 = ₹4,800. Daily settlement, where applicable, divides the cash result across dates without changing this sum when interest and costs are ignored. ₹362 × 400 is the closing notional value, not the gain. The 400-unit multiplier is hypothetical and is not a current exchange . Remember: Compute signed price change first, then apply quantity.

Hint Common mistake: Confusing notional contract value with profit or loss.

X-A-104

Practice bank se · 5

An investor sells one hypothetical futures contract at ₹1,250 per unit and later closes it by buying at ₹1,280. It covers 100 units. Ignoring costs and settlement interest, what is the cumulative result?

₹3,000 loss correctly reflects buying back 100 units at ₹30 more per unit. Per-unit result = ₹1,250 − ₹1,280 = −₹30. The investor must buy back at a higher price than the initial sale price. For 100 units the cumulative result is −₹30 × 100 = −₹3,000, a ₹3,000 loss. The ₹1,28,000 closing notional is not the loss. Only the change in the contract price, multiplied by the stated quantity, enters this calculation. Remember: For a short position, subtract the closing price from the entry sale price.

Hint Common mistake: Using the long-position sign convention for a short trade.

X-A-105

Practice bank se · 6

A long futures position covers 50 units. Entry price is ₹200. Day-one settlement price is ₹195, and day-two settlement price is ₹203. The position remains open. Under daily settlement, what mark-to-market cash amount arises on day two alone, ignoring costs and interest?

₹400 received correctly measures the second day’s rise from the previous settlement price. Day one produced (₹195 − ₹200) × 50 = −₹250 for the long position. This amount belongs to day one. Day two uses ₹195 as its starting reference: (₹203 − ₹195) × 50 = +₹400, so ₹400 is received. The two daily amounts sum to −₹250 + ₹400 = ₹150, equal to (₹203 − ₹200) × 50. This verifies cumulative profit without confusing it with day two alone. Remember: Use the previous settlement price for a daily amount and the original entry for cumulative profit.

Hint Common mistake: Answering a one-day settlement question with the life-to-date position result.

X-A-106

Practice bank se · 7

A hypothetical long futures position has initial notional exposure of ₹10,00,000 and an initial margin deposit of ₹1,00,000. An adverse move causes a loss equal to 3% of the initial notional exposure. What percentage of the initial margin does that loss represent?

30% correctly compares the ₹30,000 cash loss with the ₹1,00,000 deposit. Cash loss = 3% × ₹10,00,000 = ₹30,000. The hypothetical margin does not change how that loss is calculated. Loss as a share of = ₹30,000 ÷ ₹1,00,000 × 100 = 30%. This is a comparison with initial margin, not a complete investor-return measure allowing for later cash calls. Margin is not a maximum-loss cap. Further adverse moves may require more money. Remember: Always name the denominator when discussing leveraged gains or losses.

Hint Common mistake: Assuming that the margin posted is the most a futures position can lose.

X-A-107

Practice bank se · 8

An investor buys a European call with strike ₹120, paying premium ₹8 per unit. The position covers 50 units and the underlying is ₹145 at expiry. Assuming the contractual payoff is received, with no costs or financing interest, what is the net profit?

₹850 correctly subtracts the ₹400 premium from the ₹1,250 payoff. Expiry call payoff per unit = max(₹145 − ₹120, 0) = ₹25. For 50 units that is ₹1,250. Premium cost = ₹8 × 50 = ₹400. Net profit = ₹1,250 − ₹400 = ₹850. The payoff is already an economic benefit after paying the strike through exercise or its cash equivalent. The strike is not subtracted again from the ₹25 payoff. Remember: Start with expiry payoff, then include the premium with the correct sign.

Hint Common mistake: Calling an in-the-money option’s payoff its profit without accounting for premium.

X-A-108

Practice bank se · 9

An investor buys a European put with strike ₹500 and premium ₹18 per unit for 100 units. At expiry the underlying price is ₹455. Assuming contractual performance and ignoring costs and interest, what is the net profit?

₹2,700 deducts the stated premium from the full put payoff. Put payoff per unit = max(₹500 − ₹455, 0) = ₹45. For 100 units, the payoff is ₹4,500. Premium paid = ₹18 × 100 = ₹1,800. Net profit = ₹4,500 − ₹1,800 = ₹2,700. The underlying’s decline benefits the put buyer, but only the amount exceeding the premium produces profit in this simplified expiry calculation. Remember: Use strike minus underlying for a put, then subtract premium for the buyer.

Hint Common mistake: Using a call’s payoff direction when valuing a put.

X-A-109

Practice bank se · 10

A call has strike ₹100 and was purchased for a premium of ₹12 per unit. At expiry the underlying price is ₹108. Ignoring costs and interest, which statement is correct for the buyer?

The positive ₹8 payoff makes it in the money, while premium leaves a ₹4 net loss. The underlying price ₹108 exceeds the strike ₹100, so the call is in the money. Its payoff is ₹8 per unit. Net result = ₹8 payoff − ₹12 premium = −₹4 per unit. Exercising or receiving settlement recovers part, but not all, of the cost. The expiry price would be ₹100 + ₹12 = ₹112 under these assumptions. The observed ₹108 is below that break-even level. Remember: Keep strike-based separate from premium-inclusive break-even.

Hint Common mistake: Assuming every exercised or in-the-money option earns its buyer a net profit.

X-A-110

Practice bank se · 11

An investor writes an uncovered call and receives ₹6 premium per unit for 100 units. The underlying price has no specified upper limit. Ignoring costs and financing interest, what is the maximum profit on the option position at expiry?

₹600 is the total premium and the best possible net result when no exercise payoff is owed. Total premium collected is ₹6 × 100 = ₹600. The best expiry result occurs when the call’s payoff is zero. Then net option profit is the full ₹600. If the underlying rises far above strike, the payoff owed grows and reduces profit or creates a loss. Because this call is uncovered and the underlying has no upper bound in the model, maximum profit being limited does not imply that maximum loss is limited to ₹600. Remember: For an option writer, premium received caps profit but does not generally cap losses.

Hint Common mistake: Confusing the risk profile of the writer with that of the buyer.

X-A-111

Practice bank se · 12

An investor writes a put with strike ₹200 and receives premium ₹9 per unit. Assume the underlying price cannot fall below zero, contractual performance occurs, and there are no costs or financing interest. What is the maximum net loss per unit at expiry?

₹191 is the maximum ₹200 obligation reduced by ₹9 premium received. The worst expiry price for the writer is zero, giving put payoff max(₹200 − ₹0, 0) = ₹200 per unit owed. After including the ₹9 premium received, net result is ₹9 − ₹200 = −₹191. Thus maximum net loss is ₹191 per unit. The bound comes from the stated non-negative underlying and fixed strike. It does not mean that the margin deposit, where applicable, equals the maximum loss. Remember: Distinguish the gross exercise obligation from premium-inclusive net loss.

Hint Common mistake: Applying the buyer’s premium-limited loss to an option writer.

X-A-112

Practice bank se · 13

A call option trades at ₹14. The underlying is at ₹212 and the strike is ₹200. What is the option's time value?

₹2 is the premium remaining after subtracting the ₹12 intrinsic amount. Intrinsic value = max(₹212 − ₹200, 0) = ₹12 per unit. Time value = ₹14 premium − ₹12 intrinsic value = ₹2 per unit. The two components reconcile: ₹12 + ₹2 = ₹14. The question does not ask for expiry profit or a forecast of where the underlying will move. It is a decomposition of the observed option price at this moment. Remember: Reconcile option-price components instead of treating premium, intrinsic value and time value as synonyms.

Hint Common mistake: Subtracting strike from premium rather than from the underlying price.

X-A-113

Practice bank se · 14

An option contract permits exercise only on its expiry date, although its holder may be able to sell the contract before then. Which statement correctly describes this exercise feature?

European style correctly describes the stated exercise timing without a geographic claim. The specified restriction is exercise only at expiry. That is the defining feature of European exercise style. Permission or opportunity to sell an option beforehand does not create a right to exercise it beforehand. Trading access and exercise terms must be read separately. A forward imposes a future contractual commitment rather than becoming an option merely because early exercise is unavailable. The location of trading cannot be inferred from the style’s name. Remember: Separate exercise, closing a position by sale, and the place where a contract trades.

Hint Common mistake: Inferring early exercise rights from the ability to sell the option.

X-A-114

Practice bank se · 15

An investor buys one call for ₹8 and one put for ₹7 per underlying unit, both with strike ₹100 and the same expiry. The underlying finishes at ₹110. Ignoring costs and interest, what is the combined net result per unit?

₹5 loss correctly includes the cost of both options. At ₹110 the call pays ₹10 and the put pays zero. Combined expiry payoff is therefore ₹10 per unit. The investor paid ₹8 + ₹7 = ₹15 in premiums. Net result = ₹10 − ₹15 = −₹5, a loss. The simplified expiry break-even levels are ₹100 − ₹15 = ₹85 and ₹100 + ₹15 = ₹115. A price move of ₹10 is insufficient to recover the ₹15 cost. Remember: A strategy benefiting from a large move can still lose after a move that is too small.

Hint Common mistake: Deducting only the premium of the option that finishes in the money.

X-A-115

Practice bank se · 16

A processor hedges the future purchase of a particular local grain using futures on a related grain. Local supply conditions cause the required grain’s cash price to rise much more than the futures price. There is no counterparty failure. What risk explains the imperfect offset?

The mismatch between local grain costs and related futures prices directly describes basis risk. The processor needs one local grain but uses a related futures underlying. A price change driven by local supply may affect them differently. The futures gain is therefore smaller than the increase in the processor’s cash purchase cost. Correct hedge direction alone does not ensure a perfect match. Counterparty failure is expressly absent. The problem is the price relationship between the two exposures, not a failure to make a settlement payment. Remember: An offsetting direction is necessary for a hedge, but matching the underlying exposure also matters.

Hint Common mistake: Assuming a related contract must offset the cash-market exposure exactly.

X-A-116

Practice bank se · 17

An importer must pay US$10,000 in three months. A forward locks the purchase at ₹84 per dollar for that date. The spot exchange rate on the payment date is ₹86 per dollar. Assuming performance in full and ignoring all costs, how much less does the importer pay in rupees than buying the dollars at that date’s spot rate?

₹20,000 is the ₹2 per dollar difference applied to US$10,000. Forward purchase cost = US$10,000 × ₹84 = ₹8,40,000. Buying at the stated payment-date spot would cost US$10,000 × ₹86 = ₹8,60,000. The difference is ₹8,60,000 − ₹8,40,000 = ₹20,000 less under the forward in this scenario. This does not mean a forward always saves money. Had the future spot rate been lower than ₹84, locking ₹84 would have cost more than that lower spot alternative. Remember: A hedge fixes an exposure. Whether it looks favourable afterwards depends on the outcome used for comparison.

Hint Common mistake: Describing an outcome-specific saving as a guaranteed benefit in every exchange-rate scenario.

X-A-117

Practice bank se · 18

For one settlement period, a hypothetical swap uses ₹1 crore notional and a year fraction of 0.25. Party P pays fixed interest at 7% annually and receives floating interest fixed for that period at 8.2% annually. The two amounts are netted. No principal is exchanged. What is P’s net settlement?

₹30,000 correctly nets the two quarter-year interest amounts in P’s favour. Fixed amount owed by P = ₹1,00,00,000 × 7% × 0.25 = ₹1,75,000. Floating amount due to P = ₹1,00,00,000 × 8.2% × 0.25 = ₹2,05,000. Net receipt = ₹2,05,000 − ₹1,75,000 = ₹30,000. Both legs use the same notional and year fraction, so the shortcut is ₹1 crore × (8.2% − 7%) × 0.25. Rates are hypothetical and already set for this period. Remember: Apply the year fraction to both swap legs and determine which party owes the net difference.

Hint Common mistake: Treating the notional or one gross leg as the net settlement.

X-A-118

Practice bank se · 19

A hypothetical asset costs ₹1,000 now, pays no income and can be stored at zero cost. One-year borrowing costs exactly 5%. A forward sale of one unit in one year can be locked at ₹1,080. Assume borrowing, purchase, delivery and full settlement are all feasible with no other costs. What profit is locked by borrowing to buy the asset and simultaneously selling it forward?

₹30 is the forward receipt less the full funded acquisition cost. Borrow ₹1,000 and use it to buy one unit today, while committing to sell that same unit forward for ₹1,080 in a year. The borrowing grows to ₹1,000 × 1.05 = ₹1,050 due in one year. Deliver the held unit and receive the locked ₹1,080. After repaying ₹1,050, ₹30 remains. The result depends on the stated assumptions about funding, holding costs, deliverability and performance. It is not a claim that every observed spot/forward gap is arbitrage. Remember: Compare forward proceeds with the full carrying cost, not simply with today’s spot quote.

Hint Common mistake: Calling the entire spot-to-forward difference a riskless profit.

X-A-119

Practice bank se · 20

An investor buys a call with strike ₹100 for ₹12 and sells a call with strike ₹120 for ₹5. Both cover the same underlying unit, have the same European expiry and are fully performed. Ignoring costs and interest, what is the maximum combined net profit per unit at expiry?

₹13 deducts the net premium from the capped ₹20 payoff. Net initial premium paid = ₹12 − ₹5 = ₹7 per unit. At or above ₹120, payoff difference is (S − ₹100) − (S − ₹120) = ₹20. This equals the strike width and is the maximum gross payoff. Maximum net profit = ₹20 − ₹7 = ₹13. At or below ₹100 both expire with zero payoff and the maximum loss is the ₹7 net premium instead. Remember: For this debit spread, maximum profit is strike width minus net premium paid.

Hint Common mistake: Ignoring the short call when assuming unlimited upside from the long call.

X-A-120

Practice bank se · 21

CASE: An investor buys 100 shares at ₹500 and buys puts on those 100 shares with a strike of ₹480, at a premium of ₹12 a share. What is the total starting cost?

Shares cost ₹50,000. Puts cost 100 × ₹12 = ₹1,200. Total = ₹51,200. Remember: Add the cost of protection to the asset purchase before measuring strategy profit.

Hint Common mistake: Treating the as an upfront option payment.

X-A-121

Practice bank se · 22

CASE: An investor bought 100 shares at ₹500 and puts on them with a strike of ₹480, for ₹12 a share. At expiry the share price is ₹440. What is the puts' total payoff, before the premium?

Payoff = (₹480 − ₹440) × 100 = ₹4,000. Remember: Payoff, option profit and whole-strategy profit are three distinct measures.

Hint Common mistake: Using the stock purchase price rather than the option strike to calculate a put payoff.

X-A-122

Practice bank se · 23

CASE: An investor buys 100 shares at ₹500 and puts on them with a strike of ₹480, for ₹12 a share. At expiry the share price is ₹440. What is the net result of the shares and puts together?

The shares lose ₹6,000. The puts pay ₹4,000. The premium cost ₹1,200. Net = −₹3,200. Remember: A hedge should be evaluated with the exposure it protects, not as an isolated winning or losing trade.

Hint Common mistake: Reporting the hedge’s option profit as the combined portfolio result.

X-A-123

Practice bank se · 24

CASE: An investor buys 100 shares at ₹500 and puts on them with a strike of ₹480, for ₹12 a share. What is the largest possible net loss at expiry?

Below ₹480 the put makes up any further fall. The most the investor can lose is (₹500 − ₹480 + ₹12) × 100 = ₹3,200. Remember: A protective put’s maximum loss includes the purchase-to-strike gap plus premium.

Hint Common mistake: Confusing a terminal-value floor with full capital protection at the purchase cost.

X-A-124

Practice bank se · 25

CASE: An investor buys shares at ₹500 and a put on them with a strike of ₹480, for ₹12 a share. At what expiry share price does the combined position break even?

Above ₹480 the put expires worthless. Break-even = ₹500 + ₹12 = ₹512. Remember: Calculate strategy break-even from all initial cash flows, not from the strike alone.

Hint Common mistake: Ignoring premium because the option expires without being exercised.

X-A-125

Is topic ka lesson padho

Lot Size

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

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Margin

Margin is the money a participant must keep in place to carry a leveraged position.

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Breakeven

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

Aage padho
Moneyness (ITM, ATM, OTM)

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

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Strike Price

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

Aage padho