Unit ko samjho · NISM Series XIII
Introduction to Forwards and Futures
20 questions is unit mein
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- Which description best explains a forward contract agreed between two counterparties today?
- Which feature is commonly associated with exchange-traded futures?
- A trader holding a long futures contract benefits directly when the futures settlement price does what?
- Which price movement creates a gain for a short futures position, ignoring costs?
- What normally happens to the gap between spot and futures prices as a contract approaches expiry?
- In a futures contract, what does contract size specify?
- A trader buys one futures contract at ₹110 and exits at ₹118. The contract covers 100 units. What is the gross profit?
- A short futures position of 50 units is entered at ₹210 and closed at ₹204. What is the gross profit?
- Which important risk is generally greater in a bilateral forward than a centrally cleared futures contract?
- A non-dividend-paying asset trades at ₹1,000. With simple annual financing at 8%, what is its six-month theoretical futures price?
- A currency futures contract represents USD 1,000. Its quoted price rises by ₹0.40 per dollar. What is the long position's gain?
- What is the main purpose of marking a futures position to market each day?
- What does the basis of an equity futures contract most commonly compare?
- A futures contract has a tick size of 0.01 and a quantity of 2,000 units. What is one tick worth?
- In deliverable interest-rate futures, what is the purpose of a conversion factor?
- Under covered interest rate parity, what mainly links a currency forward rate to the spot rate?
- A deliverable bond has a conversion factor of 0.92. The futures price is 110 and accrued interest is 1.5 per ₹100 face. What invoice amount applies per ₹100 face?
- USD/INR spot is 84. Domestic one-year interest is 6% and dollar interest is 2%. What is the theoretical one-year forward rate?
- A share trades at ₹500 with simple annual funding cost of 10%. A known ₹10 cash dividend is paid at expiry in six months. What theoretical futures price follows?
- Two government bonds are eligible for delivery into the same futures contract. One delivers at lower net economic cost. Which bond is cheapest to deliver?
Zaroori ideas
Practice bank se · 1
Which description best explains a forward contract agreed between two counterparties today?
A forward fixes the terms of a future transaction through an agreement between counterparties. Remember: Forwards specify a transaction for a later date.
Hint Common mistake: Do not mistake a future-dated contract for debt ownership. Think about fixing transaction terms in advance.
XIII-031Practice bank se · 2
Which feature is commonly associated with exchange-traded futures?
Futures are commonly marked to market so gains and losses are settled through the clearing process. Remember: Futures normally involve daily settlement of value changes.
Hint Common mistake: Do not assume a futures buyer pays the full underlying value. Consider how clearing manages changes in value.
XIII-032Practice bank se · 3
A trader holding a long futures contract benefits directly when the futures settlement price does what?
A long futures position gains when the futures price rises relative to its entry price. Remember: Long futures positions have positive price exposure.
Hint Common mistake: Do not reverse long and short payoff directions. Recall the payoff direction of a long position.
XIII-033Practice bank se · 4
Which price movement creates a gain for a short futures position, ignoring costs?
A short futures position gains when it can be closed at a lower futures price. Remember: Short futures gain from declining contract prices.
Hint Common mistake: A short future is different from a long future. Compare the sale price with the later closing price.
XIII-034Practice bank se · 5
What normally happens to the gap between spot and futures prices as a contract approaches expiry?
Under consistent settlement terms, futures and underlying spot prices normally converge toward . Remember: Expiry generally drives spot-futures convergence.
Hint Common mistake: Do not expect a large persistent arbitrage gap at final settlement. Think about delivery or final settlement at expiry.
XIII-035Practice bank se · 6
In a futures contract, what does contract size specify?
specifies the underlying quantity or notional exposure defined by the contract specification. Remember: Contract size scales both profit and loss.
Hint Common mistake: Do not confuse notional exposure with the . Identify what one contract represents.
XIII-036Practice bank se · 7
A trader buys one futures contract at ₹110 and exits at ₹118. The contract covers 100 units. What is the gross profit?
Gross profit = (₹118 − ₹110) × 100 = ₹800. Remember: Multiply the price difference by contract quantity.
Hint Common mistake: Do not confuse contract turnover with profit. Calculate movement per unit and scale it by quantity.
XIII-037Practice bank se · 8
A short futures position of 50 units is entered at ₹210 and closed at ₹204. What is the gross profit?
Gross profit = (₹210 − ₹204) × 50 = ₹300. Remember: Short futures profit from lower closing prices.
Hint Common mistake: Do not use the long-position payoff formula for shorts. For a short position, compare entry sale price with exit purchase price.
XIII-038Practice bank se · 9
Which important risk is generally greater in a bilateral forward than a centrally cleared futures contract?
A bilateral forward has direct counterparty credit exposure, while central clearing helps manage that risk in futures. Remember: Clearing reduces, rather than removes, counterparty exposure.
Hint Common mistake: Do not equate standardization with absence of risk. Compare who is responsible for performance.
XIII-039Practice bank se · 10
A non-dividend-paying asset trades at ₹1,000. With simple annual financing at 8%, what is its six-month theoretical futures price?
Simple cost-of-carry price = ₹1,000 × (1 + 0.08 × 0.5) = ₹1,040. Remember: Futures pricing includes the cost of carrying an asset.
Hint Common mistake: Use the correct time fraction in a carry calculation. Account for financing over only half a year.
XIII-040Practice bank se · 11
A currency futures contract represents USD 1,000. Its quoted price rises by ₹0.40 per dollar. What is the long position's gain?
Gain in rupees = 1,000 × ₹0.40 = ₹400. Remember: Currency futures payoff uses the contract's quotation units.
Hint Common mistake: Check whether profit is expressed in rupees or dollars. Scale the rupee movement by the dollar quantity.
XIII-041Practice bank se · 12
What is the main purpose of marking a futures position to market each day?
Mark-to-market settlement credits and debits positions for changes in their futures value. Remember: Daily settlement recognizes gains and losses.
Hint Common mistake: Do not confuse daily settlement with contract expiry. Think about daily gains and losses.
XIII-042Practice bank se · 13
What does the basis of an equity futures contract most commonly compare?
Basis is a defined difference between the spot and futures price, with the sign depending on the convention used. Remember: Basis captures the spot-futures relationship.
Hint Common mistake: State the basis sign convention before calculating it. Think about cash-versus-futures price difference.
XIII-043Practice bank se · 14
A futures contract has a tick size of 0.01 and a quantity of 2,000 units. What is one tick worth?
One tick value = 0.01 × 2,000 = ₹20, assuming rupee quotation per unit. Remember: Tick value depends on price increment and contract quantity.
Hint Common mistake: A small tick size can represent a sizable contract change. Multiply minimum quoted change by contract quantity.
XIII-044Practice bank se · 15
In deliverable interest-rate futures, what is the purpose of a conversion factor?
A conversion factor adjusts eligible bonds for differences in their characteristics when calculating delivery terms. Remember: Conversion factors assist delivery comparison.
Hint Common mistake: Do not confuse the factor with a guaranteed bond price. Consider why eligible bonds need comparability.
XIII-045Practice bank se · 16
Under covered interest rate parity, what mainly links a currency forward rate to the spot rate?
Covered interest rate parity relates spot and forward rates through the two currencies' financing rates. Remember: Interest-rate differences influence theoretical forward rates.
Hint Common mistake: Use the correct domestic and foreign rate convention. Think about borrowing and lending in both currencies.
XIII-046Practice bank se · 17
A deliverable bond has a conversion factor of 0.92. The futures price is 110 and accrued interest is 1.5 per ₹100 face. What invoice amount applies per ₹100 face?
Invoice amount = 110 × 0.92 + 1.5 = 102.70 per ₹100 face. Remember: Delivery invoice uses converted futures price plus accrued interest.
Hint Common mistake: Do not add accrued interest before applying the conversion factor. Apply the bond's factor before including accrued interest.
XIII-047Practice bank se · 18
USD/INR spot is 84. Domestic one-year interest is 6% and dollar interest is 2%. What is the theoretical one-year forward rate?
Forward = 84 × (1.06 ÷ 1.02) = approximately ₹87.29 per USD. Remember: Forward points reflect relative currency financing.
Hint Common mistake: Do not interchange domestic and foreign interest rates. Match the domestic and foreign financing rates to the exchange quote.
XIII-048Practice bank se · 19
A share trades at ₹500 with simple annual funding cost of 10%. A known ₹10 cash dividend is paid at expiry in six months. What theoretical futures price follows?
Theoretical price = ₹500 × (1 + 0.10 × 0.5) − ₹10 = ₹515, assuming the dividend is paid exactly at expiry. Remember: Known payouts reduce futures fair value.
Hint Common mistake: Dividend timing matters in a full cost-of-carry model. Include both financing cost and a known cash distribution.
XIII-049Practice bank se · 20
Two government bonds are eligible for delivery into the same futures contract. One delivers at lower net economic cost. Which bond is cheapest to deliver?
The cheapest-to-deliver bond minimizes the economic cost of satisfying the delivery obligation after relevant adjustments. Remember: Delivery choice depends on adjusted economics.
Hint Common mistake: Do not rank eligible bonds using coupon rate alone. Compare market acquisition cost with adjusted invoice proceeds.
XIII-050Expiry day is the last day on which a derivative contract can be traded.
Aage padhoLot size is the number of units of the underlying that one derivatives contract stands for.
Aage padhoMargin is the money a participant must keep in place to carry a leveraged position.
Aage padho