Unit ko samjho · NISM Series V-D
Basics of Derivatives
10 questions is unit mein
Sawaal aur jawaab English mein hain, kyunki NISM ka exam paper bhi English mein hota hai.
Is unit mein kya hai
- A contract pays an amount linked to the change in a specified share index. What makes it a derivative?
- A fund owns a diversified equity portfolio and sells index futures to reduce the effect of a broad market fall. The futures quantity is chosen to offset part of its existing exposure. What is the main purpose of the transaction?
- Dev owns no shares and has no planned equity purchase. He buys index futures solely because he expects the market to rise next week. How is this position best classified?
- Two identical, immediately transferable securities trade at ₹99 and ₹101 in two venues. A trader can buy one at ₹99 and simultaneously sell the same quantity at ₹101, with guaranteed execution and total charges below ₹2 per unit. What distinguishes this assumed arbitrage from a directional bet? Assumptions: The securities are identical and transferable, both trades execute, and all relevant charges are below the spread.
- An institution needs a contract for an unusual quantity and a specific date that do not match listed contracts. Which feature generally makes a bilateral OTC contract relevant?
- A learner says, “My futures trade is centrally cleared, so an adverse price move cannot cost me money.” What is the best correction?
- A hypothetical futures position has exposure of ₹5,00,000 and an initial cash margin of ₹25,000. A 1% adverse movement causes a ₹5,000 loss. Ignoring charges and any margin change, what percentage of the original margin has been lost? Assumptions: The amounts and 1% sensitivity are hypothetical. Charges and margin changes are ignored.
- A trader wants to close an option position, but there are few buyers and the quoted bid is far below the quoted ask. Which risk is most directly illustrated?
- A dealing system accidentally sends the same sell order twice after a connection retry. Both orders execute, leaving a short position larger than authorised. What is the most direct source of the excess exposure?
- A fund hedges a concentrated healthcare-share portfolio with a broad-market index future. The broad market falls 2%, while the healthcare shares fall 8% after sector-specific news. The hedge was sized using a historical relationship. Why can a substantial loss remain? Assumptions: The portfolio is concentrated in healthcare and the hedge is a broad-market index future.
Zaroori ideas
Practice bank se · 1
A contract pays an amount linked to the change in a specified share index. What makes it a derivative?
A derivative derives its value from an underlying such as a security, index or rate. A contract linked to an index can therefore provide exposure without direct ownership of the index’s shares. Remember: Exposure to an asset and ownership of that asset are different.
Hint Focus on what determines the contract’s value.
V-D-069Practice bank se · 2
A fund owns a diversified equity portfolio and sells index futures to reduce the effect of a broad market fall. The futures quantity is chosen to offset part of its existing exposure. What is the main purpose of the transaction?
The fund already loses value when its equity holdings fall. A short index-futures position can gain during a broad market decline and offset part of that loss, making this a hedge. Remember: The purpose of a derivative depends on the exposure it accompanies.
Hint Relate the new position to the portfolio the fund already holds.
V-D-070Practice bank se · 3
Dev owns no shares and has no planned equity purchase. He buys index futures solely because he expects the market to rise next week. How is this position best classified?
Dev is taking new price risk to benefit from a rise in the index. Without an existing or anticipated offsetting exposure, the stated purpose is speculation. Remember: Classify the whole economic position, not just the instrument name.
Hint A directional view alone does not create an offsetting hedge.
V-D-071Practice bank se · 4
Two identical, immediately transferable securities trade at ₹99 and ₹101 in two venues. A trader can buy one at ₹99 and simultaneously sell the same quantity at ₹101, with guaranteed execution and total charges below ₹2 per unit. What distinguishes this assumed arbitrage from a directional bet? Assumptions: The securities are identical and transferable, both trades execute, and all relevant charges are below the spread.
The purchase and sale concern identical transferable claims and are executed together. Under the explicit execution and cost assumptions, their price difference is locked in rather than dependent on a later market direction. Remember: An arbitrage calculation must include matching, execution and costs.
Hint Check whether both sides are fixed at the same time.
V-D-072Practice bank se · 5
An institution needs a contract for an unusual quantity and a specific date that do not match listed contracts. Which feature generally makes a bilateral OTC contract relevant?
An OTC agreement can be tailored to the parties’ quantity and date requirements. That flexibility must be weighed against issues such as counterparty risk and ease of exit. Remember: Customisation brings benefits and trade-offs.
Hint Compare negotiated terms with standardised listed terms.
V-D-073Practice bank se · 6
A learner says, “My futures trade is centrally cleared, so an adverse price move cannot cost me money.” What is the best correction?
Clearing and margin processes address settlement and counterparty exposures. A trader can still owe variation payments when the market moves against the position. Remember: A risk control can reduce one risk without removing all risks.
Hint Separate the risk of non-payment from the risk of a price change.
V-D-074Practice bank se · 7
A hypothetical futures position has exposure of ₹5,00,000 and an initial cash margin of ₹25,000. A 1% adverse movement causes a ₹5,000 loss. Ignoring charges and any margin change, what percentage of the original margin has been lost? Assumptions: The amounts and 1% sensitivity are hypothetical. Charges and margin changes are ignored.
The margin loss percentage is ₹5,000 ÷ ₹25,000 × 100 = 20%. A small move in the underlying exposure can therefore have a much larger percentage effect on posted cash. Remember: Do not confuse notional exposure, posted margin and maximum possible loss.
Hint Use the original margin as the denominator.
V-D-075Practice bank se · 8
A trader wants to close an option position, but there are few buyers and the quoted bid is far below the quoted ask. Which risk is most directly illustrated?
A thin order book and wide bid–ask spread can make an exit costly or difficult. This is risk, even when the trader’s price view about the underlying is unchanged. Remember: An indicated price is not always an executable exit price.
Hint Consider the ability to trade promptly at a reasonable price.
V-D-076Practice bank se · 9
A dealing system accidentally sends the same sell order twice after a connection retry. Both orders execute, leaving a short position larger than authorised. What is the most direct source of the excess exposure?
The position arose because the order-handling process failed to prevent a duplicate submission. Price risk may result afterward, but the initiating failure is operational. Remember: Controls should distinguish an instruction retry from a new trade.
Hint Identify whether the problem began with the market or with the process.
V-D-077Practice bank se · 10
A fund hedges a concentrated healthcare-share portfolio with a broad-market index future. The broad market falls 2%, while the healthcare shares fall 8% after sector-specific news. The hedge was sized using a historical relationship. Why can a substantial loss remain? Assumptions: The portfolio is concentrated in healthcare and the hedge is a broad-market index future.
The index future offsets movements in the broad index, not every healthcare-specific event. A changing relationship between the portfolio and the hedge leaves residual risk even if the hedge performs as contracted. Remember: Hedge effectiveness depends on how closely the risks match.
Hint Compare the risk being hedged with the risk actually held.
V-D-078Liquidity in the stock market means how easily a quantity can be bought or sold.
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