Unit ko samjho · NISM Series VIII
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
- Which instrument derives its value from another asset or benchmark?
- Meera has no position in the underlying shares. Based only on her expectation that the market index will rise, she buys index futures to try to profit from the move. In this transaction, Meera is acting primarily as a:
- Which statement correctly distinguishes an exchange-traded futures contract from a typical OTC forward contract?
- Which product marked the commencement of derivatives trading on NSE on 12 June 2000?
- Why can a futures position create substantial gains or losses relative to the cash initially deposited as margin?
- Which of the following is NOT an economic function normally attributed to an organised derivatives market?
- A derivative contract is specified as cash settled. What happens at final settlement?
- A non-dividend-paying share trades at ₹1,000. After considering financing cost to expiry, the no-arbitrage futures value is ₹1,015, but the quoted futures price is ₹1,045. Ignoring transaction costs and execution risk, which trade is consistent with cash-and-carry arbitrage?
- A fund manager hedges a portfolio with index futures. During the hedge period, the portfolio falls 3% but the futures reference index falls only 2%. Which risk is illustrated most directly?
- Two companies enter a customised OTC forward directly with each other. Which risk is generally more prominent than in a centrally cleared exchange-traded futures contract?
Zaroori ideas
Practice bank se · 1
Which instrument derives its value from another asset or benchmark?
An equity futures contract is a derivative because its value depends on the price of an underlying share or equity index. A fixed deposit, savings deposit and ordinary non-convertible debenture are primary financial claims rather than contracts whose value is derived from another underlying. Remember: A derivative gets its value from an underlying asset, rate, index or other reference variable.
Hint Common mistake: Treating every market-linked or financial instrument as a derivative.
VIII-001Practice bank se · 2
Meera has no position in the underlying shares. Based only on her expectation that the market index will rise, she buys index futures to try to profit from the move. In this transaction, Meera is acting primarily as a:
A speculator deliberately assumes market risk in expectation of earning a profit from a price movement. Meera has no underlying exposure that needs protection, so the futures position is not a hedge. Remember: The participant's purpose matters: reducing an exposure is hedging. Deliberately taking price risk for profit is speculation.
Hint Common mistake: Calling every futures user a hedger simply because futures can be used for hedging.
VIII-002Practice bank se · 3
Which statement correctly distinguishes an exchange-traded futures contract from a typical OTC forward contract?
Exchange-traded futures are standardised contracts traded through an organised exchange and are subject to exchange/clearing arrangements. A typical OTC forward is negotiated bilaterally and can be customised to the counterparties' requirements. Remember: Futures trade in a standardised exchange framework. Forwards are typically customised bilateral OTC contracts.
Hint Common mistake: Reversing the settlement and standardisation features of forwards and futures.
VIII-003Practice bank se · 4
Which product marked the commencement of derivatives trading on NSE on 12 June 2000?
NSE commenced derivatives trading on 12 June 2000 with index futures based on the Nifty 50. Index options followed in June 2001, options on individual securities in July 2001, and futures on individual securities in November 2001. Remember: For NSE's equity-derivatives timeline: index futures came first, followed by index options, stock options and then stock futures.
Hint Common mistake: Remembering 'June 2000' but confusing the first product with index options.
VIII-004Practice bank se · 5
Why can a futures position create substantial gains or losses relative to the cash initially deposited as margin?
A futures trader normally posts rather than paying the full notional contract value. Profit and loss, however, are linked to the movement in the full contract exposure. This creates leverage: percentage gains and losses on the margin can be much larger than the percentage move in the underlying. Remember: Leverage magnifies both gains and losses because margin is smaller than the notional exposure.
Hint Common mistake: Thinking margin is the maximum possible loss on a futures position.
VIII-005Practice bank se · 6
Which of the following is NOT an economic function normally attributed to an organised derivatives market?
Derivatives markets can help transfer risk, improve price discovery and move trading into an organised, risk-managed framework. They do not guarantee profits. Derivatives can produce substantial losses. Remember: Derivatives facilitate risk management and price discovery. They do not remove market risk or guarantee outcomes.
Hint Common mistake: Equating a regulated market with a guaranteed profitable market.
VIII-006Practice bank se · 7
A derivative contract is specified as cash settled. What happens at final settlement?
Cash settlement means the contract is discharged through payment of the applicable monetary difference rather than delivery of the underlying asset itself. Remember: Cash settlement resolves the derivative through money differences rather than delivery of the underlying.
Hint Common mistake: Assuming every derivative requires physical delivery.
VIII-007Practice bank se · 8
A non-dividend-paying share trades at ₹1,000. After considering financing cost to expiry, the no-arbitrage futures value is ₹1,015, but the quoted futures price is ₹1,045. Ignoring transaction costs and execution risk, which trade is consistent with cash-and-carry arbitrage?
The futures contract is overpriced relative to its no-arbitrage value. A cash-and-carry arbitrageur buys the relatively cheaper spot asset and sells the relatively expensive futures contract. At expiry, convergence allows the two legs to offset economically, subject to the assumptions in the question. Remember: Overpriced futures → buy spot and sell futures. Underpriced futures → the reverse-cash-and-carry direction, subject to shorting and financing feasibility.
Hint Common mistake: Focusing only on the futures price being 'high' without taking the offsetting spot leg.
VIII-008Practice bank se · 9
A fund manager hedges a portfolio with index futures. During the hedge period, the portfolio falls 3% but the futures reference index falls only 2%. Which risk is illustrated most directly?
A hedge can be imperfect when the hedged exposure and the derivative do not move one-for-one. The difference between movements in the portfolio and the hedging instrument is a form of basis or hedge mismatch risk. Remember: A derivative hedge can reduce risk without eliminating it if the hedge instrument is not perfectly aligned with the exposure.
Hint Common mistake: Assuming any hedge using an index future automatically produces a perfect offset.
VIII-103Practice bank se · 10
Two companies enter a customised OTC forward directly with each other. Which risk is generally more prominent than in a centrally cleared exchange-traded futures contract?
An OTC forward is a bilateral contract. Unless collateralisation or other arrangements reduce it, each party is exposed to the possibility that the counterparty fails to perform. Central clearing of exchange-traded futures materially changes this counterparty structure. Remember: Customisation is a benefit of forwards, but bilateral counterparty risk is an important trade-off.
Hint Common mistake: Thinking OTC contracts are safer simply because their terms are tailored.
VIII-104Margin is the money a participant must keep in place to carry a leveraged position.
Aage padhoExpiry day is the last day on which a derivative contract can be traded.
Aage padho