Trading Mechanism in Exchange Traded Currency Derivatives

Learn these topics

• Market, Limit and Stop OrdersLesson

More units in NISM Series I

• Introduction to Currency Markets16
• Foreign Exchange Derivatives13
• Exchange Traded Currency Futures15
• Exchange Traded Currency Options20
• Strategies Using Exchange Traded Currency Derivatives19
• Clearing, Settlement and Risk Management in Exchange Traded Currency Derivatives18
• Regulatory Framework for Exchange Traded Currency Derivatives12
• Accounting and Taxation11
• Codes of Conduct and Investor Protection Measures13

Practise all of NISM Series I

Exam format

All 13 questions on Trading Mechanism in Exchange Traded Currency Derivatives, with answers

1. Q1On a normal NSE trading day, the regular trading session for currency futures and options on INR pairs is which interval in IST? Exclude holidays, special sessions and contract-specific expiry cutoffs.

   • A

     Option A. 9:15 a.m. to 3:30 p.m.

     Why it is wrong: This substitutes a different segment’s familiar timetable for the specified currency session.

   • B

     Option B. 9:00 a.m. to 5:00 p.m. — Correct answer

   • C

     Option C. 9:00 a.m. to 7:30 p.m.

     Why it is wrong: This is not the normal INR-pair session on the inspected NSE timing page.

   • D

     Option D. 9:15 a.m. to 5:00 p.m.

     Why it is wrong: The closing time is right, but the INR-pair session opens at 9:00 a.m., not 9:15 a.m.

   Answer: B. This matches the ordinary INR-pair currency derivatives session shown by NSE. NSE’s inspected market-timings page gives the ordinary INR-pair currency derivatives session as 09:00 to 17:00 IST. The question expressly excludes holidays, special sessions and earlier cutoffs that can apply to an expiring contract. The correct interval is therefore 9:00 a.m. to 5:00 p.m. A separate segment or instrument must be checked on its own terms. Remember: Use the exchange’s timetable for the specified segment and distinguish ordinary hours from expiry-day exceptions.

   Hint, shown before you answer in practice mode: Common mistake: Applying equity-market trading hours to currency derivatives.

   I-025easyregulatory

   Study this unit

2. Q2Under NSE’s published USD-INR futures specification, what is the smallest single-order quantity that attracts the quantity freeze?

   • A

     Option A. 1,000 contracts

     Why it is wrong: This confuses a possible order count with the USD 1,000 trading unit of one USD-INR contract.

   • B

     Option B. 10,000 contracts

     Why it is wrong: This is one contract below the first quantity covered by the freeze.

   • C

     Option C. 10,001 contracts — Correct answer

   • D

     Option D. 20,000 contracts

     Why it is wrong: Such an order exceeds the threshold, but it is not the smallest quantity that does so.

   Answer: C. The specification says 10,001 or greater, so this is the smallest covered order. The specification identifies orders of 10,001 contracts or more for the quantity freeze. Therefore 10,001 is the first quantity at the boundary. An order of 10,000 is below that particular threshold, though other risk checks still apply. Remember: Read a quantity-freeze threshold as a per-order boundary, not as a position limit.

   Hint, shown before you answer in practice mode: Common mistake: Rounding 10,001 down to 10,000 or confusing contracts with dollars.

   I-026easyregulatory

   Study this unit

3. Q3For the same USD-INR futures contract, sell order X at 88.30 arrives before sell order Y at 88.28. Both are available when a market buy order for one contract arrives. Which order is matched first under price-time priority?

   • A

     Option A. Y, because its selling price is lower — Correct answer

   • B

     Option B. X, because it entered the book earlier

     Why it is wrong: Earlier arrival does not outrank an order at a better price.

   • C

     Option C. X, because its selling price is higher

     Why it is wrong: The higher selling price is less attractive to the buyer, not more attractive.

   • D

     Option D. Either order, because market orders bypass priority

     Why it is wrong: A market order seeks available execution. It does not suspend the order book’s matching priority.

   Answer: A. Y offers the buyer the lower price, so it has price priority. A buyer obtains the better price from the lower-priced sell order. Here 88.28 is better than 88.30. Y therefore ranks before X despite arriving later. X’s earlier timestamp would matter against another sell order priced at 88.30. Remember: Compare prices first and timestamps only when prices are equal.

   Hint, shown before you answer in practice mode: Common mistake: Applying first-come-first-served across different price levels.

   I-027mediumapplication

   Study this unit

4. Q4An Immediate or Cancel limit order seeks to buy 8 currency-futures contracts at 88.25 or better. When it reaches the book, only 5 contracts are available at acceptable prices. What happens to the order?

   • A

     Option A. All 8 are cancelled because the full quantity is unavailable.

     Why it is wrong: This imposes an all-or-nothing condition that the stated IOC order does not have.

   • B

     Option B. Five execute and the remaining 3 stay in the book until the session ends.

     Why it is wrong: Leaving the balance in the book would conflict with immediate cancellation of the unmatched portion.

   • C

     Option C. All 8 execute, with the remaining 3 bought above the limit price.

     Why it is wrong: IOC does not authorise execution beyond the buy limit. A time condition does not remove the price condition.

   • D

     Option D. Five execute and the remaining 3 are cancelled immediately. — Correct answer

   Answer: D. The available 5 contracts execute and the unfilled 3 are immediately cancelled. Only 5 contracts satisfy the buy limit at the moment of execution, so that quantity can trade. The unfilled balance is 8 − 5 = 3. The IOC condition cancels that balance immediately rather than leaving it to wait. Remember: Apply the order’s time instruction and price limit together.

   Hint, shown before you answer in practice mode: Common mistake: Confusing IOC with all-or-nothing execution or assuming it turns a limit order into an unlimited market order.

   I-046mediumapplication

   Study this unit

5. Q5An accepted sell stop-limit order in USD-INR futures has trigger 88.40 and limit 88.30. The next trade is at 88.20 and the highest available buy order is 88.18. With no better buy order arriving, what happens?

   • A

     Option A. It executes at 88.40 because that is the trigger.

     Why it is wrong: A trigger is not a promised execution price, and no qualifying buy order at 88.40 is given.

   • B

     Option B. It executes at 88.18 because the stop has triggered.

     Why it is wrong: This treats a stop-limit as an unrestricted market order and ignores the 88.30 minimum sale price.

   • C

     Option C. It stays untriggered because the price skipped 88.40.

     Why it is wrong: A sell stop can trigger when the price crosses below the trigger. An exact trade at that number is not required.

   • D

     Option D. It triggers, but remains unexecuted at its 88.30 limit. — Correct answer

   Answer: D. Activation occurs, but the stated buy orders cannot meet the sell limit. The last trade at 88.20 is below the sell trigger of 88.40, so the order activates even though there was no trade exactly at the trigger. After activation, the sell limit permits execution only at 88.30 or a higher price. The highest bid of 88.18 is too low, so the order cannot fill on the stated book. Remember: Keep the activation test and the execution-price test separate for a stop-limit order.

   Hint, shown before you answer in practice mode: Common mistake: Assuming that triggering guarantees a fill or that a skipped trigger never activates.

   I-064mediumapplication

   Study this unit

6. Q6A market buy order for 10 USD-INR futures contracts is fully matched against 4 sell contracts at 88.10 and then 6 at 88.12. All contracts have the same size. What is the volume-weighted average execution price?

   • A

     Option A. 88.100

     Why it is wrong: This gives every contract the best initial ask even though only four were available at that price.

   • B

     Option B. 88.110

     Why it is wrong: This is an unweighted average of the two price levels, despite their unequal quantities.

   • C

     Option C. 88.112 — Correct answer

   • D

     Option D. 88.120

     Why it is wrong: This gives every contract the final and less favourable price, ignoring the four cheaper fills.

   Answer: C. This answer weights the two prices by four and six contracts, respectively. Weight each fill by its contract count: total price-weighted quantity = 4 × 88.10 + 6 × 88.12 = 881.12. Divide by 10 filled contracts: average price = 881.12 ÷ 10 = 88.112 INR per USD. The equal contract size cancels out in the weighting. This is an average, not the price of an individual fill. It lies between 88.10 and 88.12 and is closer to 88.12 because more contracts traded there. Remember: For execution averages, weight prices by filled quantity rather than by the number of price levels.

   Hint, shown before you answer in practice mode: Common mistake: Using the midpoint, best price or last fill instead of the weighted average.

   I-065mediumnumerical

   Study this unit

7. Q7A broker’s risk system shows ₹24,000 of eligible collateral and a ₹25,000 requirement after a proposed currency-futures order. The order is within the exchange price filter. No additional collateral or offsetting position is available. Which assessment is correct?

   • A

     Option A. It passes because the price filter has been met.

     Why it is wrong: Passing a price filter does not satisfy a separate funding or collateral condition.

   • B

     Option B. It fails the collateral check despite passing the price check. — Correct answer

   • C

     Option C. It passes if its limit price is changed to a market price.

     Why it is wrong: A market order changes execution instructions, not the supplied collateral balance.

   • D

     Option D. It fails the price check but passes the collateral check.

     Why it is wrong: This reverses both findings. The price is within the filter and collateral is insufficient.

   Answer: B. The specified collateral is below the requirement even though the order price is valid. The collateral shortfall is ₹25,000 − ₹24,000 = ₹1,000 under the amounts supplied by the risk system. Being inside the price filter does not supply that ₹1,000. Changing the order type does not remove the stated collateral requirement. Remember: Evaluate price validity and risk funding separately before considering an order acceptable.

   Hint, shown before you answer in practice mode: Common mistake: Assuming exchange price acceptance implies adequate margin funding.

   I-066mediumapplication

   Study this unit

8. Q8A valid DAY order to buy 20 currency futures contracts is accepted. Twelve contracts trade and eight remain unfilled when the trading day ends. What happens to this order?

   • A

     Option A. All twenty contracts are cancelled, including the twelve executed trades

     Why it is wrong: This confuses expiry of the unfilled order balance with cancellation of completed trades.

   • B

     Option B. The eight unfilled contracts automatically become a DAY order for the next session

     Why it is wrong: A DAY order does not carry its unmatched balance forward automatically.

   • C

     Option C. The eight unfilled contracts are cancelled and the twelve executed trades remain valid — Correct answer

   • D

     Option D. The exchange fills the remaining eight contracts at the closing price

     Why it is wrong: DAY validity is not a promise that unfilled quantity will trade at the close.

   Answer: C. DAY validity governs the pending order. It does not undo trades already matched. Twelve contracts have already become completed trades. The pending balance is 20 − 12 = 8 contracts. DAY validity ends with the trading day, so the unmatched balance is cancelled. Cancellation of that balance does not reverse the twelve trades or determine when their resulting position must later be closed. Remember: Separate an expiring order from an existing trade or position.

   Hint, shown before you answer in practice mode: Common mistake: Assuming that expiry of a DAY order also cancels its filled portion.

   I-089mediumapplication

   Study this unit

9. Q9A trader buys 12 USD-INR futures contracts at 88.20, each for USD 1,000. Total charges for entry and exit together are ₹240. At what closing price is the cumulative net result zero? Ignore all other costs and interest.

   • A

     Option A. 88.22 — Correct answer

   • B

     Option B. 88.20

     Why it is wrong: This breaks even before costs but leaves a ₹240 net loss after charges.

   • C

     Option C. 88.21

     Why it is wrong: A rise of 0.01 earns only ₹120, covering half of the total charges.

   • D

     Option D. 88.24

     Why it is wrong: This earns ₹480 and double-counts the stated ₹240 total round-trip charge.

   Answer: A. The gross profit required is ₹240 on USD 12,000. The required price rise is 240 ÷ 12,000 = 0.02. Total USD quantity = 12 × 1,000 = USD 12,000. Net cumulative result = (closing price − 88.20) × 12,000 − 240. Set the result equal to zero. Required price change = 240 ÷ 12,000 = ₹0.02 per USD. Break-even closing price = 88.20 + 0.02 = 88.22. The total ₹240 already includes both entry and exit and must be deducted only once. Remember: Divide total round-trip cost by total underlying quantity to find the extra break-even price move.

   Hint, shown before you answer in practice mode: Common mistake: Doubling a fee that was already stated for both legs or applying the total fee to only one contract.

   I-090mediumnumerical

   Study this unit

10. Q10A broker’s order report shows a currency futures order as accepted and open, with an order ID, executed quantity 0 and no trade confirmation. What can the client conclude from this report?

    • A

      Option A. The whole order has traded because an order ID was issued.

      Why it is wrong: An order identifier is not a full-fill confirmation, and the reported executed quantity is zero.

    • B

      Option B. One contract has traded because the order was accepted.

      Why it is wrong: Acceptance does not imply a minimum one-contract fill. The report says no quantity has executed.

    • C

      Option C. The order is recorded but no contracts have traded under it yet. — Correct answer

    • D

      Option D. The order has been rejected because no trade confirmation exists.

      Why it is wrong: The accepted and open statuses contradict rejection. An unfilled order need not have a trade confirmation.

    Answer: C. This answer is consistent with all three supplied fields: accepted, open and zero executed quantity. The report explicitly says that the order is accepted and remains open. It also reports zero executed quantity. Therefore it does not establish a futures position from this order. An order ID identifies the instruction. It is not, by itself, confirmation that any contract has been matched. Remember: Use executed quantity and trade confirmation to distinguish an order from a trade.

    Hint, shown before you answer in practice mode: Common mistake: Treating acknowledgement of an instruction as confirmation of execution.

    I-114easyapplication

    Study this unit

11. Q11An importer budgets a currency futures purchase at 88.20. It buys 25 contracts of USD 1,000 each at 88.24 and incurs ₹120 total charges for this purchase. What is the combined cost of the adverse execution-price difference and these charges?

    • A

      Option A. ₹1,000

      Why it is wrong: It includes the price shortfall but excludes the charges required by the question.

    • B

      Option B. ₹120

      Why it is wrong: It counts only the charges, ignoring the higher execution price.

    • C

      Option C. ₹880

      Why it is wrong: It subtracts charges from the adverse price difference even though they increase the cost.

    • D

      Option D. ₹1,120 — Correct answer

    Answer: D. This answer includes both the ₹1,000 adverse execution-price difference and ₹120 charges. The adverse price difference is 88.24 − 88.20 = ₹0.04 per USD. For USD 25,000, the price shortfall is ₹0.04 × 25,000 = ₹1,000. The benchmark excluded charges, so add the ₹120 actual charges. Additional outlay is ₹1,120. This is a comparison measure, not the full notional cash payment required to enter futures. Remember: State the benchmark, multiply the adverse price difference by quantity and include the relevant charges once.

    Hint, shown before you answer in practice mode: Common mistake: Confusing an execution-cost comparison with the futures notional or subtracting a cost from another cost.

    I-115mediumnumerical

    Study this unit

12. Q12An illustrative currency order book executes at the resting order’s price. It shows 10 contracts offered at 89.95 and 15 at 90.00. A valid DAY order arrives to buy 20 contracts with a limit of 89.97. With no other orders or changes, what happens immediately?

    • A

      Option A. All 20 execute at the limit price of 89.97

      Why it is wrong: There are not 20 acceptable offered contracts, and the stated rule executes against the resting price rather than automatically at the incoming limit.

    • B

      Option B. 10 execute at 89.95 and 10 remain bid at 89.97 — Correct answer

    • C

      Option C. 10 execute at 89.95 and the remaining 10 are cancelled

      Why it is wrong: Immediate cancellation of the unmatched balance would follow an IOC condition, not the DAY condition given here.

    • D

      Option D. 10 execute at 89.95 and 10 execute at 90.00

      Why it is wrong: Buying the second 10 at 90.00 would exceed the client’s maximum price of 89.97.

    Answer: B. Only the first 10 offers are within the limit. The DAY balance remains at its limit price. The 10 contracts offered at 89.95 meet the maximum purchase price of 89.97. They execute at the stated resting-order price of 89.95. The next ask of 90.00 is above the limit, so it cannot fill the remaining quantity. Because the order is DAY rather than IOC, the unmatched 10 contracts remain in the book at 89.97 under the stated unchanged conditions. Remember: A marketable limit order can get a better price while leaving a balance unfilled.

    Hint, shown before you answer in practice mode: Common mistake: Assuming the limit is a compulsory execution price or that every partially filled order cancels its remainder.

    I-138mediumapplication

    Study this unit

13. Q13A client requests cancellation of an unfilled eight-contract currency order. Exchange records show that three contracts execute before the cancellation is processed. The acknowledgement then cancels the remaining five. There is no trade annulment. What is the final status?

    • A

      Option A. Three contracts traded and five cancelled — Correct answer

    • B

      Option B. Eight contracts cancelled with no trade obligation

      Why it is wrong: The request did not take effect before the three-contract execution, and no trade annulment is given.

    • C

      Option C. Eight contracts traded because cancellation arrived late

      Why it is wrong: Only three contracts executed. The acknowledged cancellation prevents the remaining five from staying live.

    • D

      Option D. Three contracts cancelled and five traded

      Why it is wrong: This reverses the executed and cancelled quantities reported by the exchange.

    Answer: A. This follows both the execution record and the acknowledged cancelled balance. The exchange sequence shows a valid execution of three contracts first. Those are completed trades under the facts given. Five contracts remain when cancellation is processed, and the acknowledgement cancels exactly those five. Reconciliation is 8 ordered = 3 traded + 5 cancelled. Sending the request earlier does not reverse the recorded execution. Remember: Reconcile executed and cancelled quantities using acknowledgements, not only the time a request was sent.

    Hint, shown before you answer in practice mode: Common mistake: Assuming a cancellation request guarantees that no trade can occur before the request is processed.

    I-139mediumapplication

    Study this unit

Clearing, Settlement and Risk Management in Exchange Traded Currency Derivatives

18 questions on Clearing, Settlement and Risk Management in Exchange Traded Currency Derivatives. Its quiz opens on that unit.