Understanding Derivatives
25 questions. Each answer is explained.
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Learn these topics
More units in NISM Series X-A
- Introduction to Personal Financial Planning4
- Time Value of Money14
- Evaluating the Financial Position of Clients5
- Debt Management and Loans2
- Introduction to the Indian Financial Markets4
- Securities Market Segments21
- Introduction to Investment5
- Investing in Stocks20
- Investing in Fixed Income Securities25
- Mutual Funds25
- Portfolio Manager10
- Overview of Alternative Investment Funds (AIFs)15
- Introduction to Modern Portfolio Theory14
- Portfolio Construction Process11
- Portfolio Performance Measurement and Evaluation25
- Operational Aspects of Investment Management15
- Key Regulations15
- Ethical Issues15
- Grievance Redress Mechanism15
Exam format
| Questions | 135 · 1 or 2 marks each |
|---|---|
| Duration | 180 min · 3 hours |
| Pass mark | 60% · 90 of 150 marks |
| Negative marking | 25% · 0.25 or 0.5 marks off per wrong answer |
| Certificate validity | 3 years · from the date of the examination |
| Marks for this unit | Not published by NISM |
NISM Series X-A Investment Adviser (Level 1)
Exam rules read on NISM's site on 3 October 2026. Check the current rules on NISM's site (opens in a new tab)
What these answers assume, and when it was last checked
Each question uses the rules listed below. We last checked them on 5 September 2026. A Budget or SEBI circular can change a rate, lot size or expiry day. If a rule changes before your exam, treat the linked questions as out of date and check NISM's current workbook.
- NSE uses Tuesday expiry and BSE uses Thursday expiry. This applies from 1 September 2025.
- The January 2026 index lot sizes are NIFTY 65, BANKNIFTY 30, FINNIFTY 60, MIDCPNIFTY 120 and NIFTYNXT50 25.
- The October 2024 SEBI framework sets a minimum index contract value of Rs 15–20 lakh. Each exchange may list one weekly benchmark index.
- Option buyers pay the premium upfront from 1 February 2025. A short index option has an extra 2% Extreme Loss Margin on expiry day from 20 November 2024.
- Equity short-term capital gains are taxed at 20%. Long-term gains are taxed at 12.5% above Rs 1.25 lakh. Both rates apply from 23 July 2024.
- F&O income is non-speculative business income in ITR-3. NSE equity derivatives trade from 9:15 a.m. to 3:40 p.m.
- The final ten-minute session began on 3 August 2026. It aligns with the cash market Closing Auction Session.
- Most Securities Transaction Tax questions test the base and who pays. On an option sale, it is the premium and the seller pays. On a futures sale, it is the traded value and the seller pays.
- On exercise, Securities Transaction Tax uses intrinsic value: settlement price minus strike price. The buyer pays it.
- Two questions test the current rate. From 1 April 2026, option sales carry 0.15% on the premium and futures sales carry 0.05% on traded price. The earlier rates were 0.10% and 0.02% from 1 October 2024.
- This section uses the T+1 rolling settlement cycle. Obligations are fixed on T+1. A short delivery goes to buy-in auction on T+1 and settles on T+2.
- The trade-for-trade surveillance segment uses direct close-out. Funds pay in by 10:30 a.m. and pay out on or after 1:30 p.m. on settlement day.
- Securities pay in to the settlement pool by 10:30 a.m. They pay out directly to the client’s demat account by 3:30 p.m.
- The 3:30 p.m. deadline replaced 1:30 p.m. under SEBI’s 10 October 2024 circular. Direct client credit was required by SEBI’s 5 June 2024 circular.
- The optional T+0 cycle trades until 1:30 p.m. Obligations are fixed by 2:30 p.m. on the trade day. An early pay-in shortage is closed out directly.
- Cash-market Value at Risk margin is six times exponentially weighted moving-average volatility. It has a 9% floor for Group I, a 21.5% floor for Group II, and a fixed 50% or 75% level for Group III.
- Extreme Loss Margin is 3.5% for a share and 2% for a broad-market-index exchange traded fund. Mark-to-market margin is collected before the next day’s trading. The trade-for-trade segment has 100% upfront margin.
- Close-out uses the higher of the highest price from trade day to auction day and 20% above the auction day’s official close.
- A funds shortage costs 0.07% a day. The trading facility is withdrawn at a shortage of Rs 5 lakh or more.
- SCORES allows 21 calendar days, then two 15-day review levels. Online Dispute Resolution moves from conciliation to arbitration after the market participant and SCORES steps.
- At NSE, the Investor Protection Fund limit is Rs 35 lakh per investor for each defaulting or expelled member. This applies to claims arising after 13 August 2024.
- A Basic Services Demat Account has no annual maintenance charge up to Rs 4 lakh of holdings. It costs up to Rs 100 above that, until the Rs 10 lakh eligibility ceiling. These slabs apply from 1 September 2024.
- The rupee pairs are USD-INR, EUR-INR, GBP-INR and JPY-INR. The cross-currency pairs are EUR-USD, GBP-USD and USD-JPY.
- Each contract covers 1,000 units of the foreign currency, except JPY-INR. JPY-INR covers 100,000 yen and is quoted in rupees per 100 yen.
- The tick is 0.25 paise, or Rs 0.0025. It equals Rs 2.50 a contract.
- Rupee pairs trade from 9:00 a.m. to 5:00 p.m. A monthly contract stops trading at 12:30 p.m. two working days before the expiry month’s last business day.
- Final settlement is in cash at the FBIL reference rate on expiry day. FBIL, Financial Benchmarks India, has published this rate in place of the Reserve Bank since 2018. Premium-style European options are quoted in rupees. The buyer pays the premium in cash on T+1.
- Daily settlement is on T+1 and final settlement is on T+2.
- NSE Clearing circular 026/2020 sets SPAN margin plus Extreme Loss Margin. The futures margin is 0.50% for USD-INR, 0.15% for EUR-INR, 0.25% for GBP-INR and 0.35% for JPY-INR. A short option has 0.75%. These figures apply from 1 June 2020.
- A USD-INR client may hold 6% of total open interest or USD 20 million, whichever is higher. A trading member may hold 15% or USD 100 million.
- A resident user has one USD 100 million equivalent limit across all rupee pairs and exchanges. No document is needed below that limit, but a valid underlying contracted exposure must still exist. This clarification applies from 3 May 2024.
- The currency segment has no Securities Transaction Tax.
The exam figures (questions, time, pass mark, negative marking and certificate validity) come from NISM's own pages, read on 3 October 2026. Timed practice uses the same figures. Study with the official workbook as well.
The written-out answers on this page are hidden while your timed set runs.
All 25 questions on Understanding Derivatives, with answers
Q1A 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?
Option A. The contract’s initial margin deposit
Why it is wrong: Initial margin is collateral supporting obligations, rather than the reference whose movement determines this contract’s settlement.
Option B. The specified equity index — Correct answer
Option C. The contract’s agreed settlement date
Why it is wrong: The settlement date specifies when a payment is measured or due, not the index level driving its amount.
Option D. The cash settlement amount calculated at expiry
Why it is wrong: The settlement cash amount is the result of applying the contract to the index movement, not the underlying reference itself.
Answer: B. 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, shown before you answer in practice mode: Common mistake: Assuming that index-linked exposure automatically means direct ownership of the index constituents.
X-A-101easyconceptual
Q2A 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?
Option A. An exchange-traded futures contract with standard quantity and expiry
Why it is wrong: Standard exchange terms do not directly match the stated requirement for bespoke quantity and timing.
Option B. An ordinary share representing permanent ownership
Why it is wrong: An ordinary share does not create the required future delivery agreement with a counterparty.
Option C. A listed option whose quantity and expiry are fixed by the exchange
Why it is wrong: A listed option gives an option right under standard terms rather than the described bilateral forward commitment.
Option D. A privately negotiated forward contract — Correct answer
Answer: D. 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, shown before you answer in practice mode: Common mistake: Treating every future-dated agreement as an exchange-traded futures contract.
X-A-102easyconceptual
Q3An 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?
Option A. Sell the matched futures contract — Correct answer
Option B. Buy the matched futures contract
Why it is wrong: Buying futures adds another position that loses when the underlying falls.
Option C. Buy more shares of the same stock
Why it is wrong: Buying more shares increases rather than offsets the existing directional exposure.
Option D. Close an existing short futures hedge
Why it is wrong: Closing a short hedge removes an offsetting position instead of creating one.
Answer: A. 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, shown before you answer in practice mode: Common mistake: Adding a second long position and calling the extra exposure a hedge.
X-A-103mediumconceptual
Q4An 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?
Option A. ₹12 profit
Why it is wrong: ₹12 is the gain on one underlying unit, not on all 400 units in the contract.
Option B. ₹4,800 loss
Why it is wrong: ₹4,800 is the correct magnitude but the wrong sign for a long position after a price rise.
Option C. ₹4,800 profit — Correct answer
Option D. ₹1,44,800 profit
Why it is wrong: ₹1,44,800 is the closing price multiplied by quantity, not the difference from the entry price.
Answer: C. ₹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 lot size. Remember: Compute signed price change first, then apply quantity.
Hint, shown before you answer in practice mode: Common mistake: Confusing notional contract value with profit or loss.
X-A-104easynumerical
Q5An 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?
Option A. ₹3,000 loss — Correct answer
Option B. ₹3,000 profit
Why it is wrong: A profit would require a favourable price decline for this short position, not the rise given.
Option C. ₹30 loss
Why it is wrong: ₹30 loss accounts for only one unit rather than the complete contract.
Option D. ₹1,28,000 loss
Why it is wrong: ₹1,28,000 treats the closing notional as a loss and ignores the entry value.
Answer: A. ₹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, shown before you answer in practice mode: Common mistake: Using the long-position sign convention for a short trade.
X-A-105easynumerical
Q6A 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?
Option A. ₹150 received
Why it is wrong: ₹150 is cumulative profit since entry, not the second day’s settlement.
Option B. ₹400 paid
Why it is wrong: ₹400 is the right magnitude but a price rise benefits the long position, so it is received.
Option C. ₹250 paid
Why it is wrong: ₹250 paid is the first day’s settlement, not the second day’s.
Option D. ₹400 received — Correct answer
Answer: D. ₹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, shown before you answer in practice mode: Common mistake: Answering a one-day settlement question with the life-to-date position result.
X-A-106mediumnumerical
Q7A 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?
Option A. 3%
Why it is wrong: 3% is the loss relative to initial notional, not relative to margin.
Option B. 30% — Correct answer
Option C. 10%
Why it is wrong: 10% is the initial margin as a proportion of notional, not the requested loss percentage.
Option D. 300%
Why it is wrong: 300% overstates the computed fraction by ten times.
Answer: B. 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 initial margin = ₹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, shown before you answer in practice mode: Common mistake: Assuming that the margin posted is the most a futures position can lose.
X-A-107mediumnumerical
Q8An 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?
Option A. ₹1,250
Why it is wrong: ₹1,250 is the option payoff before deducting the purchase premium.
Option B. ₹400
Why it is wrong: ₹400 is the premium paid, not the resulting net profit.
Option C. ₹850 — Correct answer
Option D. ₹1,650
Why it is wrong: ₹1,650 adds the premium instead of recognising it as the buyer’s cost.
Answer: C. ₹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, shown before you answer in practice mode: Common mistake: Calling an in-the-money option’s payoff its profit without accounting for premium.
X-A-108mediumnumerical
Q9An 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?
Option A. ₹2,700 — Correct answer
Option B. ₹4,500
Why it is wrong: ₹4,500 is the gross payoff. It leaves out the cost of acquiring the option.
Option C. ₹1,800
Why it is wrong: ₹1,800 is the premium cost, not the gain after exercise or settlement.
Option D. ₹6,300
Why it is wrong: ₹6,300 incorrectly treats the buyer’s premium payment as extra income.
Answer: A. ₹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, shown before you answer in practice mode: Common mistake: Using a call’s payoff direction when valuing a put.
X-A-109mediumnumerical
Q10A 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?
Option A. The call is out of the money and the loss is ₹12 per unit.
Why it is wrong: The underlying is above strike, so out-of-the-money is the wrong classification and the payoff is not zero.
Option B. The call is in the money and the profit is ₹8 per unit.
Why it is wrong: ₹8 is payoff, not profit, because the ₹12 cost remains to be deducted.
Option C. The call is at the money and profit is zero.
Why it is wrong: At the money would require underlying equal to strike, which is not the case.
Option D. The call is in the money but the net loss is ₹4 per unit. — Correct answer
Answer: D. 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 break-even price would be ₹100 + ₹12 = ₹112 under these assumptions. The observed ₹108 is below that break-even level. Remember: Keep strike-based moneyness separate from premium-inclusive break-even.
Hint, shown before you answer in practice mode: Common mistake: Assuming every exercised or in-the-money option earns its buyer a net profit.
X-A-110mediumconceptual
Q11An 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?
Option A. ₹6
Why it is wrong: ₹6 is the premium on one unit. The position covers 100 units.
Option B. Unlimited
Why it is wrong: Unlimited upside belongs to neither the premium receipt nor this short-call payoff. The writer’s possible loss is the unbounded side.
Option C. ₹600 — Correct answer
Option D. ₹6,000
Why it is wrong: ₹6,000 applies an incorrect quantity or decimal place to the stated ₹6 × 100.
Answer: C. ₹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, shown before you answer in practice mode: Common mistake: Confusing the risk profile of the writer with that of the buyer.
X-A-111mediumnumerical
Q12An 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?
Option A. ₹200
Why it is wrong: ₹200 is the maximum payoff owed before recognising premium income.
Option B. ₹191 — Correct answer
Option C. ₹9
Why it is wrong: ₹9 is maximum profit for the writer when the put expires without payoff, not maximum loss.
Option D. ₹209
Why it is wrong: ₹209 adds premium to the loss instead of allowing for money the writer received.
Answer: B. ₹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, shown before you answer in practice mode: Common mistake: Applying the buyer’s premium-limited loss to an option writer.
X-A-112mediumnumerical
Q13A call option trades at ₹14. The underlying is at ₹212 and the strike is ₹200. What is the option's time value?
Option A. ₹14
Why it is wrong: ₹14 is the whole premium and therefore includes intrinsic value as well as time value.
Option B. ₹12
Why it is wrong: ₹12 is the intrinsic value, not the residual after removing it from premium.
Option C. ₹26
Why it is wrong: ₹26 adds premium and intrinsic value, counting the intrinsic component twice.
Option D. ₹2 — Correct answer
Answer: D. ₹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, shown before you answer in practice mode: Common mistake: Subtracting strike from premium rather than from the underlying price.
X-A-113easynumerical
Q14An 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?
Option A. It has European exercise style, which says nothing about where it trades. — Correct answer
Option B. It has American exercise style because the holder may sell it before expiry.
Why it is wrong: Earlier sale is not earlier exercise, so it does not establish American exercise style.
Option C. It is a forward contract because the holder may not exercise it before expiry.
Why it is wrong: A restriction on exercise timing does not remove the holder’s option right and convert it to a forward.
Option D. Its exercise style means it can only be traded on a European exchange.
Why it is wrong: The word European labels exercise style. It does not require a European marketplace.
Answer: A. 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, shown before you answer in practice mode: Common mistake: Inferring early exercise rights from the ability to sell the option.
X-A-114easyconceptual
Q15An 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?
Option A. ₹10 profit
Why it is wrong: ₹10 is combined payoff before deducting either premium.
Option B. ₹5 profit
Why it is wrong: ₹5 reverses the sign after comparing ₹10 payoff with ₹15 cost.
Option C. ₹5 loss — Correct answer
Option D. ₹15 loss
Why it is wrong: ₹15 loss would occur if both expired with zero payoff. Here the call pays ₹10.
Answer: C. ₹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, shown before you answer in practice mode: Common mistake: Deducting only the premium of the option that finishes in the money.
X-A-115mediumnumerical
Q16A 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?
Option A. Liquidity risk from being unable to enter or close the hedge
Why it is wrong: The scenario describes a mismatch in price changes, not inability to transact in the hedge.
Option B. Basis risk from the hedge and exposure not moving together — Correct answer
Option C. A default on the futures settlement obligation
Why it is wrong: The question states there is no counterparty failure, so default is not the cause.
Option D. Quantity risk from purchasing a different volume than the hedged volume
Why it is wrong: No change in the purchase volume is given. The mismatch comes from the stated prices moving differently.
Answer: B. 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, shown before you answer in practice mode: Common mistake: Assuming a related contract must offset the cash-market exposure exactly.
X-A-116mediumconceptual
Q17An 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?
Option A. ₹20,000 — Correct answer
Option B. ₹8,40,000
Why it is wrong: ₹8,40,000 is the total hedged cost, not the reduction relative to the spot alternative.
Option C. ₹8,60,000
Why it is wrong: ₹8,60,000 is the total unhedged cost at the stated spot rate.
Option D. ₹2,000
Why it is wrong: ₹2,000 uses only US$1,000 rather than the US$10,000 payment.
Answer: A. ₹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, shown before you answer in practice mode: Common mistake: Describing an outcome-specific saving as a guaranteed benefit in every exchange-rate scenario.
X-A-117mediumnumerical
Q18For 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?
Option A. Pays ₹30,000
Why it is wrong: The amount is correct but the direction is reversed: P receives the higher-rate leg.
Option B. Receives ₹1,20,000
Why it is wrong: ₹1,20,000 is the full-year difference, omitting the 0.25 year fraction.
Option C. Receives ₹2,05,000
Why it is wrong: ₹2,05,000 is the gross floating receipt before subtracting P’s fixed obligation.
Option D. Receives ₹30,000 — Correct answer
Answer: D. ₹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, shown before you answer in practice mode: Common mistake: Treating the notional or one gross leg as the net settlement.
X-A-118mediumnumerical
Q19A 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?
Option A. ₹80
Why it is wrong: ₹80 is the raw forward-minus-spot difference before the ₹50 financing cost.
Option B. ₹50
Why it is wrong: ₹50 is the financing cost, not the amount left after delivery and repayment.
Option C. ₹30 — Correct answer
Option D. ₹1,080
Why it is wrong: ₹1,080 is gross sale proceeds and ignores repayment of the borrowing.
Answer: C. ₹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, shown before you answer in practice mode: Common mistake: Calling the entire spot-to-forward difference a riskless profit.
X-A-119mediumnumerical
Q20An 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?
Option A. ₹13 — Correct answer
Option B. ₹20
Why it is wrong: ₹20 is maximum gross payoff, not profit after the acquisition cost.
Option C. ₹7
Why it is wrong: ₹7 is the initial net premium and maximum expiry loss, not maximum profit.
Option D. ₹27
Why it is wrong: ₹27 adds the net premium to payoff although the investor paid it.
Answer: A. ₹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, shown before you answer in practice mode: Common mistake: Ignoring the short call when assuming unlimited upside from the long call.
X-A-120mediumnumerical
Q21CASE: 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?
Option A. ₹50,000
Why it is wrong: ₹50,000 counts the shares but not the puts.
Option B. ₹51,200 — Correct answer
Option C. ₹48,000
Why it is wrong: ₹48,000 is strike × quantity, not the money paid.
Option D. ₹1,200
Why it is wrong: ₹1,200 is the put premium alone.
Answer: B. 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, shown before you answer in practice mode: Common mistake: Treating the strike price as an upfront option payment.
X-A-121easyapplication
Q22CASE: 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?
Option A. ₹6,000
Why it is wrong: ₹6,000 is the fall in the shares from ₹500. The put pays from its ₹480 strike.
Option B. ₹2,800
Why it is wrong: ₹2,800 takes off the ₹1,200 premium, which the question leaves out.
Option C. ₹44,000
Why it is wrong: ₹44,000 is the shares' value at expiry.
Option D. ₹4,000 — Correct answer
Answer: D. Payoff = (₹480 − ₹440) × 100 = ₹4,000. Remember: Payoff, option profit and whole-strategy profit are three distinct measures.
Hint, shown before you answer in practice mode: Common mistake: Using the stock purchase price rather than the option strike to calculate a put payoff.
X-A-122mediumapplication
Q23CASE: 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?
Option A. ₹3,200 loss — Correct answer
Option B. ₹2,000 loss
Why it is wrong: ₹2,000 loss forgets the ₹1,200 premium.
Option C. ₹2,800 profit
Why it is wrong: ₹2,800 profit counts only the puts.
Option D. ₹6,000 loss
Why it is wrong: ₹6,000 loss counts only the shares.
Answer: A. 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, shown before you answer in practice mode: Common mistake: Reporting the hedge’s option profit as the combined portfolio result.
X-A-123mediumapplication
Q24CASE: 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?
Option A. ₹1,200
Why it is wrong: ₹1,200 counts only the premium.
Option B. ₹2,000
Why it is wrong: ₹2,000 counts only the gap from ₹500 to ₹480.
Option C. ₹3,200 — Correct answer
Option D. ₹51,200
Why it is wrong: ₹51,200 ignores the put, which protects value below ₹480.
Answer: C. 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, shown before you answer in practice mode: Common mistake: Confusing a terminal-value floor with full capital protection at the purchase cost.
X-A-124hardapplication
Q25CASE: 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?
Option A. ₹480
Why it is wrong: At ₹480 the position still loses ₹32 a share.
Option B. ₹500
Why it is wrong: At ₹500 the share cost is covered but not the ₹12 premium.
Option C. ₹532
Why it is wrong: ₹532 adds the ₹20 gap again.
Option D. ₹512 — Correct answer
Answer: D. 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, shown before you answer in practice mode: Common mistake: Ignoring premium because the option expires without being exercised.
X-A-125mediumapplication
Understanding Derivatives: common questions
How many practice questions are there on Understanding Derivatives?
25 questions, all written out on this page with the correct answer and why each other option is wrong. This unit is one of the 20 practice topics for NISM Series X-A, which has 285 questions in total.
Are these real NISM Series X-A questions on Understanding Derivatives?
No. LearnNifty wrote every question from NISM's public syllabus. NISM does not publish its question bank, so nobody can offer you the real paper. Use these questions to check that an idea has gone in. Use the official NISM workbook to see what is examined.
Does negative marking apply to NISM Series X-A?
Yes. NISM takes off 25% of a question's marks for a wrong answer. On a 1 or 2-mark question that is 0.25 or 0.5 marks off. A blank question earns nothing and loses nothing, so a wrong guess costs marks on this paper. Timed practice here uses the same rule.
Are these practice questions kept up to date?
Each question is written against the rules printed on this page, last checked on 5 September 2026. A Budget or a SEBI circular can change a rate, a lot size or an expiry day. If one of those rules changes before your exam, treat the questions that use it as out of date. Then check NISM's current workbook.
Mutual Funds
25 questions on Mutual Funds. Its quiz opens on that unit.
Open Mutual Funds