Derivative Markets
15 questions. Each answer is explained.
Question 1 of 10Practice · Series XII — Securities Markets Foundation
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Exam format
| Questions | 100 · 1 mark each |
|---|---|
| Duration | 120 min · 2 hours |
| Pass mark | 60% · 60 of 100 marks |
| Negative marking | None · a wrong answer costs nothing beyond the mark |
| Certificate validity | 3 years · from the date of the examination |
| Marks for this unit | Not published by NISM |
NISM Series XII Securities Markets Foundation
Exam rules read on NISM's site on 17 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 If a rule changes before your exam, treat the linked questions as out of date and check NISM's current workbook.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 17 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 15 questions on Derivative Markets, with answers
Q1What gives a derivative contract its basic economic value or payoff?
Option A. The margin deposit independently of the underlying
Why it is wrong: Margin secures exposure rather than independently defining the contract’s economic payoff.
Option B. The investor’s separate cash savings balance
Why it is wrong: Personal savings do not define the derivative’s payoff link.
Option C. The brokerage charged when the trade is entered
Why it is wrong: Brokerage affects net trading costs rather than defining the underlying contractual payoff.
Option D. The value or behaviour of its specified underlying — Correct answer
Answer: D. A derivative’s value or payoff is linked to a specified underlying, such as an asset, rate or index. The contract defines how that link works. Remember: A derivative must be understood through its underlying and contract terms.
Hint, shown before you answer in practice mode: Common mistake: Assuming a derivative has a value independent of its specified underlying. Identify the asset, rate or index to which the contract is linked.
XII-136easyconceptual
Q2Which feature typically distinguishes exchange-traded futures from a privately negotiated forward contract?
Option A. Standardised terms and exchange-based trading — Correct answer
Option B. A guaranteed profit for the party buying the contract
Why it is wrong: A futures buyer can lose money when prices move unfavourably.
Option C. No obligations for either party at maturity
Why it is wrong: Both futures and forwards create contractual obligations.
Option D. Terms individually redesigned for every pair of traders
Why it is wrong: Customisation is more characteristic of a negotiated forward.
Answer: A. Exchange-traded futures use standardised terms and exchange-based trading. A forward is generally negotiated between counterparties to suit their agreement. Remember: Futures standardisation differs from the customisation of forwards.
Hint, shown before you answer in practice mode: Common mistake: Confusing standardisation with the elimination of market risk. Compare an exchange contract specification with a privately tailored agreement.
XII-137easyconceptual
Q3What contractual right does the buyer of a call option obtain?
Option A. The right to sell the underlying at the strike price
Why it is wrong: The right to sell defines a put rather than a call.
Option B. The right to buy the underlying at the strike price — Correct answer
Option C. The right to receive all future company dividends
Why it is wrong: A call option does not itself give the holder all shareholder dividend rights.
Option D. The obligation to buy whenever the seller asks
Why it is wrong: The option buyer has a right rather than that obligation.
Answer: B. A call buyer obtains the right to buy the underlying at the strike price under the contract terms. The buyer pays a premium for the option. Remember: A call gives its buyer a buying right rather than a compulsory purchase.
Hint, shown before you answer in practice mode: Common mistake: Mixing up the call buyer’s right with the option writer’s obligation. Distinguish the direction of the buyer’s option right from an obligation.
XII-138easyconceptual
Q4What does a put option allow its buyer to do under the contract terms?
Option A. Collect interest on the underlying without owning it
Why it is wrong: A put right is not a claim to interest on the underlying.
Option B. Buy the underlying at the strike price
Why it is wrong: The right to buy defines a call rather than a put.
Option C. Change the strike price after seeing the market move
Why it is wrong: The holder cannot freely rewrite the agreed strike price.
Option D. Sell the underlying at the strike price — Correct answer
Answer: D. A put gives its buyer the right to sell the underlying at the strike price under the contract terms. Exercising the right is different from being obliged to sell. Remember: A put provides its buyer with a selling right.
Hint, shown before you answer in practice mode: Common mistake: Assuming every derivative buyer must take delivery of the underlying. Recall which transaction a put holder can choose to make.
XII-139easyconceptual
Q5An investor owns shares and wants to offset some losses from a market fall. Which futures direction can provide a basic hedge?
Option A. Sell futures with no relationship to the portfolio’s risk
Why it is wrong: An unrelated exposure does not reliably offset the portfolio’s specified market risk.
Option B. Buy an additional quantity of the same share portfolio
Why it is wrong: Buying more shares adds to the existing market exposure.
Option C. Sell an appropriately matched futures exposure — Correct answer
Option D. Buy an additional futures exposure in the same direction
Why it is wrong: Adding a long futures position increases rather than offsets downward exposure.
Answer: C. A short futures exposure can offset part of the loss on a falling share portfolio when the hedge is appropriately matched. The hedge can still leave basis or sizing risk. Remember: A hedge takes an offsetting exposure rather than simply adding more of the same risk.
Hint, shown before you answer in practice mode: Common mistake: Assuming that any derivative trade automatically reduces portfolio risk. Look for a position that may gain when the existing exposure loses.
XII-140mediumapplication
Q6A trader with no existing exposure buys futures solely because a price rise is expected. What is the main purpose of this trade?
Option A. Hedging an existing holding
Why it is wrong: The case states there is no existing exposure being offset.
Option B. Settlement of an already matured contract
Why it is wrong: The trader is opening a directional position rather than settling a matured contract.
Option C. Arbitrage between simultaneous offsetting prices
Why it is wrong: The case gives a directional bet rather than offsetting trades exploiting a price difference.
Option D. Speculation — Correct answer
Answer: D. The trade is speculation because it takes a new directional exposure in expectation of a price rise. No existing risk is being hedged in the stated case. Remember: The purpose of a derivative trade depends on the exposure it creates or offsets.
Hint, shown before you answer in practice mode: Common mistake: Calling all derivatives activity hedging regardless of its purpose. Ask whether the position offsets an existing risk or creates a new directional risk.
XII-141mediumapplication
Q7A long futures position covers 75 hypothetical units. The daily settlement price rises from ₹100 to ₹102. What is the daily mark-to-market result?
Option A. ₹7,650 gain
Why it is wrong: ₹7,650 is a full position value, not the daily change in value.
Option B. ₹150 gain — Correct answer
Option C. ₹75 gain
Why it is wrong: ₹75 uses a ₹1 move rather than the stated ₹2 move.
Option D. ₹150 loss
Why it is wrong: A price rise benefits a long futures position rather than causing this loss.
Answer: B. The daily mark-to-market result is a ₹150 gain. Price change = ₹102 − ₹100 = ₹2. Gain = 75 × ₹2 = ₹150. Remember: A long futures position gains from an upward settlement-price change.
Hint, shown before you answer in practice mode: Common mistake: Confusing the contract’s full value with its daily gain or loss. Use the settlement-price change and the position’s direction.
XII-142mediumnumerical
Q8A call has a strike of ₹500, underlying price of ₹540 and premium of ₹55. What is its intrinsic value per unit?
Option A. ₹95
Why it is wrong: Adding the premium to the price difference overstates intrinsic value.
Option B. ₹55
Why it is wrong: ₹55 is the total premium rather than the intrinsic value.
Option C. ₹15
Why it is wrong: ₹15 is the premium above intrinsic value rather than intrinsic value itself.
Option D. ₹40 — Correct answer
Answer: D. The call’s intrinsic value is ₹40 per unit. Intrinsic value = maximum of ₹540 − ₹500 and zero = ₹40. The remaining ₹15 of premium is above intrinsic value. Remember: Intrinsic value is different from the full option premium.
Hint, shown before you answer in practice mode: Common mistake: Using the premium as though it were the option’s immediate exercise value. Separate the total option price from the value of exercising its right.
XII-143mediumnumerical
Q9A put has a strike price of ₹800 while the underlying trades at ₹760. How is the option classified by moneyness?
Option A. In the money — Correct answer
Option B. Impossible to classify without the premium
Why it is wrong: The premium affects net profitability, but strike and underlying price determine moneyness.
Option C. At the money
Why it is wrong: The stated underlying price is not equal to the strike.
Option D. Out of the money
Why it is wrong: A put has positive intrinsic value when the underlying is below the strike.
Answer: A. The put is in the money because its strike exceeds the underlying price. Its selling right has positive intrinsic value, though profitability also depends on the premium. Remember: Put moneyness depends on the strike relative to the underlying price.
Hint, shown before you answer in practice mode: Common mistake: Using the call-option moneyness rule for a put. Compare the put’s selling right with the current underlying price.
XII-144mediumapplication
Q10Open interest is 200 contracts. A new buyer and new seller create five additional contracts. With no other activity, what is open interest?
Option A. 210 contracts
Why it is wrong: Counting both the buyer and seller doubles the same five new contracts.
Option B. 200 contracts
Why it is wrong: New positions on both sides add five outstanding contracts.
Option C. 205 contracts — Correct answer
Option D. 195 contracts
Why it is wrong: Both sides are opening positions rather than closing five contracts.
Answer: C. Open interest becomes 205 contracts. New outstanding contracts = 5. Total = 200 + 5 = 205, not 210. Remember: Open interest counts outstanding contracts, with each contract counted once.
Hint, shown before you answer in practice mode: Common mistake: Adding the long side and short side separately to open interest. Recall how an outstanding contract is counted when both counterparties open positions.
XII-145mediumnumerical
Q11For the same option universe, put open interest is 900 contracts and call open interest is 600. What is the open-interest put-call ratio?
Option A. 1.5 — Correct answer
Option B. 0.67
Why it is wrong: 0.67 reverses the ratio by dividing calls by puts.
Option C. 2.5
Why it is wrong: 2.5 divides combined put and call counts by call counts.
Option D. 300
Why it is wrong: 300 is the difference in contract counts rather than their ratio.
Answer: A. The open-interest put-call ratio is 1.5. Ratio = 900 put contracts ÷ 600 call contracts = 1.5. This statistic alone does not guarantee a market direction. Remember: A put-call ratio must specify a consistent universe and whether it uses volume or open interest.
Hint, shown before you answer in practice mode: Common mistake: Mixing put volume with call open interest or reversing the ratio. Use comparable put and call measures from the same group of contracts.
XII-146mediumnumerical
Q12Why can losses on a futures position exceed the initial margin deposited?
Option A. The exchange fixes every future resale price at entry
Why it is wrong: Future market prices are not fixed at the entry price.
Option B. The margin is an option premium that limits every loss
Why it is wrong: Futures margin is collateral rather than the loss-limiting premium of a bought option.
Option C. The margin is only collateral for a larger exposure — Correct answer
Option D. The contract automatically stops losing after margin is used
Why it is wrong: A margin deposit does not cap the contractual loss.
Answer: C. Initial margin secures a larger futures exposure and does not cap losses. Adverse price changes can create further payment obligations. Remember: Futures margin is not a maximum-loss amount.
Hint, shown before you answer in practice mode: Common mistake: Treating futures margin like the premium paid for a standalone option purchase. Distinguish the amount posted as security from the size of the contract exposure.
XII-147mediumconceptual
Q13A cash-settled put covers 40 hypothetical units at a ₹600 strike. Premium is ₹20 per unit and expiry value is ₹550. Ignoring costs, what is the buyer’s net result?
Option A. ₹2,000 profit
Why it is wrong: ₹2,000 is the exercise payoff before deducting the ₹800 premium.
Option B. ₹1,200 profit — Correct answer
Option C. ₹2,800 profit
Why it is wrong: This adds the premium to the payoff instead of deducting it.
Option D. ₹800 loss
Why it is wrong: The put finishes with an exercise payoff that exceeds the premium paid.
Answer: B. The buyer’s net result is a ₹1,200 profit. Payoff per unit = maximum of ₹600 − ₹550 and zero = ₹50. Net profit per unit = ₹50 − ₹20 = ₹30. Total profit = 40 × ₹30 = ₹1,200. Remember: An option buyer’s net result includes both the expiry payoff and premium paid.
Hint, shown before you answer in practice mode: Common mistake: Confusing an in-the-money payoff with profit after the premium. Find the expiry payoff, deduct the premium, then use the contract quantity.
XII-148hardnumerical
Q14An investor holds 100 units bought at ₹500 and shorts futures for 100 units at ₹502. Later spot is ₹470 and futures ₹474. Ignoring costs and income, what is the combined result?
Option A. ₹200 loss — Correct answer
Option B. ₹3,000 loss
Why it is wrong: This counts only the spot loss and ignores the futures gain.
Option C. ₹2,800 profit
Why it is wrong: This counts only the futures gain and ignores the spot loss.
Option D. ₹200 profit
Why it is wrong: The ₹3,000 spot loss exceeds the ₹2,800 futures gain.
Answer: A. The combined result is a ₹200 loss. Spot result = 100 × (₹470 − ₹500) = −₹3,000. Short futures result = 100 × (₹502 − ₹474) = ₹2,800. Combined result = −₹3,000 + ₹2,800 = −₹200. Remember: An offsetting futures hedge can leave a residual result when spot and futures move differently.
Hint, shown before you answer in practice mode: Common mistake: Assuming equal quantities guarantee an exact offset despite a changing price difference. Calculate the long spot position and short futures position separately before combining them.
XII-149hardnumerical
Q15A one-year swap on ₹20 lakh pays fixed 7% and receives floating 8.5% for that year. Assume net settlement and no other payment. What is the net cash flow?
Option A. ₹1,40,000 paid
Why it is wrong: ₹1,40,000 is the fixed leg alone rather than the net of both legs.
Option B. ₹30,000 received — Correct answer
Option C. ₹1,70,000 received
Why it is wrong: ₹1,70,000 is the gross floating receipt before the fixed payment is offset.
Option D. ₹30,000 paid
Why it is wrong: The floating receipt exceeds the fixed payment, so the net direction is a receipt.
Answer: B. The net cash flow is ₹30,000 received. Floating receipt = ₹20,00,000 × 8.5% = ₹1,70,000. Fixed payment = ₹20,00,000 × 7% = ₹1,40,000. Net receipt = ₹1,70,000 − ₹1,40,000 = ₹30,000. Remember: A net-settled interest-rate swap pays the difference between the two agreed interest legs.
Hint, shown before you answer in practice mode: Common mistake: Treating the swap’s notional principal as an additional cash payment. Calculate the two interest legs on the same notional amount and compare their directions.
XII-150hardnumerical
Derivative Markets: common questions
How many practice questions are there on Derivative Markets?
15 questions, all written out on this page with the correct answer and why each other option is wrong. This unit is one of the 6 practice topics for NISM Series XII, which has 150 questions in total.
Are these real NISM Series XII questions on Derivative Markets?
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 XII?
No. NISM applies no negative marking to Series XII. A wrong answer costs nothing beyond the mark you did not earn, so a blank is never better than an attempt. 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.
Try a paper on all of NISM Series XII
This is the last unit of Securities Markets Foundation. The series page runs one quiz across every unit.
Open the NISM Series XII practice pagePaper Trading Try it on the practice trading desk