Introduction to the Underlying Markets
24 questions. Each answer is explained.
Question 1 of 10Practice · Series XIII — Common Derivatives
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Learn these topics
More units in NISM Series XIII
- Basics of Derivatives (Equity, Currency and Interest Rate)6
- Introduction to Forwards and Futures20
- Strategies Using Futures24
- Introduction to Options – Options on Equities and Currencies22
- Option Trading Strategies – Strategies using Equity Options and Currency options4
- Introduction to Trading, Clearing, Settlement & Risk Management25
- Legal and Regulatory Environment14
- Accounting and Taxation of Derivatives6
- Sales Practices, Code of Conduct and Investor Protection Measures5
Exam format
| Questions | 150 · 1 mark each |
|---|---|
| Duration | 180 min · 3 hours |
| Pass mark | 60% · 90 of 150 marks |
| Negative marking | 25% · 0.25 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 XIII Common Derivatives
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 If a rule changes before your exam, treat the linked questions as out of date and check NISM's current workbook.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 24 questions on Introduction to the Underlying Markets, with answers
Q1What does an ordinary equity share primarily represent?
Option A. A fixed repayment obligation from the government
Why it is wrong: Government debt is a loan rather than an ordinary share.
Option B. An ownership interest in the issuing company — Correct answer
Option C. A guaranteed interest payment every month
Why it is wrong: Ordinary equity dividends and returns are not guaranteed.
Option D. A standardized agreement to exchange currencies
Why it is wrong: A currency derivative is a contract rather than company ownership.
Answer: B. An equity share represents a residual ownership interest in a company. Remember: Equity holders own a residual stake.
Hint, shown before you answer in practice mode: Common mistake: Do not treat equity as guaranteed debt. Recall the difference between owners and lenders.
XIII-007easyconceptual
Q2What is the main purpose of a broad market index?
Option A. Guarantee the return of each included share
Why it is wrong: Index membership does not guarantee individual returns.
Option B. Summarize movements of a defined basket of securities — Correct answer
Option C. Publish the exact future price of every stock
Why it is wrong: An index is not a prediction of future prices.
Option D. Eliminate all company-specific investment risk
Why it is wrong: Diversified exposure can reduce but not eliminate risk.
Answer: B. A market index summarizes the performance of a defined group of securities. Remember: An index tracks a defined market basket.
Hint, shown before you answer in practice mode: Common mistake: A market index cannot guarantee performance. Think of an index as a market indicator.
XIII-008easyconceptual
Q3Why do index designers often prefer free-float market capitalization over total market capitalization?
Option A. It emphasizes shares reasonably available for public trading — Correct answer
Option B. It includes only the shares held by company promoters
Why it is wrong: Promoter-held strategic shares are generally excluded from free float.
Option C. It gives every company exactly the same weight
Why it is wrong: Equal weighting is a different index method.
Option D. It permanently removes changes in market price
Why it is wrong: Free-float weights still change as prices change.
Answer: A. Free-float weighting emphasizes the market value of shares available for public investors. Remember: Investability matters in index construction.
Hint, shown before you answer in practice mode: Common mistake: Free float is not the same as total issued shares. Think about investable shares.
XIII-009mediumconceptual
Q4A market order buys 200 shares at ₹101 against a ₹100 reference price. What is the purchase-side impact cost?
Option A. 0.5%
Why it is wrong: 0.5% understates the price difference.
Option B. 2%
Why it is wrong: 2% doubles the actual percentage difference.
Option C. 1% — Correct answer
Option D. 100%
Why it is wrong: 100% confuses rupees with percentage change.
Answer: C. Impact cost = (101 − 100) ÷ 100 × 100 = 1%. Remember: Execution away from the reference price creates impact cost.
Hint, shown before you answer in practice mode: Common mistake: Do not use the share quantity in a per-share percentage calculation. Compare execution with the reference price.
XIII-010mediumnumerical
Q5Two stocks have free-float values of ₹300 crore and ₹100 crore. If the first rises 8%, what is its contribution to index return?
Option A. 6% — Correct answer
Option B. 2%
Why it is wrong: 2% uses the smaller stock's weight.
Option C. 8%
Why it is wrong: 8% ignores the index weighting.
Option D. 24%
Why it is wrong: 24% multiplies rather than weights the return.
Answer: A. First stock weight = 300 ÷ 400 = 75%. Contribution = 75% × 8% = 6 percentage points. Remember: Index contribution depends on weight and return.
Hint, shown before you answer in practice mode: Common mistake: Do not assume every stock influences an index equally. Weight the return by investable market value.
XIII-011hardnumerical
Q6In a USD/INR quotation, what does the quoted number show?
Option A. Rupees required for one US dollar — Correct answer
Option B. US dollars required for one rupee
Why it is wrong: The inverse quote is INR/USD.
Option C. Rupees required for one euro
Why it is wrong: EUR/INR refers to a different base currency.
Option D. The future interest rate of the rupee
Why it is wrong: An exchange rate is not an interest rate.
Answer: A. USD/INR expresses the number of Indian rupees for one US dollar. Remember: Read currency pairs in base and quote order.
Hint, shown before you answer in practice mode: Common mistake: Do not accidentally invert the currency pair. Identify the base currency in the quotation.
XIII-012easyconceptual
Q7What does the value date of a foreign exchange transaction identify?
Option A. The date an exchange rate is first published
Why it is wrong: Publication of an exchange rate is not settlement.
Option B. The final day of the financial year
Why it is wrong: A financial year-end need not be a value date.
Option C. The day the importer issues an invoice
Why it is wrong: Invoice issue and settlement are different events.
Option D. The date when the agreed currency exchange settles — Correct answer
Answer: D. The value date is the agreed settlement date for exchanging the currencies. Remember: Currency trades have an agreed settlement date.
Hint, shown before you answer in practice mode: Common mistake: Trade date and value date may differ. Think about delivery of both currencies.
XIII-013easyconceptual
Q8If USD/INR is 84 and EUR/USD is 1.10, what is EUR/INR, ignoring spreads?
Option A. 76.36
Why it is wrong: 76.36 divides rather than multiplies the compatible quotes.
Option B. 84.10
Why it is wrong: 84.10 adds unlike exchange-rate quantities.
Option C. 92.40 — Correct answer
Option D. 110.00
Why it is wrong: 110.00 treats 1.10 as a rupee exchange rate.
Answer: C. EUR/INR = EUR/USD × USD/INR = 1.10 × 84 = 92.40. Remember: Cross rates follow currency units.
Hint, shown before you answer in practice mode: Common mistake: Multiplication or division depends on quotation order. Join the two currency quotes using their common currency.
XIII-014mediumnumerical
Q9If USD/INR rises from 83 to 85, what has happened to the Indian rupee against the dollar?
Option A. The rupee has appreciated
Why it is wrong: Rupee appreciation would reduce the USD/INR quote.
Option B. The rupee has depreciated — Correct answer
Option C. The rupee's value is unchanged
Why it is wrong: A change from 83 to 85 is not unchanged.
Option D. The dollar has lost value in rupees
Why it is wrong: The dollar has become more expensive in rupees.
Answer: B. The rupee has depreciated because more rupees are needed to buy one dollar. Remember: A higher USD/INR quote means a weaker rupee.
Hint, shown before you answer in practice mode: Common mistake: Do not read USD/INR as the value of one rupee. Interpret how many rupees buy one dollar.
XIII-015mediumconceptual
Q10Country A's inflation unexpectedly rises while its nominal exchange rate is unchanged. What likely happens to its currency's purchasing power domestically?
Option A. It increases by the inflation rate
Why it is wrong: Higher prices reduce rather than increase purchasing power.
Option B. It remains exactly the same
Why it is wrong: An unchanged nominal exchange rate does not freeze domestic prices.
Option C. It decreases — Correct answer
Option D. It becomes independent of domestic prices
Why it is wrong: Domestic purchasing power remains linked to local inflation.
Answer: C. Higher domestic inflation reduces the currency's purchasing power over domestic goods, even if the nominal exchange quote has not moved. Remember: Nominal exchange rates and purchasing power are distinct.
Hint, shown before you answer in practice mode: Common mistake: Do not assume stable exchange quotes imply stable real value. Separate domestic purchasing power from the quoted foreign-exchange rate.
XIII-016hardapplication
Q11Which instrument is normally classified as a fixed-income security?
Option A. A bond promising specified coupon payments — Correct answer
Option B. An ordinary share with variable dividends
Why it is wrong: Ordinary equity dividends are discretionary.
Option C. A long call option on an index
Why it is wrong: An option does not promise bond coupons.
Option D. A spot foreign-exchange transaction
Why it is wrong: Spot currency exchange is not a debt security.
Answer: A. A bond usually promises defined contractual principal and coupon cash flows. Remember: Bonds are debt instruments.
Hint, shown before you answer in practice mode: Common mistake: Fixed income does not mean the market price is fixed. Identify an instrument with contractual debt cash flows.
XIII-017easyconceptual
Q12Why can a fixed-coupon bond still deliver a negative holding-period return?
Option A. Its coupon is automatically cancelled after issue
Why it is wrong: Fixed-coupon terms are not automatically cancelled.
Option B. Its face value always increases with inflation
Why it is wrong: The bond's face value does not necessarily rise with inflation.
Option C. Its market price may fall more than the coupon received — Correct answer
Option D. Its issuer must repurchase it above purchase cost
Why it is wrong: No automatic profitable repurchase is promised.
Answer: C. A fixed coupon does not prevent a price decline large enough to create a negative total return. Remember: Total bond return includes price changes.
Hint, shown before you answer in practice mode: Common mistake: Fixed coupons do not guarantee positive trading returns. Separate coupon from total holding return.
XIII-018mediumconceptual
Q13In a bond market, what does the interest rate mainly represent?
Option A. The number of issued equity shares
Why it is wrong: Equity share count is unrelated to interest rates.
Option B. The fixed number of market participants
Why it is wrong: Participant count does not determine the definition.
Option C. The percentage ownership of a bondholder
Why it is wrong: A bondholder is a creditor rather than an owner.
Option D. The price of borrowing money over time — Correct answer
Answer: D. An interest rate expresses the cost of borrowing or return for lending over time. Remember: Interest is the time price of money.
Hint, shown before you answer in practice mode: Common mistake: Do not confuse lending income with share ownership. Think about the cost of using funds.
XIII-019easyconceptual
Q14An investment earns 7% nominally while inflation is 4%. What is the approximate real return?
Option A. 11%
Why it is wrong: 11% adds inflation instead of adjusting for it.
Option B. 28%
Why it is wrong: 28% multiplies percentage numbers incorrectly.
Option C. 7%
Why it is wrong: 7% ignores purchasing-power erosion.
Option D. 3% — Correct answer
Answer: D. Approximate real return = 7% − 4% = 3%. Remember: Real returns account for inflation.
Hint, shown before you answer in practice mode: Common mistake: Nominal and real returns are not the same. Adjust nominal returns for inflation.
XIII-020mediumnumerical
Q15What does an inverted government yield curve usually indicate?
Option A. Every bond in the market has the same yield
Why it is wrong: Equal yields describe a flat curve.
Option B. Long-term yields exceed comparable short-term yields
Why it is wrong: Higher long-term yields describe a normal upward curve.
Option C. Short-term yields exceed comparable long-term yields — Correct answer
Option D. Government bonds no longer pay coupon income
Why it is wrong: Coupon payment is separate from curve shape.
Answer: C. An inverted yield curve has short-maturity yields higher than long-maturity yields for comparable debt. Remember: Yield-curve shape compares maturities.
Hint, shown before you answer in practice mode: Common mistake: Do not confuse an inverted curve with negative yields. Compare short and long maturities.
XIII-021mediumconceptual
Q16A bond pays a ₹80 annual coupon on ₹1,000 face value. What coupon accrues over exactly one-quarter of a year?
Option A. ₹20 — Correct answer
Option B. ₹80
Why it is wrong: ₹80 is the full annual coupon.
Option C. ₹10
Why it is wrong: ₹10 is only one-eighth of the annual coupon.
Option D. ₹40
Why it is wrong: ₹40 is one-half of the annual coupon.
Answer: A. Accrued coupon = ₹80 × 1/4 = ₹20. Remember: Accrued interest grows with elapsed coupon time.
Hint, shown before you answer in practice mode: Common mistake: Do not book the entire annual coupon after three months. Assume simple time-proportionate accrual.
XIII-022mediumnumerical
Q17A bond pays ₹90 annual coupon and trades for ₹900. What is its current yield?
Option A. 9%
Why it is wrong: 9% uses a different assumed denominator.
Option B. 10% — Correct answer
Option C. 11.11%
Why it is wrong: 11.11% reverses the ratio.
Option D. 1%
Why it is wrong: 1% misplaces the decimal.
Answer: B. Current yield = ₹90 ÷ ₹900 × 100 = 10%. Remember: Current yield divides annual coupon by market price.
Hint, shown before you answer in practice mode: Common mistake: Current yield is not the same as coupon rate. Use current market price, not face value.
XIII-023mediumnumerical
Q18A one-year zero-coupon bond will pay ₹1,050 at maturity and costs ₹1,000. What is its yield to maturity?
Option A. 4.76%
Why it is wrong: 4.76% uses redemption value as the denominator for holding yield.
Option B. 5% — Correct answer
Option C. 10%
Why it is wrong: 10% doubles the correct increase.
Option D. 0.5%
Why it is wrong: 0.5% moves the decimal point.
Answer: B. For one year, yield = 1,050 ÷ 1,000 − 1 = 5%. Remember: Zero-coupon yield comes from price appreciation to redemption.
Hint, shown before you answer in practice mode: Common mistake: Do not use the maturity payment as the original investment. Find the discount rate equating price and redemption amount.
XIII-024hardnumerical
Q19For a standard fixed-rate bond, what usually happens to price when the required market yield rises?
Option A. Its price rises
Why it is wrong: Bond price and yield normally move in opposite directions.
Option B. Its face value doubles
Why it is wrong: Face value need not change when yield rises.
Option C. Its coupon rate resets automatically
Why it is wrong: A fixed coupon does not automatically reset.
Option D. Its price falls — Correct answer
Answer: D. A fixed-rate bond's present value generally falls when the market discount rate rises. Remember: Bond prices generally move inversely to yields.
Hint, shown before you answer in practice mode: Common mistake: Coupon rate and market yield are different. Recall the inverse price-yield relationship.
XIII-025mediumconceptual
Q20A bond has modified duration 4.5 years. If yield rises by 0.20 percentage point, approximately how much does its price change?
Option A. −0.9% — Correct answer
Option B. +0.9%
Why it is wrong: A rise in yield generally reduces bond price.
Option C. −9.0%
Why it is wrong: −9.0% uses 0.02 rather than 0.002.
Option D. +0.2%
Why it is wrong: +0.2% ignores duration and the inverse relationship.
Answer: A. Approximate price change = −4.5 × 0.002 = −0.009 = −0.9%. Remember: Modified duration estimates price sensitivity.
Hint, shown before you answer in practice mode: Common mistake: Convert percentage points into decimals before multiplying. Use duration for a small yield change.
XIII-026hardnumerical
Q21What does the price value of a basis point, or PVBP, measure for a bond?
Option A. The annual coupon printed on the bond certificate
Why it is wrong: PVBP is not the contractual coupon.
Option B. The total number of bonds issued in a year
Why it is wrong: Issuance quantity is unrelated to PVBP.
Option C. Approximate price change for a one-basis-point yield move — Correct answer
Option D. The initial purchase price excluding accrued interest
Why it is wrong: Dirty and clean prices are separate bond-price concepts.
Answer: C. PVBP approximates the bond's price change for a one-basis-point change in yield. Remember: PVBP measures small-move interest-rate sensitivity.
Hint, shown before you answer in practice mode: Common mistake: A basis point means 0.01 percentage point. Think about a very small yield movement.
XIII-027mediumconceptual
Q22Two fixed-rate bonds have similar yields, but Bond A has higher modified duration. Which bond is more rate-sensitive for small yield changes?
Option A. Bond A — Correct answer
Option B. Bond B
Why it is wrong: Lower duration generally implies less sensitivity.
Option C. They must have identical sensitivity
Why it is wrong: Similar yields do not force identical durations.
Option D. Their coupon payment dates alone decide
Why it is wrong: Coupon dates alone do not fully measure rate sensitivity.
Answer: A. Bond A is more rate-sensitive because higher modified duration implies a larger approximate percentage price response. Remember: Higher duration means greater first-order rate exposure.
Hint, shown before you answer in practice mode: Common mistake: Do not compare price sensitivity using yield alone. Compare duration, keeping yield changes equally small.
XIII-028hardapplication
Q23Why is convexity useful in addition to duration when estimating a bond's price change?
Option A. It replaces the bond's legal final maturity date
Why it is wrong: Convexity does not alter contract maturity.
Option B. It fixes the bond's annual coupon payment
Why it is wrong: Coupon payments remain contractual features.
Option C. It captures curvature in the price-yield relationship — Correct answer
Option D. It removes the need to know bond price
Why it is wrong: Bond valuation still requires price and cash-flow assumptions.
Answer: C. Convexity helps capture the curvature that duration alone misses for larger yield movements. Remember: Duration is linear while convexity adds curvature.
Hint, shown before you answer in practice mode: Common mistake: Do not treat duration as exact for large rate changes. Think beyond a straight-line approximation.
XIII-029mediumconceptual
Q24GBP/USD is 1.25 and USD/INR is 82.40. A payment of GBP 2,000 equals approximately how many rupees?
Option A. ₹1,64,800
Why it is wrong: ₹1,64,800 ignores the pound-dollar conversion.
Option B. ₹1,03,000
Why it is wrong: ₹1,03,000 values only 1,000 pounds.
Option C. ₹2,47,200
Why it is wrong: ₹2,47,200 assumes a different cross rate.
Option D. ₹2,06,000 — Correct answer
Answer: D. GBP/INR = 1.25 × 82.40 = 103. Payment = 2,000 × 103 = ₹2,06,000. Remember: Currency amounts require both conversion rate and quantity.
Hint, shown before you answer in practice mode: Common mistake: Do not stop after computing a cross rate. Convert through the common US dollar quote.
XIII-030hardnumerical
Introduction to the Underlying Markets: common questions
How many practice questions are there on Introduction to the Underlying Markets?
24 questions, all written out on this page with the correct answer and why each other option is wrong. This unit is one of the 10 practice topics for NISM Series XIII, which has 150 questions in total.
Are these real NISM Series XIII questions on Introduction to the Underlying 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 XIII?
Yes. NISM takes off 25% of a question's marks for a wrong answer. On a 1-mark question that is 0.25 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.
Introduction to Forwards and Futures
20 questions on Introduction to Forwards and Futures. Its quiz opens on that unit.
Open Introduction to Forwards and FuturesPaper Trading Try it on the practice trading desk