Derivatives
7 questions. Each answer is explained.
Question 1 of 7Practice · Series XXI-A — Portfolio Management Services (PMS) Distributors
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Learn these topics
More units in NISM Series XXI-A
- Investments11
- Introduction to Securities Markets7
- Investing in Stocks15
- Investing in Fixed Income Securities8
- Collective Investment Vehicles8
- Role of Portfolio Managers15
- Operational Aspects of Portfolio Managers20
- Portfolio Management Process22
- Performance Measurement and Evaluation of Portfolio Managers15
- Taxation7
- Regulatory, Governance and Ethical Aspects of Portfolio Managers15
Exam format
| Questions | 100 · 1 mark each |
|---|---|
| Duration | 120 min · 2 hours |
| Pass mark | 60% · 60 of 100 marks |
| Negative marking | 10% · 0.1 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 XXI-A Portfolio Management Services (PMS) Distributors
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 If a rule changes before your exam, treat the linked questions as out of date and check NISM's current workbook.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 7 questions on Derivatives, with answers
Q1Which feature most clearly distinguishes a standard exchange-traded futures contract from a privately negotiated forward?
Option A. A forward always gives the buyer a right without an obligation.
Why it is wrong: That description is characteristic of an option, not an ordinary forward obligation.
Option B. A futures position cannot lose more than its initial margin.
Why it is wrong: Margin is collateral and does not necessarily limit the total loss.
Option C. The futures contract uses exchange-specified standard terms. — Correct answer
Option D. Only a forward derives value from an underlying.
Why it is wrong: Both forwards and futures are derivatives linked to an underlying.
Answer: C. Forwards and futures both create obligations linked to an underlying, but their trading arrangements and standardisation differ. Identify whether terms are individually negotiated or specified for exchange trading. A standard futures contract has exchange-defined terms. This distinction does not make it an option or eliminate its risks. Remember: Contract standardisation is separate from the risk of taking a position.
Hint, shown before you answer in practice mode: Common mistake: Confusing a futures obligation with an option buyer’s right.
XXI-A-042easyconceptual
Q2Assume a permitted hedge of a ₹1.2 crore equity portfolio with beta 1 uses index futures. Each contract has exposure of ₹24 lakh. Ignoring basis risk, what position offsets the initial market exposure?
Option A. Short 10 contracts
Why it is wrong: Ten contracts represent twice the stated exposure under the supplied beta.
Option B. Short 5 contracts — Correct answer
Option C. Short 2 contracts
Why it is wrong: Two contracts offset only ₹48 lakh of the stated ₹120 lakh exposure.
Option D. Long 5 contracts
Why it is wrong: Buying futures adds exposure in the same direction as the equity portfolio.
Answer: B. A simple beta hedge sizes an opposite futures position to the portfolio’s market-equivalent exposure. Market-equivalent exposure = ₹120 lakh × beta 1 = ₹120 lakh. Required contracts = ₹120 lakh/₹24 lakh = 5. A short position offsets a long equity exposure in this simplified model. Remember: Hedge direction matters as much as the number of contracts.
Hint, shown before you answer in practice mode: Common mistake: Calculating the quantity correctly but buying futures against an already long portfolio.
XXI-A-043mediumconceptual
Q3A call option has strike price ₹500. The buyer pays a premium of ₹20 per share. At expiry the underlying is ₹560. What is the buyer’s net profit per share, ignoring costs?
Option A. ₹80
Why it is wrong: This adds the premium to the payoff instead of treating it as a cost.
Option B. ₹60
Why it is wrong: This is the option payoff before deducting the premium.
Option C. −₹20
Why it is wrong: This is the result if the option expires worthless, which it does not here.
Option D. ₹40 — Correct answer
Answer: D. An option’s terminal payoff and the buyer’s profit differ by the premium and any other relevant costs. Call payoff per share = max(₹560 − ₹500, 0) = ₹60. Net profit = ₹60 − ₹20 = ₹40 per share. No further premium payment is added at expiry. Remember: Deduct the premium when moving from option payoff to buyer profit.
Hint, shown before you answer in practice mode: Common mistake: Reporting intrinsic value as net profit.
XXI-A-044mediumnumerical
Q4A share is bought for ₹1,000 together with a put of strike ₹1,000 costing ₹25. At expiry the share is ₹800. What is the combined net profit or loss per share, ignoring costs and financing?
Option A. A loss of ₹225
Why it is wrong: This counts the share loss and premium but ignores the put’s payoff.
Option B. A profit of ₹175
Why it is wrong: This counts the put payoff less premium while omitting the loss on the share.
Option C. A loss of ₹25 — Correct answer
Option D. No profit or loss
Why it is wrong: This offsets the share loss with the put payoff but omits the premium.
Answer: C. A protective put can limit downside from the combined position, but the option premium still affects the net result. Share profit = ₹800 − ₹1,000 = −₹200. Put payoff = max(₹1,000 − ₹800, 0) = ₹200. Combined result = −₹200 + ₹200 − ₹25 = −₹25 per share. The protection is not free. Remember: Calculate all legs and the premium when evaluating a hedged position.
Hint, shown before you answer in practice mode: Common mistake: Looking only at the profitable hedge leg.
XXI-A-045hardconceptual
Q5A long futures position was marked at 200 yesterday. Today’s settlement price is 196 and the position multiplier is 500. What is today’s mark-to-market amount?
Option A. A debit of ₹4
Why it is wrong: This ignores the position multiplier.
Option B. A credit of ₹2,000
Why it is wrong: This reverses the gain/loss direction for the long position.
Option C. A debit of ₹2,000 — Correct answer
Option D. A debit of ₹98,000
Why it is wrong: This uses the entire current contract value rather than the daily change.
Answer: C. Futures mark-to-market measures the value change since the relevant previous settlement, scaled by the position size. The settlement change is 196 − 200 = −4 points. Multiply by 500 to obtain −₹2,000. A negative amount is a debit for the long position. Remember: Use the settlement-price difference, not the full notional value.
Hint, shown before you answer in practice mode: Common mistake: Forgetting the multiplier or reversing the long position’s sign.
XXI-A-046mediumconceptual
Q6A borrower pays a floating reference rate plus a fixed spread on debt. A matching interest-rate swap is available. Which swap direction most directly converts the reference-rate exposure to fixed?
Option A. Pay fixed and receive the matching reference rate on twice the loan notional.
Why it is wrong: The oversized floating receipt leaves a net floating exposure rather than matching the loan.
Option B. Pay fixed and receive the same floating reference rate. — Correct answer
Option C. Pay the floating reference rate and receive fixed.
Why it is wrong: This adds a floating payment rather than offsetting the loan’s floating reference component.
Option D. Pay fixed and receive a different floating reference rate.
Why it is wrong: A mismatch between the received rate and the loan’s rate can leave basis risk.
Answer: B. A swap can change the pattern of financing cash flows without changing the original loan contract. The debt payment is reference rate plus the contractual spread. Receiving that same reference rate through a matched swap offsets it. The remaining payment is the swap’s fixed rate plus the loan spread, subject to counterparty and other risks. Remember: Write the loan and swap cash flows together before deciding the hedge direction.
Hint, shown before you answer in practice mode: Common mistake: Looking at the swap in isolation from the exposure being hedged.
XXI-A-047hardapplication
Q7What is the most accurate interpretation of initial margin on a futures position?
Option A. It is the entire market value of the underlying position, paid upfront.
Why it is wrong: Futures exposure may be much larger than the margin amount.
Option B. It is collateral for the contract’s obligations, and losses can exceed it. — Correct answer
Option C. It buys the same limited-loss right that a premium buys for an option holder.
Why it is wrong: Futures create obligations and margin is not payment for an option right.
Option D. It guarantees that the position can never require any further cash.
Why it is wrong: Adverse mark-to-market changes and margin requirements can create additional cash needs.
Answer: B. Margin supports performance of a leveraged contract. It should not be confused with the price of the underlying or an option premium. Identify the exposure created by the futures contract separately from the collateral deposited. The contract can continue to lose value beyond that initial collateral, so the investor must consider total exposure and liquidity needs. Remember: Assess futures risk from the position exposure, not just the initial cash deposited.
Hint, shown before you answer in practice mode: Common mistake: Treating margin as a prepaid maximum loss.
XXI-A-048easyconceptual
Derivatives: common questions
How many practice questions are there on Derivatives?
7 questions, all written out on this page with the correct answer and why each other option is wrong. This unit is one of the 12 practice topics for NISM Series XXI-A, which has 150 questions in total.
Are these real NISM Series XXI-A questions on 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 XXI-A?
Yes. NISM takes off 10% of a question's marks for a wrong answer. On a 1-mark question that is 0.1 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.
Collective Investment Vehicles
8 questions on Collective Investment Vehicles. Its quiz opens on that unit.
Open Collective Investment Vehicles