Trading Mechanism in Exchange Traded Interest Rate Derivatives
10 questions. Each answer is explained.
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Learn these topics
More units in NISM Series IV
- Introduction to Interest Rate, Interest Rate Instruments and Fixed Income Market30
- Interest Rate Derivatives10
- Exchange Traded Interest Rate Futures20
- Exchange Traded Interest Rate Options22
- Strategies Using Exchange Traded Interest Rate Futures and Options24
- Clearing, Settlement and Risk Management of Interest Rate Derivatives16
- Regulatory Framework for Interest Rate Derivatives8
- Accounting and Taxation of Interest Rate Derivatives4
- Code of Conduct and Investor Protection Measures in Interest Rate Derivatives6
Exam format
| Questions | 100 · 1 mark each |
|---|---|
| Duration | 120 min · 2 hours |
| Pass mark | 60% · 60 of 100 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 IV Interest Rate Derivatives
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 If a rule changes before your exam, treat the linked questions as out of date and check NISM's current workbook.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 10 questions on Trading Mechanism in Exchange Traded Interest Rate Derivatives, with answers
Q1A client sends an order to buy interest-rate futures through a trading member. Which activity belongs primarily to post-trade clearing rather than order matching?
Option A. Ranking bids by their limit prices in the exchange order book
Why it is wrong: This is part of the trading and matching mechanism.
Option B. Calculating settlement obligations and collecting the required margins — Correct answer
Option C. Comparing an incoming buy order with available sell orders
Why it is wrong: Matching buy and sell orders is the trading system’s function.
Option D. Assigning time priority to orders at the same price
Why it is wrong: Time priority is an order-book matching function.
Answer: B. The trading system brings compatible orders together. Clearing determines the resulting positions, settlement amounts and financial safeguards. A trading member may also have clearing responsibilities if authorised, but that does not make matching and clearing the same function. Identifying the activity is more reliable than assuming every intermediary performs every role. Remember: Distinguish trade execution from the management of post-trade obligations.
Hint, shown before you answer in practice mode: Common mistake: Attributing every exchange-related function to the order-matching engine.
IV-107easyconceptual
Q2An order book offers 3 futures contracts at 100.00 and another 5 at 100.05. A market buy for 5 contracts executes immediately against this unchanged book. What is its average execution price?
Option A. 100.025
Why it is wrong: This is an unweighted average of two prices despite unequal quantities.
Option B. 100.05
Why it is wrong: This incorrectly prices all five contracts at the second level.
Option C. 100.00
Why it is wrong: Only three of the five contracts are available at the best offer.
Option D. 100.02 — Correct answer
Answer: D. The buy first consumes the lowest available offers. It fills 3 at 100.00 and 2 at 100.05. Average execution price = (3×100.00 + 2×100.05)/5 = 100.02. Market depth matters: the top-of-book quote is not necessarily the price for an entire order larger than the displayed quantity. Remember: Calculate execution price using the quantities actually filled at each level.
Hint, shown before you answer in practice mode: Common mistake: Assuming the best displayed quote applies to an unlimited order size.
IV-108mediumnumerical
Q3In a price-time-priority order book, sell order X for 2 contracts at 100.10 was entered before sell order Y for 20 contracts at the same price. No lower offers exist. Which order has first priority against an incoming buy?
Option A. Order X, because it arrived earlier at the same price — Correct answer
Option B. Order Y, because the most recently entered order receives priority
Why it is wrong: This reverses the time-priority rule.
Option C. Both orders must receive an equal pro-rata allocation
Why it is wrong: Pro-rata allocation is a different matching rule.
Option D. Order Y, because larger orders always outrank smaller orders
Why it is wrong: The stated matching rule is price-time priority, not size priority.
Answer: A. Orders are first ranked by price. When prices tie, the earlier eligible order is served before a later order. The larger size of Y does not displace X under the stated rule. Other matching algorithms exist, so the rule specified for the order book must be followed rather than assumed from order size. Remember: Price determines the queue. Time determines priority within an equal-price queue.
Hint, shown before you answer in practice mode: Common mistake: Using order size to resolve a tie in a price-time-priority market.
IV-109mediumconceptual
Q4Where IOC orders are permitted, a trader enters an immediate-or-cancel limit buy for 10 contracts at 100.00. Only 6 can be bought immediately at or below that price. What happens?
Option A. Six execute and four remain in the book until the end of the day
Why it is wrong: An IOC remainder is not retained as a day order.
Option B. All ten are cancelled because full execution was unavailable
Why it is wrong: This confuses IOC with an all-or-none execution condition.
Option C. Six contracts execute and the unmatched four are cancelled — Correct answer
Option D. All ten execute even if the remaining four cost more than 100.00
Why it is wrong: The IOC condition does not override the buy limit.
Answer: C. IOC combines an immediate execution opportunity with cancellation of whatever cannot be matched immediately. The limit price still applies. A partial fill is therefore possible: 6 are purchased and 4 are cancelled. This example defines the order condition. It does not assert availability of every order type in every current product interface. Remember: Order validity and price restrictions apply together.
Hint, shown before you answer in practice mode: Common mistake: Treating IOC as either fill-or-kill or permission to disregard a limit price.
IV-110mediumregulatory
Q5A sell stop-limit order has trigger 99.50 and limit 99.40. After the trigger condition is met, the best available bid is only 99.20. Assuming no bid at 99.40 or above appears, what happens?
Option A. The order is activated but may remain unexecuted — Correct answer
Option B. It must execute at the trigger price of 99.50
Why it is wrong: A trigger is not a guaranteed transaction price.
Option C. It must execute at 99.20 despite the limit
Why it is wrong: A sell limit cannot be ignored merely because the stop has triggered.
Option D. The exchange pays the difference between 99.40 and 99.20
Why it is wrong: Order activation does not create a price guarantee from the exchange.
Answer: A. A stop condition controls when an order enters the active market. The limit controls the minimum acceptable selling price. If bids have already fallen below the limit, activation alone does not produce a fill. This protects the specified execution price but can leave the underlying position exposed during a gap or illiquid move. Remember: A stop-limit order can limit execution price without ensuring execution.
Hint, shown before you answer in practice mode: Common mistake: Assuming a stop trigger guarantees that a position has been closed.
IV-111hardregulatory
Q6A trader will buy a bond future only at 100.20 or below and is willing to miss the trade rather than pay more. Which instruction best reflects that priority?
Option A. A buy order with only a time-in-force setting and no price restriction
Why it is wrong: A validity instruction alone does not enforce the maximum purchase price.
Option B. An unrestricted market buy
Why it is wrong: A market order prioritises obtaining a fill at available prices rather than the stated price cap.
Option C. A buy limit order at 100.20 — Correct answer
Option D. A sell limit order at 100.20
Why it is wrong: That is the opposite trade direction.
Answer: C. A buy limit states the highest price the buyer will accept. Execution can occur at that price or a better, lower price, but sufficient eligible offers must be available. A market order does not express the same strict price constraint. The appropriate order reflects the trader’s choice between certainty of price and certainty of execution. Remember: Use a limit when the maximum purchase or minimum sale price is the priority.
Hint, shown before you answer in practice mode: Common mistake: Believing a limit order both guarantees a fill and guarantees the requested price.
IV-112mediumconceptual
Q7A broker’s stated pre-trade rule requires ₹80,000 of available trading collateral for a proposed order. The client has only ₹65,000 available. What should happen before the order is routed under this rule?
Option A. The order is sent first and collateral is considered only if it loses money
Why it is wrong: That defeats the expressly required pre-trade condition.
Option B. The order is routed because the client’s total bank balance, not available collateral, is the only check
Why it is wrong: The stipulated pre-trade test is available trading collateral, which is insufficient.
Option C. The order is rejected or held pending adequate collateral — Correct answer
Option D. The exchange must lend the ₹15,000 shortfall without approval
Why it is wrong: The rule does not provide such automatic financing.
Answer: C. The question supplies a specific broker risk rule, not a universal fixed rupee margin. Required collateral exceeds available collateral by ₹15,000. Pre-trade checks are intended to prevent an order from creating exposure beyond authorised resources. A client’s confidence in a trade is not a substitute for meeting those checks. Remember: Risk checks should constrain exposure before it is created.
Hint, shown before you answer in practice mode: Common mistake: Using expected profit to justify bypassing an explicit collateral requirement.
IV-113mediumnumerical
Q8An exchange rejects an order outside a permitted price range. Which conclusion is justified?
Option A. A price-validation control has worked. It does not cap the loss on an existing position — Correct answer
Option B. The rejected order has been executed automatically at the nearest permitted price
Why it is wrong: An invalid order need not be repriced and executed automatically.
Option C. The investor can never lose more than the width of the price range shown on screen
Why it is wrong: Ranges and market conditions can change, and an order filter is not a loss cap.
Option D. Every outstanding position in that contract is automatically closed out at its entry price
Why it is wrong: Rejection of one order does not reverse existing trades.
Answer: A. A price filter limits which order prices are accepted under the applicable trading rules. It is different from a contractual payoff cap or a guaranteed exit. Existing exposures, changing reference ranges and liquidity can still produce losses. The example does not assume any particular current percentage band for Series IV products. Remember: Trading controls reduce specific operational risks, not every source of investment loss.
Hint, shown before you answer in practice mode: Common mistake: Confusing an order-entry price band with guaranteed downside protection.
IV-114mediumconceptual
Q9A bond future is quoted 99.90 bid and 99.95 offer. A trader buys 4 contracts at the offer and immediately sells all 4 at the unchanged bid. Each contract has a multiplier of 2,000. What is the spread cost, excluding other charges?
Option A. ₹800
Why it is wrong: This counts the same complete round-trip spread twice.
Option B. ₹100
Why it is wrong: This is the spread cost for only one contract.
Option C. ₹400 — Correct answer
Option D. Zero
Why it is wrong: Unchanged mid-price does not eliminate the cost of crossing the spread.
Answer: C. An immediate buyer pays the offer. An immediate seller receives the bid. The round-trip difference is 99.95 − 99.90 = 0.05 per unit. Multiplying by 2,000 units and 4 contracts gives ₹400. This cost exists even with no movement in the quoted prices and before brokerage or statutory charges. Remember: The bid-ask spread is an execution cost separate from explicit fees.
Hint, shown before you answer in practice mode: Common mistake: Assuming no price movement means no trading cost.
IV-115mediumnumerical
Q10A completed futures trade generates gross profit of ₹6,500. For this example, total round-trip brokerage is ₹240, other exchange and clearing charges are ₹110, and applicable taxes or levies on the trade total ₹70. What is net profit?
Option A. ₹6,920
Why it is wrong: This adds costs to profit.
Option B. ₹6,080 — Correct answer
Option C. ₹6,150
Why it is wrong: This deducts brokerage and exchange charges but omits the stated taxes or levies.
Option D. ₹5,660
Why it is wrong: This deducts the round-trip charges twice.
Answer: B. Net profit = ₹6,500 − ₹240 − ₹110 − ₹70 = ₹6,080. The supplied amounts already cover the full round trip, so they are not doubled. These are hypothetical amounts for cost accounting. They do not assert any current tax rate, levy applicability or broker tariff for interest-rate derivatives. Remember: Use all stated costs once and distinguish an assumed charge from a live tariff.
Hint, shown before you answer in practice mode: Common mistake: Double-counting charges that are already described as round-trip totals.
IV-116mediumnumerical
Trading Mechanism in Exchange Traded Interest Rate Derivatives: common questions
How many practice questions are there on Trading Mechanism in Exchange Traded Interest Rate Derivatives?
10 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 IV, which has 150 questions in total.
Are these real NISM Series IV questions on Trading Mechanism in Exchange Traded Interest Rate 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 IV?
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.
Clearing, Settlement and Risk Management of Interest Rate Derivatives
16 questions on Clearing, Settlement and Risk Management of Interest Rate Derivatives. Its quiz opens on that unit.
Open Clearing, Settlement and Risk Management of Interest Rate Derivatives