Basics of Derivatives
10 questions. Each answer is explained.
Question 1 of 10Practice · Series V-D — Mutual Fund - Specialized Investment Fund Distributors
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Learn these topics
More units in NISM Series V-D
- The Investment Landscape5
- Concept & Role of a Mutual Fund4
- Legal Structure of Mutual Funds in India3
- Legal and Regulatory Framework7
- Scheme Related Information7
- Fund Distribution and Channel Management Practices4
- Net Asset Value, Total Expense Ratio and Pricing of Units5
- Taxation3
- Investor Services10
- Risk, Return and Performance of Funds5
- Mutual Fund Scheme Performance5
- Mutual Fund Scheme Selection10
- Understanding Index5
- Introduction to Forwards and Futures15
- Introduction to Options13
- Strategies Using Equity Futures and Equity Options9
- Introduction to Interest Rate, Interest Rate Instruments and Fixed Income Markets6
- Interest Rate Derivatives2
- Exchange Traded Interest Rate Futures10
- Exchange Traded Interest Rate Options6
- Strategies Using Interest Rate Derivatives6
Exam format
| Questions | 150 · 1 mark each |
|---|---|
| Duration | 180 min · 3 hours |
| Pass mark | 60% · 90 of 150 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 | 10 of 150 marks (6.7%) |
Source: July 2026 Annexure I, Chapter 13: Basics of Derivatives
NISM Series V-D Mutual Fund - Specialized Investment Fund Distributors
Exam rules read on NISM's site on 30 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 If a rule changes before your exam, treat the linked questions as out of date and check NISM's current workbook.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 30 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 Basics of Derivatives, with answers
Q1A contract pays an amount linked to the change in a specified share index. What makes it a derivative?
Option A. It must pay a fixed deposit-like interest rate.
Why it is wrong: Derivative payoffs need not be fixed interest payments.
Option B. Its value depends on an identified underlying variable. — Correct answer
Option C. Its value is independent of market prices.
Why it is wrong: Dependence on the underlying is the defining relationship.
Option D. It gives the holder ownership of every company in the index.
Why it is wrong: An index-linked contract does not by itself create ownership of the constituent shares.
Answer: B. A derivative derives its value from an underlying such as a security, index or rate. A contract linked to an index can therefore provide exposure without direct ownership of the index’s shares. Remember: Exposure to an asset and ownership of that asset are different.
Hint, shown before you answer in practice mode: Focus on what determines the contract’s value.
V-D-069easyconceptual
Q2A fund owns a diversified equity portfolio and sells index futures to reduce the effect of a broad market fall. The futures quantity is chosen to offset part of its existing exposure. What is the main purpose of the transaction?
Option A. Hedging an existing market exposure. — Correct answer
Option B. Eliminating every company-specific risk.
Why it is wrong: An index hedge does not perfectly offset every constituent-specific movement.
Option C. Creating an additional unhedged long equity exposure.
Why it is wrong: Selling futures offsets some of the existing long exposure rather than adding a long position.
Option D. Earning a guaranteed return from market timing.
Why it is wrong: The transaction reduces an exposure. It does not establish a guaranteed profit.
Answer: A. The fund already loses value when its equity holdings fall. A short index-futures position can gain during a broad market decline and offset part of that loss, making this a hedge. Remember: The purpose of a derivative depends on the exposure it accompanies.
Hint, shown before you answer in practice mode: Relate the new position to the portfolio the fund already holds.
V-D-070easyapplication
Q3Dev owns no shares and has no planned equity purchase. He buys index futures solely because he expects the market to rise next week. How is this position best classified?
Option A. A hedge of an existing long share portfolio.
Why it is wrong: Dev has no such portfolio in the stated facts.
Option B. A risk-free arbitrage position.
Why it is wrong: There is no offsetting trade locking in a price difference.
Option C. A speculative long position. — Correct answer
Option D. A reduction of a pre-existing short exposure.
Why it is wrong: No short exposure is given.
Answer: C. Dev is taking new price risk to benefit from a rise in the index. Without an existing or anticipated offsetting exposure, the stated purpose is speculation. Remember: Classify the whole economic position, not just the instrument name.
Hint, shown before you answer in practice mode: A directional view alone does not create an offsetting hedge.
V-D-071mediumconceptual
Q4Two identical, immediately transferable securities trade at ₹99 and ₹101 in two venues. A trader can buy one at ₹99 and simultaneously sell the same quantity at ₹101, with guaranteed execution and total charges below ₹2 per unit. What distinguishes this assumed arbitrage from a directional bet? Assumptions: The securities are identical and transferable, both trades execute, and all relevant charges are below the spread.
Option A. Only the purchase leg needs to be executed, and the sale can wait for a better price.
Why it is wrong: A purchase alone leaves exposure to future price movements.
Option B. Any two profitable-looking securities create an arbitrage, even if they are not identical.
Why it is wrong: The payoff and transferability must match. Unrelated securities may move differently.
Option C. The matched transactions lock in a price difference without requiring a later price rise. — Correct answer
Option D. The trader must wait for the cheaper security to rise above ₹101 before making a profit.
Why it is wrong: The sale is already executed at ₹101 under the stated assumptions.
Answer: C. The purchase and sale concern identical transferable claims and are executed together. Under the explicit execution and cost assumptions, their price difference is locked in rather than dependent on a later market direction. Remember: An arbitrage calculation must include matching, execution and costs.
Hint, shown before you answer in practice mode: Check whether both sides are fixed at the same time.
V-D-072mediumconceptual
Q5An institution needs a contract for an unusual quantity and a specific date that do not match listed contracts. Which feature generally makes a bilateral OTC contract relevant?
Option A. Every OTC contract has a guaranteed active secondary market.
Why it is wrong: Customised contracts may be difficult to transfer or unwind.
Option B. OTC contracts cannot expose either party to default risk.
Why it is wrong: Bilateral counterparty risk is a relevant concern.
Option C. The parties can negotiate terms tailored to the exposure. — Correct answer
Option D. OTC contracts must use the same lot size as an exchange contract.
Why it is wrong: Negotiability of quantity is one reason to use an OTC contract.
Answer: C. An OTC agreement can be tailored to the parties’ quantity and date requirements. That flexibility must be weighed against issues such as counterparty risk and ease of exit. Remember: Customisation brings benefits and trade-offs.
Hint, shown before you answer in practice mode: Compare negotiated terms with standardised listed terms.
V-D-073easyconceptual
Q6A learner says, “My futures trade is centrally cleared, so an adverse price move cannot cost me money.” What is the best correction?
Option A. Central clearing manages counterparty exposures. It does not remove losses from an adverse market move. — Correct answer
Option B. Only OTC contracts can have market-price losses, so a cleared futures trade is fully protected.
Why it is wrong: Exchange-traded positions also carry market risk.
Option C. A centrally cleared futures position always has a fixed positive return set by the clearing house.
Why it is wrong: Its profit or loss still depends on the direction and size of price changes.
Option D. Margins are a guarantee that the trade will be profitable, whichever way the market moves.
Why it is wrong: Margins support performance of obligations, not profitability.
Answer: A. Clearing and margin processes address settlement and counterparty exposures. A trader can still owe variation payments when the market moves against the position. Remember: A risk control can reduce one risk without removing all risks.
Hint, shown before you answer in practice mode: Separate the risk of non-payment from the risk of a price change.
V-D-074mediumapplication
Q7A hypothetical futures position has exposure of ₹5,00,000 and an initial cash margin of ₹25,000. A 1% adverse movement causes a ₹5,000 loss. Ignoring charges and any margin change, what percentage of the original margin has been lost? Assumptions: The amounts and 1% sensitivity are hypothetical. Charges and margin changes are ignored.
Option A. 20% — Correct answer
Option B. 1%
Why it is wrong: This is the loss as a percentage of exposure, not of the smaller margin.
Option C. 5%
Why it is wrong: ₹5,000 is one-fifth, not one-twentieth, of ₹25,000.
Option D. 50%
Why it is wrong: Half of the original margin would be ₹12,500.
Answer: A. The margin loss percentage is ₹5,000 ÷ ₹25,000 × 100 = 20%. A small move in the underlying exposure can therefore have a much larger percentage effect on posted cash. Remember: Do not confuse notional exposure, posted margin and maximum possible loss.
Hint, shown before you answer in practice mode: Use the original margin as the denominator.
V-D-075mediumnumerical
Q8A trader wants to close an option position, but there are few buyers and the quoted bid is far below the quoted ask. Which risk is most directly illustrated?
Option A. Liquidity risk. — Correct answer
Option B. The option has no underlying exposure.
Why it is wrong: Poor liquidity does not sever the link to the underlying.
Option C. The issuer has certainly defaulted.
Why it is wrong: A wide spread and few buyers do not establish an issuer default.
Option D. Inflation has certainly exceeded the option return.
Why it is wrong: The facts concern trading conditions, not inflation.
Answer: A. A thin order book and wide bid–ask spread can make an exit costly or difficult. This is liquidity risk, even when the trader’s price view about the underlying is unchanged. Remember: An indicated price is not always an executable exit price.
Hint, shown before you answer in practice mode: Consider the ability to trade promptly at a reasonable price.
V-D-076easyapplication
Q9A dealing system accidentally sends the same sell order twice after a connection retry. Both orders execute, leaving a short position larger than authorised. What is the most direct source of the excess exposure?
Option A. A correct arbitrage strategy by the dealer.
Why it is wrong: The extra position was unintended and unauthorised.
Option B. An unavoidable consequence of positive option gamma.
Why it is wrong: Gamma describes price sensitivity, not duplicate order submission.
Option C. A change in the index’s free-float factors.
Why it is wrong: No index maintenance event caused the duplicate trade.
Option D. An operational control failure. — Correct answer
Answer: D. The position arose because the order-handling process failed to prevent a duplicate submission. Price risk may result afterward, but the initiating failure is operational. Remember: Controls should distinguish an instruction retry from a new trade.
Hint, shown before you answer in practice mode: Identify whether the problem began with the market or with the process.
V-D-077mediumconceptual
Q10A fund hedges a concentrated healthcare-share portfolio with a broad-market index future. The broad market falls 2%, while the healthcare shares fall 8% after sector-specific news. The hedge was sized using a historical relationship. Why can a substantial loss remain? Assumptions: The portfolio is concentrated in healthcare and the hedge is a broad-market index future.
Option A. Central clearing makes sector-specific risk disappear from the hedged healthcare portfolio.
Why it is wrong: Clearing arrangements do not eliminate the portfolio’s sector concentration.
Option B. A short future never gains when its underlying falls, so the hedge itself added to the loss.
Why it is wrong: A short future normally gains from a fall in its own futures price.
Option C. Historical correlation guarantees identical percentage returns for the portfolio and the index.
Why it is wrong: Correlation does not promise a fixed future return relationship.
Option D. The portfolio and the hedge do not have identical exposures, and their relationship can change. — Correct answer
Answer: D. The index future offsets movements in the broad index, not every healthcare-specific event. A changing relationship between the portfolio and the hedge leaves residual risk even if the hedge performs as contracted. Remember: Hedge effectiveness depends on how closely the risks match.
Hint, shown before you answer in practice mode: Compare the risk being hedged with the risk actually held.
V-D-078hardapplication
Basics of Derivatives: common questions
How many practice questions are there on Basics of 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 22 practice topics for NISM Series V-D, which has 150 questions in total.
Are these real NISM Series V-D questions on Basics of 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.
How much of the NISM Series V-D exam is Basics of Derivatives?
NISM's published syllabus outline gives it 10 of the paper's 150 marks, or 6.7% of the exam. It is quoted from the outline, not estimated. The published unit it comes from: July 2026 Annexure I, Chapter 13: Basics of Derivatives
Does negative marking apply to NISM Series V-D?
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.
Understanding Index
5 questions on Understanding Index. Its quiz opens on that unit.
Open Understanding IndexPaper Trading Try it on the practice trading desk