Application of Futures
13 questions. Each answer is explained.
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More units in NISM Series VIII
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 | 25 of 100 marks (25%) |
That figure belongs to one published unit covered under these headings — Application of Futures and Forwards and Futures — so the marks belong to the whole group. They are quoted together because no source divides them among its headings.
Source: Unit 3: Introduction to Forwards and Futures. One published unit: its objectives 3.9 and 3.10 (using futures to manage risk: hedging, speculation and arbitrage strategies) ARE the futures applications the bank files under a separate heading, so both bank headings share this unit's 25 marks instead of a split we would have to invent.
NISM Series VIII Equity Derivatives
Exam rules read on NISM's site on 3 October 2026. Test objectives in force from 1 May 2022. 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 If a rule changes before your exam, treat the linked questions as out of date and check NISM's current workbook.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 13 questions on Application of Futures, with answers
Q1A trader buys one index futures contract at 24,000. The question assumes a lot size of 50 units. The trader closes the position at 24,180. Ignoring charges, what is the profit?
Option A. ₹4,500
Why it is wrong: This uses only half the stated lot exposure.
Option B. ₹18,000
Why it is wrong: This effectively doubles the one-contract exposure.
Option C. ₹9,000 — Correct answer
Option D. ₹24,180
Why it is wrong: The futures price itself is not the rupee profit.
Answer: C. For a long futures position, profit = (exit futures price − entry futures price) × lot size. Here, (24,180 − 24,000) × 50 = 180 × 50 = ₹9,000. Remember: Long futures P&L = price change × contract quantity. A price rise benefits the long.
Hint, shown before you answer in practice mode: Common mistake: Using the margin amount or futures price itself instead of the change in price multiplied by contract quantity.
VIII-017mediumnumerical
Q2A trader sells two index futures contracts at 52,500 and later buys them back at 51,900. Assume a lot size of 25 units per contract. Ignoring charges, what is the total profit?
Option A. ₹15,000
Why it is wrong: This accounts for only one contract.
Option B. ₹30,000 — Correct answer
Option C. ₹25,000
Why it is wrong: It does not match the 600-point move across 50 total units.
Option D. ₹60,000
Why it is wrong: This doubles the correct exposure.
Answer: B. A short futures position gains when the futures price falls. Profit = (sell price − buy-back price) × lot size × number of contracts = (52,500 − 51,900) × 25 × 2 = 600 × 50 = ₹30,000. Remember: Short futures P&L = (entry sell price − exit buy price) × total contract quantity.
Hint, shown before you answer in practice mode: Common mistake: Using the long-position sign and treating a price fall as a loss to the short seller.
VIII-018mediumnumerical
Q3An index futures contract is quoted at 53,000 and the problem specifies a contract lot of 25 units. What is the notional contract value?
Option A. ₹13,25,000 — Correct answer
Option B. ₹5,30,000
Why it is wrong: This equals only ten price units per lot rather than the full 25.
Option C. ₹2,12,000
Why it is wrong: It does not use the stated 25-unit contract multiplier correctly.
Option D. ₹53,00,000
Why it is wrong: This overstates the contract multiplier.
Answer: A. Notional contract value = futures price × lot size = 53,000 × 25 = ₹13,25,000. Remember: For a simple index-futures contract, notional value is futures price multiplied by the contract's lot size/multiplier.
Hint, shown before you answer in practice mode: Common mistake: Confusing notional contract value with the margin that must be deposited.
VIII-019easynumerical
Q4What does daily mark-to-market (MTM) settlement of a futures position primarily do?
Option A. It recognises daily gains and losses on open futures positions at the settlement price — Correct answer
Option B. It postpones all profit and loss on the position until the contract finally expires
Why it is wrong: That is the opposite of daily MTM.
Option C. It converts every futures position into physical delivery at the end of each day
Why it is wrong: MTM is a financial revaluation/settlement mechanism, not daily physical delivery.
Option D. It fixes the futures price permanently at the trader's original entry price, whatever the market does
Why it is wrong: Market prices continue to change after the trade is entered.
Answer: A. MTM revalues open futures positions and debits or credits the resulting daily losses or gains according to the applicable settlement process. This prevents all accumulated gains and losses from being deferred until final expiry. Remember: Futures risk is managed partly through daily recognition and settlement of gains and losses.
Hint, shown before you answer in practice mode: Common mistake: Thinking MTM means only 'showing' an unrealised P&L without settlement consequences.
VIII-020easyconceptual
Q5A fund holds an equity portfolio worth ₹1.80 crore with a beta of 1.20 relative to Nifty. Assume Nifty futures are at 24,000 and the problem specifies a lot size of 75. Approximately how many Nifty futures contracts should the fund SELL to target a full beta hedge?
Option A. 12 contracts — Correct answer
Option B. 10 contracts
Why it is wrong: Ten contracts represent ₹1.80 crore of futures notional, which ignores the portfolio beta of 1.20.
Option C. 8 contracts
Why it is wrong: Eight contracts hedge only ₹1.44 crore of index notional and ignore much of the beta-adjusted exposure.
Option D. 15 contracts
Why it is wrong: Fifteen contracts would create ₹2.70 crore of futures notional and over-hedge the stated beta exposure.
Answer: A. Beta-adjusted portfolio exposure = ₹1.80 crore × 1.20 = ₹2.16 crore. One futures contract has notional value = 24,000 × 75 = ₹18,00,000. Hedge contracts = ₹2.16 crore ÷ ₹18 lakh = 12. Because the fund is long the cash portfolio and wants to reduce market exposure, it sells futures. Remember: Portfolio hedge contracts ≈ Portfolio value × beta ÷ Futures contract notional value.
Hint, shown before you answer in practice mode: Common mistake: Dividing the raw portfolio value by futures notional and forgetting to adjust for beta.
VIII-021hardnumerical
Q6An institutional investor expects to receive cash in three weeks and then buy a diversified equity portfolio. The investor is concerned that the market may rise before the cash is received. Which futures action most directly hedges that risk?
Option A. Sell index futures now
Why it is wrong: A short futures position benefits from a market decline and would worsen the economic effect of a pre-purchase market rise.
Option B. Buy index futures now — Correct answer
Option C. Sell call options without any other position
Why it is wrong: A naked short call creates a different and potentially substantial risk profile. It is not the direct futures hedge asked for.
Option D. Do nothing because futures cannot hedge an anticipated purchase
Why it is wrong: Futures can be used to hedge an anticipated future purchase.
Answer: B. The investor faces the risk of having to buy equities later at higher prices. A long index-futures position can gain if the market rises, helping offset the higher cash-market purchase cost when the funds become available. This is an anticipatory or long hedge. Remember: Future buyer worried about prices rising → long hedge. Current holder worried about prices falling → short hedge.
Hint, shown before you answer in practice mode: Common mistake: Automatically associating 'hedging' with selling futures, regardless of the direction of the underlying exposure.
VIII-022mediumapplication
Q7Open interest in a futures contract is 10,000 contracts. A new buyer and a new seller create 400 additional contracts with each other, and no other positions are opened or closed. What is the new open interest?
Option A. 10,200
Why it is wrong: Each new contract adds one unit of open interest, not half a unit.
Option B. 20,000
Why it is wrong: Open interest does not double merely because every contract has both a buyer and a seller.
Option C. 10,800
Why it is wrong: This double-counts the buyer and seller sides of the same 400 contracts.
Option D. 10,400 — Correct answer
Answer: D. Open interest counts outstanding contracts, not the sum of the long and short sides separately. When a new buyer and a new seller create 400 contracts, open interest rises by 400, from 10,000 to 10,400. Remember: Open interest is the number of outstanding contracts. One contract has both a long and a short side, but it is counted once.
Hint, shown before you answer in practice mode: Common mistake: Adding the buyer's 400 and seller's 400 separately and increasing OI by 800.
VIII-023mediumapplication
Q8A futures contract rises in price while its open interest also rises materially. Under the commonly used price–open-interest interpretation, this combination is generally described as:
Option A. Short covering
Why it is wrong: Short covering is generally associated with rising price and falling OI.
Option B. Long unwinding
Why it is wrong: Long unwinding is generally associated with falling price and falling OI.
Option C. Short build-up
Why it is wrong: Short build-up is generally associated with falling price and rising OI.
Option D. Long build-up — Correct answer
Answer: D. A price rise accompanied by rising open interest is commonly interpreted as fresh long participation or 'long build-up'. This is an analytical convention, not proof that prices must continue rising. By contrast, a price rise with falling open interest is commonly associated with short covering. Remember: Price/OI labels are descriptive heuristics: ↑price + ↑OI = long build-up. ↑price + ↓OI = short covering. ↓price + ↑OI = short build-up. ↓price + ↓OI = long unwinding.
Hint, shown before you answer in practice mode: Common mistake: Treating these labels as guaranteed forecasts rather than interpretations of current positioning.
VIII-024mediumapplication
Q9A trader wants to maintain the same bullish futures exposure beyond the expiry of the near-month contract. Which action best describes a rollover?
Option A. Keep the near-month contract open after it has expired without settlement
Why it is wrong: An expired contract cannot simply remain open indefinitely.
Option B. Close the near-month long position and establish a long position in a later-expiry contract — Correct answer
Option C. Close the near-month long position and open a short position in the same near-month contract
Why it is wrong: Opening the opposite direction would reverse exposure rather than roll it forward.
Option D. Convert the futures contract automatically into shares without any transaction
Why it is wrong: Futures do not automatically convert into shares merely because the trader wants to continue exposure.
Answer: B. A rollover normally means closing the position in the expiring/near contract and establishing an equivalent-direction position in a later-expiry contract. The trader thereby extends the market exposure into the next contract period. Remember: Rollover changes the contract expiry while preserving the intended market direction.
Hint, shown before you answer in practice mode: Common mistake: Thinking rollover means doing nothing and allowing the expiring contract to continue past expiry.
VIII-025mediumapplication
Q10A trader buys the March futures contract on a stock and simultaneously sells the April futures contract on the same stock. The position is best described as a:
Option A. Calendar spread — Correct answer
Option B. Covered call
Why it is wrong: A covered call combines ownership of the underlying with a short call option.
Option C. Protective put
Why it is wrong: A protective put combines a long underlying position with a long put.
Option D. Long straddle
Why it is wrong: A long straddle combines a call and put at the same strike/expiry.
Answer: A. A calendar spread uses opposite positions in futures contracts on the same underlying but with different expiry months. The trade is primarily exposed to changes in the price relationship between the two expiries rather than to a simple outright long or short view. Remember: Calendar spreads trade the relative pricing of two expiries on the same underlying.
Hint, shown before you answer in practice mode: Common mistake: Calling any two-leg position by one name without checking the expiries and the underlying.
VIII-028mediumapplication
Q11A trader posts ₹3,00,000 as total margin for a long futures position with a notional contract value of ₹18,00,000. The futures price rises by 2% and the position is closed. Ignoring charges and margin changes, what is the return on the margin originally deployed?
Option A. 2%
Why it is wrong: 2% is the price move, not the return on the smaller margin base.
Option B. 12% — Correct answer
Option C. 6%
Why it is wrong: This understates the ₹36,000 profit relative to ₹3,00,000 margin.
Option D. 20%
Why it is wrong: A 20% return would require ₹60,000 profit on the stated margin.
Answer: B. A 2% gain on ₹18,00,000 notional exposure produces a profit of ₹36,000. Return on the ₹3,00,000 margin deployed = ₹36,000 ÷ ₹3,00,000 = 12%. This illustrates leverage: the percentage return on margin can be much larger than the percentage move in the futures price. Remember: Leverage means P&L is generated on notional exposure while return is often measured against a much smaller margin amount.
Hint, shown before you answer in practice mode: Common mistake: Calculating return using contract value instead of margin when the question asks for return on margin.
VIII-029hardnumerical
Q12For NIFTY 50 derivative contracts under the lot-size revision that applies from the January 2026 series, the market lot is:
Option A. 25 units
Why it is wrong: 25 was an older NIFTY lot size before the 2024 contract-size revision.
Option B. 65 units — Correct answer
Option C. 50 units
Why it is wrong: 50 is not the revised NIFTY lot in the cited circular.
Option D. 75 units
Why it is wrong: 75 was the immediately preceding market lot.
Answer: B. NSE Circular NSE/FAOP/70616 revised the NIFTY 50 market lot from 75 to 65. The existing weekly and monthly lot size remained applicable through the December 30, 2025 expiry, after which the revised size applies to the January 2026 series and later applicable contracts. Remember: NIFTY lot size is an exchange specification that can change. Always date-stamp questions that test it.
Hint, shown before you answer in practice mode: Common mistake: Memorising an old lot size without checking the effective contract series.
VIII-030easyregulatory
Q13A futures contract records 50,000 contracts of trading volume during the day, but end-of-day open interest rises by only 4,000 contracts. Which statement is correct?
Option A. Volume counts only the buy orders, while open interest counts only the sell orders
Why it is wrong: Each trade has both sides. The definitions are not buy-versus-sell.
Option B. Open interest must always equal the total daily volume
Why it is wrong: They can differ substantially.
Option C. The data are impossible because open interest can never rise by less than volume
Why it is wrong: High turnover of existing positions can create volume without equivalent new OI.
Option D. Volume counts contracts traded, while open interest counts contracts still open — Correct answer
Answer: D. Volume measures trading activity over a period and can include repeated opening, closing and transfer of positions. Open interest measures contracts still outstanding. Therefore, large volume can coexist with a much smaller change in open interest. Remember: Volume is flow. Open interest is the stock of outstanding contracts.
Hint, shown before you answer in practice mode: Common mistake: Assuming every traded contract creates one new open contract.
VIII-128mediumconceptual
Application of Futures: common questions
How many practice questions are there on Application of Futures?
13 questions, all written out on this page with the correct answer and why each other option is wrong. This unit is one of the 11 practice topics for NISM Series VIII, which has 150 questions in total.
Are these real NISM Series VIII questions on Application of Futures?
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 VIII exam is Application of Futures?
NISM's published syllabus outline gives it 25 of the paper's 100 marks, or 25% of the exam. That figure covers one published unit taught here under more than one heading (Application of Futures and Forwards and Futures). So it is the marks for the group, not for this page alone. No source splits it, so it is not split here. The published unit it comes from: Unit 3: Introduction to Forwards and Futures. One published unit: its objectives 3.9 and 3.10 (using futures to manage risk: hedging, speculation and arbitrage strategies) ARE the futures applications the bank files under a separate heading, so both bank headings share this unit's 25 marks instead of a split we would have to invent.
Does negative marking apply to NISM Series VIII?
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 Options
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