Basics of Derivatives
10 questions. Each answer is explained.
Question 1 of 10Practice · Series VIII — Equity Derivatives
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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 | 8 of 100 marks (8%) |
Source: Unit 1: Basics of Derivatives
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 If a rule changes before your exam, treat the linked questions as out of date and check NISM's current workbook.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 10 questions on Basics of Derivatives, with answers
Q1Which instrument derives its value from another asset or benchmark?
Option A. An equity futures contract — Correct answer
Option B. A fixed deposit with a predetermined interest rate
Why it is wrong: A fixed deposit is a deposit claim with contractual interest, not a derivative on an underlying asset.
Option C. A savings-bank deposit
Why it is wrong: A savings deposit is a banking deposit, not a derivative.
Option D. A non-convertible debenture held to maturity
Why it is wrong: A plain non-convertible debenture is a debt security. It does not derive its value through a derivative payoff formula.
Answer: A. An equity futures contract is a derivative because its value depends on the price of an underlying share or equity index. A fixed deposit, savings deposit and ordinary non-convertible debenture are primary financial claims rather than contracts whose value is derived from another underlying. Remember: A derivative gets its value from an underlying asset, rate, index or other reference variable.
Hint, shown before you answer in practice mode: Common mistake: Treating every market-linked or financial instrument as a derivative.
VIII-001easyconceptual
Q2Meera has no position in the underlying shares. Based only on her expectation that the market index will rise, she buys index futures to try to profit from the move. In this transaction, Meera is acting primarily as a:
Option A. Hedger
Why it is wrong: A hedger uses derivatives to reduce an existing or anticipated underlying risk.
Option B. Clearing corporation
Why it is wrong: A clearing corporation performs clearing, settlement and risk-management functions. It is not the role described.
Option C. Speculator — Correct answer
Option D. Depository participant
Why it is wrong: A depository participant provides access to depository services and is unrelated to this directional futures position.
Answer: C. A speculator deliberately assumes market risk in expectation of earning a profit from a price movement. Meera has no underlying exposure that needs protection, so the futures position is not a hedge. Remember: The participant's purpose matters: reducing an exposure is hedging. Deliberately taking price risk for profit is speculation.
Hint, shown before you answer in practice mode: Common mistake: Calling every futures user a hedger simply because futures can be used for hedging.
VIII-002easyapplication
Q3Which statement correctly distinguishes an exchange-traded futures contract from a typical OTC forward contract?
Option A. Futures have no contract specifications, while forwards have exchange-defined specifications
Why it is wrong: Futures have detailed exchange-defined contract specifications.
Option B. Forwards are always settled daily, while futures are settled only at maturity
Why it is wrong: Daily mark-to-market is characteristic of exchange-traded futures. A typical forward is settled according to its bilateral terms.
Option C. Futures are normally standardised by the exchange, while forwards can be customised bilaterally — Correct answer
Option D. OTC forwards are guaranteed by the stock exchange in the same manner as exchange-traded futures
Why it is wrong: A bilateral OTC forward does not obtain the same exchange-clearing guarantee merely by being a forward.
Answer: C. Exchange-traded futures are standardised contracts traded through an organised exchange and are subject to exchange/clearing arrangements. A typical OTC forward is negotiated bilaterally and can be customised to the counterparties' requirements. Remember: Futures trade in a standardised exchange framework. Forwards are typically customised bilateral OTC contracts.
Hint, shown before you answer in practice mode: Common mistake: Reversing the settlement and standardisation features of forwards and futures.
VIII-003easyconceptual
Q4Which product marked the commencement of derivatives trading on NSE on 12 June 2000?
Option A. Nifty 50 index options
Why it is wrong: Nifty 50 index options were introduced later, in June 2001.
Option B. Nifty 50 index futures — Correct answer
Option C. Options on individual securities
Why it is wrong: Options on individual securities were introduced later, in July 2001.
Option D. Futures on individual securities
Why it is wrong: Futures on individual securities were introduced later, in November 2001.
Answer: B. NSE commenced derivatives trading on 12 June 2000 with index futures based on the Nifty 50. Index options followed in June 2001, options on individual securities in July 2001, and futures on individual securities in November 2001. Remember: For NSE's equity-derivatives timeline: index futures came first, followed by index options, stock options and then stock futures.
Hint, shown before you answer in practice mode: Common mistake: Remembering 'June 2000' but confusing the first product with index options.
VIII-004mediumconceptual
Q5Why can a futures position create substantial gains or losses relative to the cash initially deposited as margin?
Option A. Because futures prices cannot move against the trader by more than the margin deposited
Why it is wrong: Losses are not capped at the initial margin merely because that was the amount first deposited.
Option B. Because the exchange guarantees a minimum return on margin
Why it is wrong: There is no guaranteed minimum return.
Option C. Because margin is only a fraction of the contract's notional exposure — Correct answer
Option D. Because the underlying asset is purchased in full when the futures order is entered
Why it is wrong: Entering a futures contract does not require buying the underlying asset in full.
Answer: C. A futures trader normally posts margin rather than paying the full notional contract value. Profit and loss, however, are linked to the movement in the full contract exposure. This creates leverage: percentage gains and losses on the margin can be much larger than the percentage move in the underlying. Remember: Leverage magnifies both gains and losses because margin is smaller than the notional exposure.
Hint, shown before you answer in practice mode: Common mistake: Thinking margin is the maximum possible loss on a futures position.
VIII-005easyconceptual
Q6Which of the following is NOT an economic function normally attributed to an organised derivatives market?
Option A. Ensuring that every participant earns a profit — Correct answer
Option B. Contributing to price discovery
Why it is wrong: Incorrect as a choice because derivatives can contribute to price discovery.
Option C. Providing an organised venue for risk-taking and hedging
Why it is wrong: Incorrect as a choice because organised derivatives markets facilitate hedging and risk-taking under trading and risk-management rules.
Option D. Facilitating transfer of price risk
Why it is wrong: Incorrect as a choice because risk transfer is an important derivatives-market function.
Answer: A. Derivatives markets can help transfer risk, improve price discovery and move trading into an organised, risk-managed framework. They do not guarantee profits. Derivatives can produce substantial losses. Remember: Derivatives facilitate risk management and price discovery. They do not remove market risk or guarantee outcomes.
Hint, shown before you answer in practice mode: Common mistake: Equating a regulated market with a guaranteed profitable market.
VIII-006mediumconceptual
Q7A derivative contract is specified as cash settled. What happens at final settlement?
Option A. The underlying asset must always be delivered physically
Why it is wrong: Physical delivery is the alternative to cash settlement.
Option B. The contract automatically converts into a cash-market purchase of the underlying
Why it is wrong: Cash settlement does not automatically turn the derivative into a cash-market purchase.
Option C. Both parties receive the full notional contract value
Why it is wrong: The full notional value is not simply paid to both parties.
Option D. Only the monetary settlement difference is exchanged according to the contract rules — Correct answer
Answer: D. Cash settlement means the contract is discharged through payment of the applicable monetary difference rather than delivery of the underlying asset itself. Remember: Cash settlement resolves the derivative through money differences rather than delivery of the underlying.
Hint, shown before you answer in practice mode: Common mistake: Assuming every derivative expiry requires physical delivery.
VIII-007easyconceptual
Q8A non-dividend-paying share trades at ₹1,000. After considering financing cost to expiry, the no-arbitrage futures value is ₹1,015, but the quoted futures price is ₹1,045. Ignoring transaction costs and execution risk, which trade is consistent with cash-and-carry arbitrage?
Option A. Sell the share short and buy the futures
Why it is wrong: This is the direction used when futures are sufficiently underpriced, not overpriced.
Option B. Buy the share and sell the futures — Correct answer
Option C. Buy both the share and the futures
Why it is wrong: Buying both leaves the trader directionally long rather than locking an arbitrage spread.
Option D. Sell both the share and the futures
Why it is wrong: Selling both creates directional exposure and does not exploit the relative mispricing correctly.
Answer: B. The futures contract is overpriced relative to its no-arbitrage value. A cash-and-carry arbitrageur buys the relatively cheaper spot asset and sells the relatively expensive futures contract. At expiry, convergence allows the two legs to offset economically, subject to the assumptions in the question. Remember: Overpriced futures → buy spot and sell futures. Underpriced futures → the reverse-cash-and-carry direction, subject to shorting and financing feasibility.
Hint, shown before you answer in practice mode: Common mistake: Focusing only on the futures price being 'high' without taking the offsetting spot leg.
VIII-008mediumapplication
Q9A fund manager hedges a portfolio with index futures. During the hedge period, the portfolio falls 3% but the futures reference index falls only 2%. Which risk is illustrated most directly?
Option A. Coupon reinvestment risk
Why it is wrong: No coupon cash flow is involved.
Option B. Settlement guarantee risk only
Why it is wrong: A clearing guarantee issue is not described in the scenario.
Option C. Basis/hedge mismatch risk — Correct answer
Option D. Currency-convertibility risk
Why it is wrong: No foreign-currency conversion is involved.
Answer: C. A hedge can be imperfect when the hedged exposure and the derivative do not move one-for-one. The difference between movements in the portfolio and the hedging instrument is a form of basis or hedge mismatch risk. Remember: A derivative hedge can reduce risk without eliminating it if the hedge instrument is not perfectly aligned with the exposure.
Hint, shown before you answer in practice mode: Common mistake: Assuming any hedge using an index future automatically produces a perfect offset.
VIII-103mediumapplication
Q10Two companies enter a customised OTC forward directly with each other. Which risk is generally more prominent than in a centrally cleared exchange-traded futures contract?
Option A. Risk that the exchange changes the closing auction price
Why it is wrong: The contract is not dependent on an exchange closing auction in the way described.
Option B. Risk that the forward has an exchange-standard lot size
Why it is wrong: Customisation, not exchange standardisation, is typical of OTC forwards.
Option C. Bilateral counterparty credit risk — Correct answer
Option D. Risk that daily exchange MTM necessarily eliminates all exposure
Why it is wrong: A bilateral forward is not automatically subject to exchange daily MTM.
Answer: C. An OTC forward is a bilateral contract. Unless collateralisation or other arrangements reduce it, each party is exposed to the possibility that the counterparty fails to perform. Central clearing of exchange-traded futures materially changes this counterparty structure. Remember: Customisation is a benefit of forwards, but bilateral counterparty risk is an important trade-off.
Hint, shown before you answer in practice mode: Common mistake: Thinking OTC contracts are safer simply because their terms are tailored.
VIII-104mediumapplication
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 11 practice topics for NISM Series VIII, which has 150 questions in total.
Are these real NISM Series VIII 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 VIII exam is Basics of Derivatives?
NISM's published syllabus outline gives it 8 of the paper's 100 marks, or 8% of the exam. It is quoted from the outline, not estimated. The published unit it comes from: Unit 1: Basics of Derivatives
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.
Understanding the Index
6 questions on Understanding the Index. Its quiz opens on that unit.
Open Understanding the Index