Trading Mechanism
11 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 | 4 of 100 marks (4%) |
Source: Unit 6: Introduction to Trading Systems
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 If a rule changes before your exam, treat the linked questions as out of date and check NISM's current workbook.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 11 questions on Trading Mechanism, with answers
Q1For NSE equity derivatives contracts with expiry falling on or after 1 September 2025, the revised expiry day is generally:
Option A. Tuesday — Correct answer
Option B. Monday
Why it is wrong: Monday is not the revised NSE expiry day.
Option C. Thursday
Why it is wrong: Thursday was the prior NSE convention for many contracts.
Option D. Friday
Why it is wrong: Friday is not the revised NSE expiry day.
Answer: A. NSE shifted the relevant index and stock derivative expiries to Tuesday for contracts expiring on or after 1 September 2025. Monthly contracts therefore generally expire on the last Tuesday of the expiry period, while applicable weekly NIFTY options expire on Tuesday of the expiry week. Remember: Expiry-day rules are exchange-specific and date-sensitive. NSE’s applicable equity-derivatives expiry day is now Tuesday.
Hint, shown before you answer in practice mode: Common mistake: Relying on the long-standing Thursday convention after the 2025 change.
VIII-059easyregulatory
Q2If the scheduled Tuesday expiry of an NSE equity-derivatives contract is a trading holiday, the contract generally expires on:
Option A. The previous trading day — Correct answer
Option B. The next trading day
Why it is wrong: The rule specifies the previous trading day.
Option C. The next calendar day whether or not the market is open
Why it is wrong: Expiry is not automatically moved to the next calendar day.
Option D. The last Friday of that month
Why it is wrong: There is no general last-Friday substitution rule.
Answer: A. NSE contract specifications state that if the scheduled Tuesday expiry is a trading holiday, the expiry is moved to the previous trading day. Remember: Holiday adjustment for NSE equity-derivatives expiry is backward to the previous trading day.
Hint, shown before you answer in practice mode: Common mistake: Assuming expiry moves forward to the next trading day as some other deadlines might.
VIII-060easyregulatory
Q3As of October 2026, what are the regular trading-session hours for NSE’s equity-derivatives segment?
Option A. 09:00–15:30
Why it is wrong: 09:00 is associated with the pre-open phase, not the regular session opening.
Option B. 09:15–15:30
Why it is wrong: 15:30 is an older/common cash-market close time, but the current equity-derivatives regular session closes at 15:40.
Option C. 09:30–16:00
Why it is wrong: These are not the published regular-session times.
Option D. 09:15–15:40 — Correct answer
Answer: D. NSE currently lists the equity-derivatives regular/normal market session as opening at 09:15 and closing at 15:40. A separate pre-open session for eligible futures operates before the regular session. Remember: Current NSE equity-derivatives normal market: 09:15–15:40. Do not confuse it with cash-market or pre-open timings.
Hint, shown before you answer in practice mode: Common mistake: Using the familiar 15:30 cash-market close without checking the current derivatives schedule.
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Q4A trader is short a futures contract at 1,000 and wants a stop-loss buy order that activates if the market rises to 1,025. What is the role of the 1,025 trigger?
Option A. It prevents the market from trading above 1,025
Why it is wrong: The trigger does not cap the market price.
Option B. It guarantees the final execution price will be exactly 1,025
Why it is wrong: Trigger price and actual execution price can differ.
Option C. It converts the existing short position into a call option
Why it is wrong: An order type does not change the instrument into an option.
Option D. It is the price condition that activates the buy order — Correct answer
Answer: D. A stop-loss order remains inactive until its trigger condition is reached. For a short position, a buy stop above the current market can be used to limit loss if price rises. The trigger activates the order. It does not guarantee an exact execution price, particularly in fast markets. Remember: Stop-loss trigger activates an order. It is not necessarily the guaranteed execution price.
Hint, shown before you answer in practice mode: Common mistake: Treating trigger price and fill price as identical.
VIII-062mediumapplication
Q5A trader submits an Immediate or Cancel (IOC) order for 1,000 units. Only 650 units can be executed immediately at acceptable prices. What happens to the remaining 350 units?
Option A. They remain in the order book until the end of the day
Why it is wrong: That describes a day-order style behavior, not IOC.
Option B. They are cancelled immediately — Correct answer
Option C. They are automatically converted into a stop-loss order
Why it is wrong: IOC does not convert unfilled quantity into a stop-loss order.
Option D. They must be carried forward to the next trading day
Why it is wrong: IOC does not carry unfilled quantity to the next day.
Answer: B. An IOC order attempts immediate execution. Any portion that cannot be executed immediately is cancelled rather than resting in the order book. Remember: IOC = execute immediately to the extent possible. Cancel the balance.
Hint, shown before you answer in practice mode: Common mistake: Assuming “immediate” means the full quantity must execute or the whole order fails. Partial execution can occur.
VIII-063mediumapplication
Q6What is the main objective when an exchange adjusts derivative contract terms for a corporate action such as a stock split or bonus issue?
Option A. To keep the value of open positions unchanged by the corporate action — Correct answer
Option B. To guarantee a profit to every option holder affected by the action
Why it is wrong: The adjustment does not guarantee profit.
Option C. To change every open long position into a short position on the ex-date
Why it is wrong: Directional positions are not automatically reversed.
Option D. To eliminate all margin requirements on the adjusted contracts
Why it is wrong: Margin requirements continue under the applicable framework.
Answer: A. Corporate-action adjustments are designed so that, as far as practicable, the economic value of open derivative positions is preserved across the ex-date. Depending on the action, strike prices, market lots/positions or other contract terms may be adjusted. Remember: Corporate-action adjustments are intended to remove mechanical windfalls/losses, not market risk.
Hint, shown before you answer in practice mode: Common mistake: Thinking a split or bonus itself should create derivative profit because the quoted share price changes.
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Q7For a simplified 1-for-2 stock split illustration, an option has strike ₹1,000 and market lot 500 shares immediately before the adjustment. If the exchange applies the usual value-preserving split factor so price terms halve and quantity terms double, what adjusted pair is consistent with that logic?
Option A. Strike ₹2,000, lot 250
Why it is wrong: This moves price and quantity in the wrong directions for a split.
Option B. Strike ₹500, lot 1,000 — Correct answer
Option C. Strike ₹1,000, lot 1,000
Why it is wrong: Doubling quantity without adjusting strike doubles notional exposure.
Option D. Strike ₹500, lot 250
Why it is wrong: Halving both strike and quantity quarters the notional strike value.
Answer: B. In a 1-for-2 split, each old share becomes two shares and the per-share price is mechanically halved, other things equal. A value-preserving derivative adjustment therefore approximately halves the strike and doubles the lot: ₹1,000 → ₹500 and 500 → 1,000. Remember: For a simple split, strike and lot move in opposite directions to preserve economic exposure.
Hint, shown before you answer in practice mode: Common mistake: Changing strike but forgetting the corresponding position/lot adjustment.
VIII-138hardnumerical
Q8Which statement correctly distinguishes Securities Transaction Tax (STT) from brokerage in an F&O trade?
Option A. Brokerage is set by the Income Tax Department for every broker at one identical rate
Why it is wrong: Broker pricing is not a single Income Tax Department-set brokerage rate.
Option B. Both are the same government tax, simply collected under two different names
Why it is wrong: Brokerage is not simply another name for STT.
Option C. STT is a tax set by law, while brokerage is the broker's fee for its service — Correct answer
Option D. STT is charged only when a trader closes the trade at a profit
Why it is wrong: STT is not conditioned on the trade being profitable.
Answer: C. STT is imposed by law on specified securities transactions at prescribed rates and bases. Brokerage is the broker's service charge, subject to the applicable regulatory/exchange framework and the broker's pricing. STT can arise even on a losing trade because it is transaction-based. Remember: Trading costs include multiple distinct components. Know which are statutory taxes and which are service/exchange charges.
Hint, shown before you answer in practice mode: Common mistake: Combining every line item on the contract note into a single 'brokerage' charge.
VIII-139mediumconceptual
Q9Which description best captures algorithmic trading in the context of exchange markets?
Option A. A trading method that is exempt from all exchange and broker risk controls
Why it is wrong: Automated orders remain subject to market and risk-control rules.
Option B. Any trade entered by hand through a broker's mobile trading app
Why it is wrong: A manually entered order is not algorithmic merely because it uses a digital device.
Option C. A system that guarantees computer-generated trades will be profitable
Why it is wrong: Algorithms can lose money.
Option D. Use of pre-programmed rules to place and manage orders automatically — Correct answer
Answer: D. Algorithmic trading uses computerised rules/logic to automate aspects of order generation and execution. Automation can improve speed or consistency, but it does not guarantee profit and remains subject to the applicable exchange, broker and regulatory controls. Remember: Automation changes how orders are generated/executed, not whether market risk exists.
Hint, shown before you answer in practice mode: Common mistake: Equating algorithmic trading with guaranteed or risk-free trading.
VIII-140mediumconceptual
Q10A trader wants strike-wise option premium, bid/ask information, volume and open interest for listed index options. Which exchange data view is most directly suited to this purpose?
Option A. The listed option chain — Correct answer
Option B. The company's annual report only
Why it is wrong: A company annual report does not provide live strike-wise option-market data.
Option C. A fixed-deposit interest-rate table
Why it is wrong: Deposit rates are unrelated to listed option-chain information.
Option D. A mutual fund factsheet unrelated to the underlying
Why it is wrong: An unrelated fund factsheet is not the direct source.
Answer: A. An exchange option chain organises listed option information by expiry and strike and commonly displays fields such as prices/quotes, volume and open interest. It is a direct source for analysing listed option contracts. Remember: Use exchange-derived F&O data for contract-level market analysis rather than unrelated secondary documents.
Hint, shown before you answer in practice mode: Common mistake: Treating commentary or a chart screenshot as equivalent to the underlying exchange data.
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Q11As of October 2026, which statement about SEBI's Investor Risk Reduction Access (IRRA) platform is current?
Option A. IRRA remains the mandatory platform through which every retail derivative order must be placed
Why it is wrong: IRRA was never the mandatory route for every retail derivative order.
Option B. SEBI discontinued the IRRA platform through a circular dated 7 May 2026 — Correct answer
Option C. IRRA became the clearing corporation for NSE derivatives
Why it is wrong: It was not a clearing corporation.
Option D. IRRA replaced KYC for derivative clients
Why it is wrong: It had no role as a replacement for KYC.
Answer: B. SEBI issued a circular on 7 May 2026 discontinuing the IRRA platform after citing strengthened business-continuity and resilience arrangements in the market ecosystem. This is a time-sensitive current-status fact and should be reverified if used in a later exam-preparation edition. Remember: Operational infrastructure can change. Current exam content should not preserve an obsolete platform status uncritically.
Hint, shown before you answer in practice mode: Common mistake: Learning an older workbook reference to IRRA without checking later SEBI circulars.
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Trading Mechanism: common questions
How many practice questions are there on Trading Mechanism?
11 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 Trading Mechanism?
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 Trading Mechanism?
NISM's published syllabus outline gives it 4 of the paper's 100 marks, or 4% of the exam. It is quoted from the outline, not estimated. The published unit it comes from: Unit 6: Introduction to Trading Systems
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.
Clearing, Settlement and Risk Management
16 questions on Clearing, Settlement and Risk Management. Its quiz opens on that unit.
Open Clearing, Settlement and Risk Management