Understanding the Index
6 questions. Each answer is explained.
Question 1 of 6Practice · 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 | 2 of 100 marks (2%) |
Source: Unit 2: Understanding Index
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 If a rule changes before your exam, treat the linked questions as out of date and check NISM's current workbook.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 6 questions on Understanding the Index, with answers
Q1Under the methodology currently used for the Nifty 50, constituent weights are based primarily on:
Option A. Equal weight for every constituent
Why it is wrong: Nifty 50 is not an equal-weight index.
Option B. Free-float market capitalisation — Correct answer
Option C. Total book value of each company
Why it is wrong: Book value is not the weighting basis for Nifty 50.
Option D. Only the previous day's trading volume
Why it is wrong: Trading volume is relevant to liquidity analysis but is not the sole constituent-weighting formula.
Answer: B. Nifty 50 is calculated using the free-float market-capitalisation weighted method. Free float focuses on shares considered available for trading rather than giving full weight to strategic or promoter holdings. Remember: Nifty 50 weights constituents by free-float market capitalisation, not full market capitalisation or equal weights.
Hint, shown before you answer in practice mode: Common mistake: Assuming every share a company has issued counts towards its index weight.
VIII-009mediumconceptual
Q2An index has a base value of 1,000 and a base free-float market capitalisation of ₹600 crore. If the comparable current free-float market capitalisation is ₹750 crore and no divisor adjustment is required, what is the index level?
Option A. 1,150
Why it is wrong: It does not follow the market-capitalisation ratio in the question.
Option B. 1,200
Why it is wrong: 750/600 is 1.25, not 1.20.
Option C. 1,250 — Correct answer
Option D. 1,350
Why it is wrong: This overstates the 25% increase in comparable free-float market capitalisation.
Answer: C. Index level = Base index value × (Current free-float market capitalisation ÷ Base free-float market capitalisation). Therefore, 1,000 × (750 ÷ 600) = 1,250. Remember: For a simple market-cap-weighted index example, scale the base index value by the ratio of current to base market capitalisation, subject to divisor adjustments in real index maintenance.
Hint, shown before you answer in practice mode: Common mistake: Adding the rupee increase directly to the index level instead of using a ratio.
VIII-010mediumnumerical
Q3For a required trade size, the ideal market price of a share is ₹100, but the order is actually executed at an average price of ₹101. Ignoring other charges, the market impact cost for the buy order is:
Option A. 1.0% — Correct answer
Option B. 0.5%
Why it is wrong: A ₹0.50 deterioration on ₹100 would be 0.5%, not the ₹1 deterioration given.
Option C. 1.5%
Why it is wrong: That would require a ₹1.50 deterioration from the ideal price.
Option D. 2.0%
Why it is wrong: That would require a ₹2 deterioration from the ideal price.
Answer: A. Impact cost measures the price deterioration caused by executing a given trade size relative to an ideal price. Here, the execution is ₹1 above an ideal price of ₹100, so impact cost = (101 − 100) ÷ 100 × 100 = 1%. Remember: Impact cost is a practical liquidity measure: larger execution slippage from the ideal price means higher impact cost.
Hint, shown before you answer in practice mode: Common mistake: Confusing impact cost with brokerage, STT or bid-ask spread alone.
VIII-011mediumapplication
Q4A mutual fund wants to compare its diversified large-cap portfolio return with a broad market reference. Which is the most direct use of an equity index in this situation?
Option A. Setting the fund's accounting policy
Why it is wrong: Accounting policy is not the primary purpose described.
Option B. Guaranteeing the fund's future return
Why it is wrong: An index does not guarantee future investment results.
Option C. Eliminating all unsystematic risk by law
Why it is wrong: An index reference does not legally eliminate portfolio risk.
Option D. Benchmarking performance — Correct answer
Answer: D. An equity index provides a transparent reference against which portfolio performance can be compared. Indices are widely used as benchmarks, as underlyings for products and as indicators of market segments. Remember: An index is a measurement and benchmarking tool. It is not a return guarantee.
Hint, shown before you answer in practice mode: Common mistake: Treating a benchmark as a promised target return.
VIII-105easyapplication
Q5Why may an index provider adjust the index divisor when a corporate action changes constituent market capitalisation mechanically but should not represent an economic market move?
Option A. To guarantee that the index never falls
Why it is wrong: Genuine market declines still reduce the index.
Option B. To force every constituent to have equal weight
Why it is wrong: Divisor changes do not necessarily equal-weight constituents.
Option C. To preserve continuity of the index level across the corporate action — Correct answer
Option D. To convert a price index automatically into a total-return index
Why it is wrong: A total-return index additionally accounts for distributions. A divisor adjustment alone does not automatically change index type.
Answer: C. A divisor adjustment is used to preserve index continuity when events such as certain corporate actions alter the mathematical market-capitalisation base without representing an equivalent market return. The aim is to prevent an artificial jump or drop caused purely by the event mechanics. Remember: Index maintenance separates genuine price movement from mechanical changes caused by constituent events.
Hint, shown before you answer in practice mode: Common mistake: Believing the index divisor is permanently fixed.
VIII-106mediumconceptual
Q6Why is low impact cost desirable when selecting securities for a tradable market index?
Option A. It means big trades move the price less, so the index is easier to replicate — Correct answer
Option B. It guarantees that the security's price will rise after it is added to the index
Why it is wrong: Liquidity does not predict the direction of return.
Option C. It means the security has no bid-ask spread under any market condition
Why it is wrong: A liquid security can still have a bid-ask spread.
Option D. It proves the company is financially strong and has no business risk
Why it is wrong: Market liquidity says nothing about eliminating the company's business risk.
Answer: A. Impact cost measures the price effect of executing a specified trade size relative to an ideal price. Lower impact cost generally indicates better liquidity and makes the index easier for market participants and products to track or replicate. Remember: A good tradable index must be representative and practically replicable. Liquidity matters.
Hint, shown before you answer in practice mode: Common mistake: Confusing liquidity quality with expected price performance.
VIII-107mediumconceptual
Understanding the Index: common questions
How many practice questions are there on Understanding the Index?
6 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 Understanding the Index?
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 Understanding the Index?
NISM's published syllabus outline gives it 2 of the paper's 100 marks, or 2% of the exam. It is quoted from the outline, not estimated. The published unit it comes from: Unit 2: Understanding Index
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.
Forwards and Futures
9 questions on Forwards and Futures. Its quiz opens on that unit.
Open Forwards and Futures