Unit study guide · NISM Series XII
Derivative Markets
15 questions in this unit
What this unit covers
- What gives a derivative contract its basic economic value or payoff?
- Which feature typically distinguishes exchange-traded futures from a privately negotiated forward contract?
- What contractual right does the buyer of a call option obtain?
- What does a put option allow its buyer to do under the contract terms?
- An investor owns shares and wants to offset some losses from a market fall. Which futures direction can provide a basic hedge?
- A trader with no existing exposure buys futures solely because a price rise is expected. What is the main purpose of this trade?
- A long futures position covers 75 hypothetical units. The daily settlement price rises from ₹100 to ₹102. What is the daily mark-to-market result?
- A call has a strike of ₹500, underlying price of ₹540 and premium of ₹55. What is its intrinsic value per unit?
- A put has a strike price of ₹800 while the underlying trades at ₹760. How is the option classified by moneyness?
- Open interest is 200 contracts. A new buyer and new seller create five additional contracts. With no other activity, what is open interest?
- For the same option universe, put open interest is 900 contracts and call open interest is 600. What is the open-interest put-call ratio?
- Why can losses on a futures position exceed the initial margin deposited?
- A cash-settled put covers 40 hypothetical units at a ₹600 strike. Premium is ₹20 per unit and expiry value is ₹550. Ignoring costs, what is the buyer’s net result?
- An investor holds 100 units bought at ₹500 and shorts futures for 100 units at ₹502. Later spot is ₹470 and futures ₹474. Ignoring costs and income, what is the combined result?
- A one-year swap on ₹20 lakh pays fixed 7% and receives floating 8.5% for that year. Assume net settlement and no other payment. What is the net cash flow?
Key ideas
From the practice bank · 1
What gives a derivative contract its basic economic value or payoff?
A derivative’s value or payoff is linked to a specified underlying, such as an asset, rate or index. The contract defines how that link works. Remember: A derivative must be understood through its underlying and contract terms.
Hint Common mistake: Assuming a derivative has a value independent of its specified underlying. Identify the asset, rate or index to which the contract is linked.
XII-136From the practice bank · 2
Which feature typically distinguishes exchange-traded futures from a privately negotiated forward contract?
Exchange-traded futures use standardised terms and exchange-based trading. A forward is generally negotiated between counterparties to suit their agreement. Remember: Futures standardisation differs from the customisation of forwards.
Hint Common mistake: Confusing standardisation with the elimination of market risk. Compare an exchange contract specification with a privately tailored agreement.
XII-137From the practice bank · 3
What contractual right does the buyer of a call option obtain?
A call buyer obtains the right to buy the underlying at the under the contract terms. The buyer pays a premium for the option. Remember: A call gives its buyer a buying right rather than a compulsory purchase.
Hint Common mistake: Mixing up the call buyer’s right with the option writer’s obligation. Distinguish the direction of the buyer’s option right from an obligation.
XII-138From the practice bank · 4
What does a put option allow its buyer to do under the contract terms?
A put gives its buyer the right to sell the underlying at the strike price under the contract terms. Exercising the right is different from being obliged to sell. Remember: A put provides its buyer with a selling right.
Hint Common mistake: Assuming every derivative buyer must take delivery of the underlying. Recall which transaction a put holder can choose to make.
XII-139From the practice bank · 5
An investor owns shares and wants to offset some losses from a market fall. Which futures direction can provide a basic hedge?
A short futures exposure can offset part of the loss on a falling share portfolio when the hedge is appropriately matched. The hedge can still leave basis or sizing risk. Remember: A hedge takes an offsetting exposure rather than simply adding more of the same risk.
Hint Common mistake: Assuming that any derivative trade automatically reduces portfolio risk. Look for a position that may gain when the existing exposure loses.
XII-140From the practice bank · 6
A trader with no existing exposure buys futures solely because a price rise is expected. What is the main purpose of this trade?
The trade is speculation because it takes a new directional exposure in expectation of a price rise. No existing risk is being hedged in the stated case. Remember: The purpose of a derivative trade depends on the exposure it creates or offsets.
Hint Common mistake: Calling all derivatives activity hedging regardless of its purpose. Ask whether the position offsets an existing risk or creates a new directional risk.
XII-141From the practice bank · 7
A long futures position covers 75 hypothetical units. The daily settlement price rises from ₹100 to ₹102. What is the daily mark-to-market result?
The daily mark-to-market result is a ₹150 gain. Price change = ₹102 − ₹100 = ₹2. Gain = 75 × ₹2 = ₹150. Remember: A long futures position gains from an upward settlement-price change.
Hint Common mistake: Confusing the contract’s full value with its daily gain or loss. Use the settlement-price change and the position’s direction.
XII-142From the practice bank · 8
A call has a strike of ₹500, underlying price of ₹540 and premium of ₹55. What is its intrinsic value per unit?
The call’s intrinsic value is ₹40 per unit. Intrinsic value = maximum of ₹540 − ₹500 and zero = ₹40. The remaining ₹15 of premium is above intrinsic value. Remember: Intrinsic value is different from the full .
Hint Common mistake: Using the premium as though it were the option’s immediate exercise value. Separate the total option price from the value of exercising its right.
XII-143From the practice bank · 9
A put has a strike price of ₹800 while the underlying trades at ₹760. How is the option classified by moneyness?
The put is in the money because its strike exceeds the underlying price. Its selling right has positive intrinsic value, though profitability also depends on the premium. Remember: Put depends on the strike relative to the underlying price.
Hint Common mistake: Using the call-option moneyness rule for a put. Compare the put’s selling right with the current underlying price.
XII-144From the practice bank · 10
Open interest is 200 contracts. A new buyer and new seller create five additional contracts. With no other activity, what is open interest?
becomes 205 contracts. New outstanding contracts = 5. Total = 200 + 5 = 205, not 210. Remember: Open interest counts outstanding contracts, with each contract counted once.
Hint Common mistake: Adding the long side and short side separately to open interest. Recall how an outstanding contract is counted when both counterparties open positions.
XII-145From the practice bank · 11
For the same option universe, put open interest is 900 contracts and call open interest is 600. What is the open-interest put-call ratio?
The open-interest put-call ratio is 1.5. Ratio = 900 put contracts ÷ 600 call contracts = 1.5. This statistic alone does not guarantee a market direction. Remember: A put-call ratio must specify a consistent universe and whether it uses volume or open interest.
Hint Common mistake: Mixing put volume with call open interest or reversing the ratio. Use comparable put and call measures from the same group of contracts.
XII-146From the practice bank · 12
Why can losses on a futures position exceed the initial margin deposited?
secures a larger futures exposure and does not cap losses. Adverse price changes can create further payment obligations. Remember: Futures margin is not a maximum-loss amount.
Hint Common mistake: Treating futures margin like the premium paid for a standalone option purchase. Distinguish the amount posted as security from the size of the contract exposure.
XII-147From the practice bank · 13
A cash-settled put covers 40 hypothetical units at a ₹600 strike. Premium is ₹20 per unit and expiry value is ₹550. Ignoring costs, what is the buyer’s net result?
The buyer’s net result is a ₹1,200 profit. Payoff per unit = maximum of ₹600 − ₹550 and zero = ₹50. Net profit per unit = ₹50 − ₹20 = ₹30. Total profit = 40 × ₹30 = ₹1,200. Remember: An option buyer’s net result includes both the expiry payoff and premium paid.
Hint Common mistake: Confusing an in-the-money payoff with profit after the premium. Find the expiry payoff, deduct the premium, then use the contract quantity.
XII-148From the practice bank · 14
An investor holds 100 units bought at ₹500 and shorts futures for 100 units at ₹502. Later spot is ₹470 and futures ₹474. Ignoring costs and income, what is the combined result?
The combined result is a ₹200 loss. Spot result = 100 × (₹470 − ₹500) = −₹3,000. Short futures result = 100 × (₹502 − ₹474) = ₹2,800. Combined result = −₹3,000 + ₹2,800 = −₹200. Remember: An offsetting futures hedge can leave a residual result when spot and futures move differently.
Hint Common mistake: Assuming equal quantities guarantee an exact offset despite a changing price difference. Calculate the long spot position and short futures position separately before combining them.
XII-149From the practice bank · 15
A one-year swap on ₹20 lakh pays fixed 7% and receives floating 8.5% for that year. Assume net settlement and no other payment. What is the net cash flow?
The net cash flow is ₹30,000 received. Floating receipt = ₹20,00,000 × 8.5% = ₹1,70,000. Fixed payment = ₹20,00,000 × 7% = ₹1,40,000. Net receipt = ₹1,70,000 − ₹1,40,000 = ₹30,000. Remember: A net-settled interest-rate swap pays the difference between the two agreed interest legs.
Hint Common mistake: Treating the swap’s notional principal as an additional cash payment. Calculate the two interest legs on the same notional amount and compare their directions.
XII-150The strike price is the level at which an option can be exercised.
Read moreMoneyness describes where an option's strike sits relative to the current level of the underlying.
Read moreOpen Interest (OI) is the number of futures or options contracts in the NSE F&O segment that are still open.
Read moreMargin is the money a participant must keep in place to carry a leveraged position.
Read more