Unit study guide · NISM Series XIII
Introduction to Forwards and Futures
20 questions in this unit
What this unit covers
- Which description best explains a forward contract agreed between two counterparties today?
- Which feature is commonly associated with exchange-traded futures?
- A trader holding a long futures contract benefits directly when the futures settlement price does what?
- Which price movement creates a gain for a short futures position, ignoring costs?
- What normally happens to the gap between spot and futures prices as a contract approaches expiry?
- In a futures contract, what does contract size specify?
- A trader buys one futures contract at ₹110 and exits at ₹118. The contract covers 100 units. What is the gross profit?
- A short futures position of 50 units is entered at ₹210 and closed at ₹204. What is the gross profit?
- Which important risk is generally greater in a bilateral forward than a centrally cleared futures contract?
- A non-dividend-paying asset trades at ₹1,000. With simple annual financing at 8%, what is its six-month theoretical futures price?
- A currency futures contract represents USD 1,000. Its quoted price rises by ₹0.40 per dollar. What is the long position's gain?
- What is the main purpose of marking a futures position to market each day?
- What does the basis of an equity futures contract most commonly compare?
- A futures contract has a tick size of 0.01 and a quantity of 2,000 units. What is one tick worth?
- In deliverable interest-rate futures, what is the purpose of a conversion factor?
- Under covered interest rate parity, what mainly links a currency forward rate to the spot rate?
- A deliverable bond has a conversion factor of 0.92. The futures price is 110 and accrued interest is 1.5 per ₹100 face. What invoice amount applies per ₹100 face?
- USD/INR spot is 84. Domestic one-year interest is 6% and dollar interest is 2%. What is the theoretical one-year forward rate?
- A share trades at ₹500 with simple annual funding cost of 10%. A known ₹10 cash dividend is paid at expiry in six months. What theoretical futures price follows?
- Two government bonds are eligible for delivery into the same futures contract. One delivers at lower net economic cost. Which bond is cheapest to deliver?
Key ideas
From the practice bank · 1
Which description best explains a forward contract agreed between two counterparties today?
A forward fixes the terms of a future transaction through an agreement between counterparties. Remember: Forwards specify a transaction for a later date.
Hint Common mistake: Do not mistake a future-dated contract for debt ownership. Think about fixing transaction terms in advance.
XIII-031From the practice bank · 2
Which feature is commonly associated with exchange-traded futures?
Futures are commonly marked to market so gains and losses are settled through the clearing process. Remember: Futures normally involve daily settlement of value changes.
Hint Common mistake: Do not assume a futures buyer pays the full underlying value. Consider how clearing manages changes in value.
XIII-032From the practice bank · 3
A trader holding a long futures contract benefits directly when the futures settlement price does what?
A long futures position gains when the futures price rises relative to its entry price. Remember: Long futures positions have positive price exposure.
Hint Common mistake: Do not reverse long and short payoff directions. Recall the payoff direction of a long position.
XIII-033From the practice bank · 4
Which price movement creates a gain for a short futures position, ignoring costs?
A short futures position gains when it can be closed at a lower futures price. Remember: Short futures gain from declining contract prices.
Hint Common mistake: A short future is different from a long future. Compare the sale price with the later closing price.
XIII-034From the practice bank · 5
What normally happens to the gap between spot and futures prices as a contract approaches expiry?
Under consistent settlement terms, futures and underlying spot prices normally converge toward . Remember: Expiry generally drives spot-futures convergence.
Hint Common mistake: Do not expect a large persistent arbitrage gap at final settlement. Think about delivery or final settlement at expiry.
XIII-035From the practice bank · 6
In a futures contract, what does contract size specify?
specifies the underlying quantity or notional exposure defined by the contract specification. Remember: Contract size scales both profit and loss.
Hint Common mistake: Do not confuse notional exposure with the . Identify what one contract represents.
XIII-036From the practice bank · 7
A trader buys one futures contract at ₹110 and exits at ₹118. The contract covers 100 units. What is the gross profit?
Gross profit = (₹118 − ₹110) × 100 = ₹800. Remember: Multiply the price difference by contract quantity.
Hint Common mistake: Do not confuse contract turnover with profit. Calculate movement per unit and scale it by quantity.
XIII-037From the practice bank · 8
A short futures position of 50 units is entered at ₹210 and closed at ₹204. What is the gross profit?
Gross profit = (₹210 − ₹204) × 50 = ₹300. Remember: Short futures profit from lower closing prices.
Hint Common mistake: Do not use the long-position payoff formula for shorts. For a short position, compare entry sale price with exit purchase price.
XIII-038From the practice bank · 9
Which important risk is generally greater in a bilateral forward than a centrally cleared futures contract?
A bilateral forward has direct counterparty credit exposure, while central clearing helps manage that risk in futures. Remember: Clearing reduces, rather than removes, counterparty exposure.
Hint Common mistake: Do not equate standardization with absence of risk. Compare who is responsible for performance.
XIII-039From the practice bank · 10
A non-dividend-paying asset trades at ₹1,000. With simple annual financing at 8%, what is its six-month theoretical futures price?
Simple cost-of-carry price = ₹1,000 × (1 + 0.08 × 0.5) = ₹1,040. Remember: Futures pricing includes the cost of carrying an asset.
Hint Common mistake: Use the correct time fraction in a carry calculation. Account for financing over only half a year.
XIII-040From the practice bank · 11
A currency futures contract represents USD 1,000. Its quoted price rises by ₹0.40 per dollar. What is the long position's gain?
Gain in rupees = 1,000 × ₹0.40 = ₹400. Remember: Currency futures payoff uses the contract's quotation units.
Hint Common mistake: Check whether profit is expressed in rupees or dollars. Scale the rupee movement by the dollar quantity.
XIII-041From the practice bank · 12
What is the main purpose of marking a futures position to market each day?
Mark-to-market settlement credits and debits positions for changes in their futures value. Remember: Daily settlement recognizes gains and losses.
Hint Common mistake: Do not confuse daily settlement with contract expiry. Think about daily gains and losses.
XIII-042From the practice bank · 13
What does the basis of an equity futures contract most commonly compare?
Basis is a defined difference between the spot and futures price, with the sign depending on the convention used. Remember: Basis captures the spot-futures relationship.
Hint Common mistake: State the basis sign convention before calculating it. Think about cash-versus-futures price difference.
XIII-043From the practice bank · 14
A futures contract has a tick size of 0.01 and a quantity of 2,000 units. What is one tick worth?
One tick value = 0.01 × 2,000 = ₹20, assuming rupee quotation per unit. Remember: Tick value depends on price increment and contract quantity.
Hint Common mistake: A small tick size can represent a sizable contract change. Multiply minimum quoted change by contract quantity.
XIII-044From the practice bank · 15
In deliverable interest-rate futures, what is the purpose of a conversion factor?
A conversion factor adjusts eligible bonds for differences in their characteristics when calculating delivery terms. Remember: Conversion factors assist delivery comparison.
Hint Common mistake: Do not confuse the factor with a guaranteed bond price. Consider why eligible bonds need comparability.
XIII-045From the practice bank · 16
Under covered interest rate parity, what mainly links a currency forward rate to the spot rate?
Covered interest rate parity relates spot and forward rates through the two currencies' financing rates. Remember: Interest-rate differences influence theoretical forward rates.
Hint Common mistake: Use the correct domestic and foreign rate convention. Think about borrowing and lending in both currencies.
XIII-046From the practice bank · 17
A deliverable bond has a conversion factor of 0.92. The futures price is 110 and accrued interest is 1.5 per ₹100 face. What invoice amount applies per ₹100 face?
Invoice amount = 110 × 0.92 + 1.5 = 102.70 per ₹100 face. Remember: Delivery invoice uses converted futures price plus accrued interest.
Hint Common mistake: Do not add accrued interest before applying the conversion factor. Apply the bond's factor before including accrued interest.
XIII-047From the practice bank · 18
USD/INR spot is 84. Domestic one-year interest is 6% and dollar interest is 2%. What is the theoretical one-year forward rate?
Forward = 84 × (1.06 ÷ 1.02) = approximately ₹87.29 per USD. Remember: Forward points reflect relative currency financing.
Hint Common mistake: Do not interchange domestic and foreign interest rates. Match the domestic and foreign financing rates to the exchange quote.
XIII-048From the practice bank · 19
A share trades at ₹500 with simple annual funding cost of 10%. A known ₹10 cash dividend is paid at expiry in six months. What theoretical futures price follows?
Theoretical price = ₹500 × (1 + 0.10 × 0.5) − ₹10 = ₹515, assuming the dividend is paid exactly at expiry. Remember: Known payouts reduce futures fair value.
Hint Common mistake: Dividend timing matters in a full cost-of-carry model. Include both financing cost and a known cash distribution.
XIII-049From the practice bank · 20
Two government bonds are eligible for delivery into the same futures contract. One delivers at lower net economic cost. Which bond is cheapest to deliver?
The cheapest-to-deliver bond minimizes the economic cost of satisfying the delivery obligation after relevant adjustments. Remember: Delivery choice depends on adjusted economics.
Hint Common mistake: Do not rank eligible bonds using coupon rate alone. Compare market acquisition cost with adjusted invoice proceeds.
XIII-050Expiry day is the last day on which a derivative contract can be traded.
Read moreLot size is the number of units of the underlying that one derivatives contract stands for.
Read moreMargin is the money a participant must keep in place to carry a leveraged position.
Read more