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Unit study guide · NISM Series XIII

Strategies Using Futures

24 questions in this unit

What this unit covers

Key ideas

From the practice bank · 1

An investor owns a diversified equity portfolio and fears a short-term market fall. Which futures direction is a basic hedge?

Selling suitable index futures can offset some losses when the underlying portfolio falls. Remember: A long equity portfolio can be hedged with short index futures.

Hint Common mistake: Choose hedge direction opposite to the exposure. Consider which position gains when markets fall.

XIII-051

From the practice bank · 2

An Indian exporter will receive dollars in two months and fears rupee appreciation. Which currency futures position is a basic hedge?

Selling USD/INR futures can help offset a decline in the rupee value of future dollar receipts. Remember: Dollar receivables are naturally exposed to a weaker dollar.

Hint Common mistake: Remember whether the business receives or pays dollars. Think about the exporter receiving dollars later.

XIII-052

From the practice bank · 3

An Indian importer must buy dollars in two months and fears rupee depreciation. Which futures position directly hedges that risk?

Buying USD/INR futures can offset a higher rupee cost of acquiring dollars later. Remember: Dollar payables can be hedged with long dollar exposure.

Hint Common mistake: Importers and exporters generally need opposite currency hedge directions. Identify what becomes more expensive for the importer.

XIII-053

From the practice bank · 4

Which statement best describes the goal of speculation using futures contracts?

Speculation accepts directional market risk in pursuit of profit from price changes. Remember: Speculation deliberately assumes price risk.

Hint Common mistake: A directional trade is not necessarily a hedge. Focus on the motive behind the position.

XIII-054

From the practice bank · 5

What is cash-and-carry arbitrage generally designed to exploit?

Cash-and-carry can exploit overpriced futures by buying spot exposure and selling futures where feasible. Remember: Cash-and-carry compares futures price with spot plus carry.

Hint Common mistake: Arbitrage profitability requires accounting for costs and execution. Compare observed futures price with fair carrying cost.

XIII-055

From the practice bank · 6

A bond investor fears rising yields will lower bond prices. Which interest-rate futures direction is a typical price hedge?

Shorting suitable bond-price futures can offset losses on bond holdings when yields rise. Remember: Hedge a long bond position with opposite price exposure.

Hint Common mistake: Do not confuse hedging rising yields with betting on falling yields. Think about bond prices when yields rise.

XIII-056

From the practice bank · 7

Which position is a long currency futures position?

A long currency futures position gains from an increase in the quoted currency futures rate. Remember: Long currency futures benefit from a higher quoted rate.

Hint Common mistake: Do not assume long means holding cash foreign currency today. Distinguish buying a futures contract from selling it.

XIII-057

From the practice bank · 8

An equity portfolio is worth ₹50 lakh. One index futures contract has ₹10 lakh notional exposure. With beta 1, how many short contracts approximately hedge it?

Contracts = ₹50 lakh ÷ ₹10 lakh = 5 short futures contracts. Remember: Hedge quantity follows exposure and contract value.

Hint Common mistake: Do not ignore contract notional size. Match total market exposure to contract notional.

XIII-058

From the practice bank · 9

A portfolio worth ₹40 lakh has beta 1.5. Each index future represents ₹10 lakh. How many short contracts approximate a beta hedge?

Required notional = ₹40 lakh × 1.5 = ₹60 lakh. Contracts = 60 ÷ 10 = 6 short contracts. Remember: Use beta-adjusted exposure for an index hedge.

Hint Common mistake: An index hedge of a high-beta portfolio needs more notional. First adjust portfolio exposure by its beta.

XIII-059

From the practice bank · 10

An exporter sells USD 10,000 in futures at ₹84 per dollar and closes at ₹82. What is the futures gain?

Gain = (84 − 82) × 10,000 = ₹20,000. Remember: Short dollar futures gain when USD/INR declines.

Hint Common mistake: Keep dollar contract quantity separate from the quoted rate. For a short position, subtract the closing price from the entry price.

XIII-060

From the practice bank · 11

An importer buys USD 5,000 futures at ₹83 and exits at ₹85. What is the futures gain, ignoring costs?

Long futures gain = (₹85 − ₹83) × USD 5,000 = ₹10,000. Remember: Long currency futures gain when their quote rises.

Hint Common mistake: Do not confuse gross notional with gain. Consider the difference between entry and exit dollar rates.

XIII-061

From the practice bank · 12

When futures are overpriced versus the cost-of-carry value, what is the conventional cash-and-carry position?

Buying spot and selling overpriced futures seeks to lock the positive mispricing after costs. Remember: Cash-and-carry normally sells rich futures against spot holdings.

Hint Common mistake: Position direction determines whether the spread is captured. Construct opposite positions around the price discrepancy.

XIII-062

From the practice bank · 13

When futures are unusually cheap relative to fair value, which paired trade is called reverse cash-and-carry?

Reverse cash-and-carry generally shorts or sells spot exposure and purchases underpriced futures where feasible. Remember: Reverse carry buys relatively cheap futures.

Hint Common mistake: Short-sale constraints can prevent a theoretical arbitrage. Reverse the usual cash-and-carry positions.

XIII-063

From the practice bank · 14

Why can a currency hedge using futures still produce an imperfect offset?

Changes in basis, tenor or hedge size can leave currency exposure partly unhedged. Remember: Hedging effectiveness depends on price co-movement and size.

Hint Common mistake: A hedge is risk reduction, not guaranteed profit. Consider the difference between hedge and actual exposure.

XIII-064

From the practice bank · 15

A trader buys a near-month currency future at ₹84 and sells a far-month future at ₹85. Near rises to ₹85 and far to ₹85.40. What is the gain per dollar?

Near long gains ₹1.00. Far short loses ₹0.40. Net gain = ₹0.60 per dollar. Remember: A calendar spread depends on changes in the relationship between expiries.

Hint Common mistake: Do not ignore the second leg of a spread. Calculate both legs of the calendar spread.

XIII-065

From the practice bank · 16

A fund holds large-cap shares and hedges with index futures. One stock has a major company-specific fall while the index is flat. Which exposure is least protected?

An index futures hedge mainly offsets broad index movement and may not cover company-specific price shocks. Remember: Index hedges are weaker against idiosyncratic stock moves.

Hint Common mistake: Treating diversified market exposure and single-stock exposure as the same risk. Check whether the hedge tracks the individual stock.

XIII-066

From the practice bank · 17

A debt portfolio has ₹20 lakh interest-rate exposure. A suitable futures contract represents ₹5 lakh of comparable exposure. How many short contracts match the notional?

Required short contracts = ₹20 lakh ÷ ₹5 lakh = 4. Remember: Notional hedging starts with exposure divided by contract value.

Hint Common mistake: Duration differences can require further adjustment. Assume the instrument sensitivities are otherwise comparable.

XIII-067

From the practice bank · 18

What risk arises when a bond portfolio and its interest-rate futures hedge respond differently to curve movements?

Yield-curve spread risk can arise when yields at the portfolio's and futures' maturities do not move together. Remember: Yield moves at different maturities can diverge.

Hint Common mistake: Parallel-shift hedges do not cover every curve twist. Think about shifts at different maturities.

XIII-068

From the practice bank · 19

An exporter hedges a dollar receivable with short futures. The rupee weakens unexpectedly before payment. What is the likely hedge trade-off?

A weaker rupee increases rupees obtained for the exporter's dollars, while the short USD/INR futures hedge tends to lose. Remember: A useful hedge can lose when the underlying exposure benefits.

Hint Common mistake: Judge the combined exposure, not the hedge leg alone. Offset cash-flow improvement against derivative movement.

XIII-069

From the practice bank · 20

An equity portfolio is ₹72 lakh with beta 1.25. Each index futures contract is ₹15 lakh. How many short contracts give an approximate beta hedge?

Index-equivalent exposure = 72 × 1.25 = ₹90 lakh. Short contracts = 90 ÷ 15 = 6. Remember: Index futures hedge size depends on portfolio beta.

Hint Common mistake: Never round before accounting for beta. Calculate index-equivalent notional before contract count.

XIII-070

From the practice bank · 21

Spot asset costs ₹1,000, three-month fair futures value is ₹1,020, and traded futures price is ₹1,035. Ignoring fees, what is cash-and-carry arbitrage profit per unit?

Profit = observed futures ₹1,035 − fair carry value ₹1,020 = ₹15 per unit, assuming convergence and feasible trading. Remember: Mispricing profit is the difference from fair carry value.

Hint Common mistake: Do not compare futures only with unfinanced spot cost. Compare traded futures with total financed spot cost.

XIII-071

From the practice bank · 22

An importer owes USD 20,000 and buys USD/INR futures at ₹84. At payment, spot is ₹87 and the future closes at ₹86.80. Ignoring costs, what is net rupee payment after hedge gain?

Spot payment = 20,000 × 87 = ₹17,40,000. Futures gain = 20,000 × (86.80 − 84) = ₹56,000. Net = ₹16,84,000. Remember: A currency hedge can have residual basis difference.

Hint Common mistake: Hedged cost is not always exactly the original futures notional. Calculate the payment at spot, then subtract the futures gain.

XIII-072

From the practice bank · 23

A bond portfolio has modified duration 6 and value ₹30 lakh. Each futures contract has duration 5 and value ₹6 lakh. Approximately how many short futures hedge first-order duration risk?

Portfolio duration exposure = 30 × 6 = 180 lakh-years. Per future = 6 × 5 = 30 lakh-years. Contracts = 180 ÷ 30 = 6. Remember: Duration hedge ratio uses value and sensitivity.

Hint Common mistake: Two same-notional assets can have different rate sensitivities. Match rupee duration rather than only market value.

XIII-073

From the practice bank · 24

A trader buys 1,000 near-month dollar futures at ₹83 and sells 1,000 far-month futures at ₹84. At exit, prices are ₹83.60 and ₹84.20. What is the net rupee gain?

Near long = (83.60 − 83) × 1,000 = ₹600. Far short = (84 − 84.20) × 1,000 = −₹200. Net = ₹400. Remember: Calendar spreads depend on relative price movements.

Hint Common mistake: Never calculate only the profitable leg of a spread. Net the long and short leg changes.

XIII-074