Unit study guide · NISM Series XXI-A
Derivatives
7 questions in this unit
What this unit covers
- Which feature most clearly distinguishes a standard exchange-traded futures contract from a privately negotiated forward?
- Assume a permitted hedge of a ₹1.2 crore equity portfolio with beta 1 uses index futures. Each contract has exposure of ₹24 lakh. Ignoring basis risk, what position offsets the initial market exposure?
- A call option has strike price ₹500. The buyer pays a premium of ₹20 per share. At expiry the underlying is ₹560. What is the buyer’s net profit per share, ignoring costs?
- A share is bought for ₹1,000 together with a put of strike ₹1,000 costing ₹25. At expiry the share is ₹800. What is the combined net profit or loss per share, ignoring costs and financing?
- A long futures position was marked at 200 yesterday. Today’s settlement price is 196 and the position multiplier is 500. What is today’s mark-to-market amount?
- A borrower pays a floating reference rate plus a fixed spread on debt. A matching interest-rate swap is available. Which swap direction most directly converts the reference-rate exposure to fixed?
- What is the most accurate interpretation of initial margin on a futures position?
Key ideas
From the practice bank · 1
Which feature most clearly distinguishes a standard exchange-traded futures contract from a privately negotiated forward?
Forwards and futures both create obligations linked to an underlying, but their trading arrangements and standardisation differ. Identify whether terms are individually negotiated or specified for exchange trading. A standard futures contract has exchange-defined terms. This distinction does not make it an option or eliminate its risks. Remember: Contract standardisation is separate from the risk of taking a position.
Hint Common mistake: Confusing a futures obligation with an option buyer’s right.
XXI-A-042From the practice bank · 2
Assume a permitted hedge of a ₹1.2 crore equity portfolio with beta 1 uses index futures. Each contract has exposure of ₹24 lakh. Ignoring basis risk, what position offsets the initial market exposure?
A simple beta hedge sizes an opposite futures position to the portfolio’s market-equivalent exposure. Market-equivalent exposure = ₹120 lakh × beta 1 = ₹120 lakh. Required contracts = ₹120 lakh/₹24 lakh = 5. A short position offsets a long equity exposure in this simplified model. Remember: Hedge direction matters as much as the number of contracts.
Hint Common mistake: Calculating the quantity correctly but buying futures against an already long portfolio.
XXI-A-043From the practice bank · 3
A call option has strike price ₹500. The buyer pays a premium of ₹20 per share. At expiry the underlying is ₹560. What is the buyer’s net profit per share, ignoring costs?
An option’s terminal payoff and the buyer’s profit differ by the premium and any other relevant costs. Call payoff per share = max(₹560 − ₹500, 0) = ₹60. Net profit = ₹60 − ₹20 = ₹40 per share. No further premium payment is added at expiry. Remember: Deduct the premium when moving from option payoff to buyer profit.
Hint Common mistake: Reporting intrinsic value as net profit.
XXI-A-044From the practice bank · 4
A share is bought for ₹1,000 together with a put of strike ₹1,000 costing ₹25. At expiry the share is ₹800. What is the combined net profit or loss per share, ignoring costs and financing?
A protective put can limit downside from the combined position, but the still affects the net result. Share profit = ₹800 − ₹1,000 = −₹200. Put payoff = max(₹1,000 − ₹800, 0) = ₹200. Combined result = −₹200 + ₹200 − ₹25 = −₹25 per share. The protection is not free. Remember: Calculate all legs and the premium when evaluating a hedged position.
Hint Common mistake: Looking only at the profitable hedge leg.
XXI-A-045From the practice bank · 5
A long futures position was marked at 200 yesterday. Today’s settlement price is 196 and the position multiplier is 500. What is today’s mark-to-market amount?
Futures mark-to-market measures the value change since the relevant previous settlement, scaled by the position size. The settlement change is 196 − 200 = −4 points. Multiply by 500 to obtain −₹2,000. A negative amount is a debit for the long position. Remember: Use the settlement-price difference, not the full notional value.
Hint Common mistake: Forgetting the multiplier or reversing the long position’s sign.
XXI-A-046From the practice bank · 6
A borrower pays a floating reference rate plus a fixed spread on debt. A matching interest-rate swap is available. Which swap direction most directly converts the reference-rate exposure to fixed?
A swap can change the pattern of financing cash flows without changing the original loan contract. The debt payment is reference rate plus the contractual spread. Receiving that same reference rate through a matched swap offsets it. The remaining payment is the swap’s fixed rate plus the loan spread, subject to counterparty and other risks. Remember: Write the loan and swap cash flows together before deciding the hedge direction.
Hint Common mistake: Looking at the swap in isolation from the exposure being hedged.
XXI-A-047From the practice bank · 7
What is the most accurate interpretation of initial margin on a futures position?
Margin supports performance of a leveraged contract. It should not be confused with the price of the underlying or an option premium. Identify the exposure created by the futures contract separately from the collateral deposited. The contract can continue to lose value beyond that initial collateral, so the investor must consider total exposure and needs. Remember: Assess futures risk from the position exposure, not just the initial cash deposited.
Hint Common mistake: Treating margin as a prepaid maximum loss.
XXI-A-048Liquidity describes how easily a given quantity can be traded.
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