Unit study guide · NISM Series XXI-B
Derivatives in Portfolio Management
6 questions in this unit
What this unit covers
- What makes a financial contract a derivative rather than a direct holding of its underlying asset?
- Which statement correctly distinguishes an option buyer from an option writer?
- A put with strike ₹100 costs ₹7. At expiry the underlying is ₹85. What is the buyer’s profit per unit?
- A hypothetical 100-unit futures contract is sold at 24,500 and bought back at 24,300. What is the gross trading result?
- An exporter expects foreign-currency receipts and fears rupee appreciation. Which forward position directly hedges that currency exposure?
- Open interest is 400 contracts. Then 25 new contracts open and 10 existing contracts close. What is the resulting open interest?
Key ideas
From the practice bank · 1
What makes a financial contract a derivative rather than a direct holding of its underlying asset?
A derivative takes its value from an underlying reference such as an asset, index or rate. It is a contract rather than necessarily direct ownership of that underlying. Remember: Derivative value is linked to an underlying reference.
Hint Focus on where the contract’s economic value comes from. Common mistake: Assuming derivative ownership is the same as owning the underlying asset.
XXI-B-021From the practice bank · 2
Which statement correctly distinguishes an option buyer from an option writer?
The buyer purchases a right, while the writer accepts the corresponding contractual obligation. The premium compensates the writer for taking that obligation. Remember: Buying an option and writing an option create different rights and risks.
Hint Compare the benefit purchased with the commitment sold. Common mistake: Treating both sides of an option like identical futures obligations.
XXI-B-022From the practice bank · 3
A put with strike ₹100 costs ₹7. At expiry the underlying is ₹85. What is the buyer’s profit per unit?
The buyer earns ₹8 per unit because the ₹15 payoff exceeds the ₹7 premium. Put payoff = max(₹100 − ₹85, 0) = ₹15. Profit = ₹15 − ₹7 = ₹8, ignoring charges. Remember: Option payoff and option profit differ by the premium paid.
Hint Distinguish exercise value from the buyer’s net result. Common mistake: Reporting intrinsic value as profit without deducting the premium.
XXI-B-023From the practice bank · 4
A hypothetical 100-unit futures contract is sold at 24,500 and bought back at 24,300. What is the gross trading result?
The short futures position earns ₹20,000 because the buyback price is lower. Price gain = 24,500 − 24,300 = 200 points. Gross profit = 200 × 100 = ₹20,000. Remember: Futures profit depends on direction, price movement and the contract multiplier.
Hint Check the position’s direction before applying the stated multiplier. Common mistake: Using the long-position sign for a contract sold first.
XXI-B-024From the practice bank · 5
An exporter expects foreign-currency receipts and fears rupee appreciation. Which forward position directly hedges that currency exposure?
Selling the expected foreign currency forward offsets the exporter’s exposure to its future rupee value. The amount and maturity should correspond to the exposure being hedged. Remember: A hedge offsets an existing exposure rather than doubling it.
Hint Identify what the exporter will receive and which price movement reduces its rupee value. Common mistake: Buying the currency merely because it is the currency of the invoice.
XXI-B-025From the practice bank · 6
Open interest is 400 contracts. Then 25 new contracts open and 10 existing contracts close. What is the resulting open interest?
becomes 415 contracts because opening adds outstanding contracts and closing removes them. Working: 400 + 25 − 10 = 415. Each contract has two counterparties but is counted once. Remember: Open interest counts outstanding contracts, not trading volume or both sides separately.
Hint Count outstanding contracts once, not each counterparty separately. Common mistake: Doubling contract counts because every contract has a buyer and a seller.
XXI-B-026Open Interest (OI) is the number of futures or options contracts in the NSE F&O segment that are still open.
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