Unit study guide · NISM Series IV

Exchange Traded Interest Rate Futures

20 questions in this unit

What this unit covers

Under the posted NSE G-Sec futures specification, one contract represents 2,000 units of ₹100 face value. At a quoted bond price of ₹103.25 per ₹100 face, what is the contract value?
A futures contract has a tick size of ₹0.0025 per quoted unit and a multiplier of 2,000. A trader holds 12 contracts. What is the position’s rupee change for a one-tick favourable move?
A futures order price must lie on a ₹0.0025 tick grid. Starting from a valid price of ₹100.0000, which proposed price is also on that grid?
A trader enters a long futures contract rather than buying a call option. Which statement correctly distinguishes the futures position?
A trader is long seven contracts of a particular G-Sec futures expiry. Which trade closes that position without creating a different maturity exposure?
An investor holds a cash-settled G-Sec futures position until expiry. What does expiry normally involve under that stated settlement type?
A trader buys five bond futures at 101.20 and closes all five at 101.65. With a multiplier of 2,000 and no costs, what is the total profit?
A trader shorts ten futures at 99.80. The multiplier is 2,000 and total round-trip charges are ₹1,000. At what buyback price does the trade break even after those charges?
A new buyer and a new seller open one futures contract with each other. How do that trade’s volume and market open interest change?
Define basis as spot price minus futures price. Spot is 100.40 and futures is 100.65. What is the basis?
For a cash-settled futures contract, why does the terminal settlement value align with its specified underlying reference rather than an unrelated bond quote?
A zero-coupon security costs ₹98. No payment occurs before a three-month forward date. Assume simple financing at 8% per annum, a quarter-year period and no costs. What is its theoretical forward price?
A bond has dirty spot price ₹102. A coupon payable before a six-month forward date has present value ₹2. Use a six-month growth factor of 1.03 and assume no other cash flows or costs. What is the theoretical dirty forward price?
A bond’s theoretical dirty forward value is ₹104.20 per ₹100 face. Accrued interest at delivery will be ₹1.60. If the forward is quoted on a clean-price basis, what is its theoretical quote?
A bond’s spot price and expected pre-expiry coupon receipts remain unchanged. In a simple cost-of-carry model, what happens to its theoretical futures price when the funding cost rises?
Two hedges have similar terminal economic exposure: exchange-traded futures with daily variation settlement and a bilateral FRA settling under its agreed terms. Why might the futures hedge need more interim cash planning?
A hypothetical futures position has market exposure ₹2,00,000 and initial margin ₹8,000. A price move creates a ₹4,000 loss. What percentage of the initially posted margin does the loss represent?
For a 91-day T-bill futures settlement, use the NSE Clearing convention P = 100 − 0.25Y, where Y is the annualised yield expressed in percentage points. If Y is 6.40, what is P?
A portfolio holds long-duration fixed-coupon government bonds. A trader selects an overnight-rate futures contract solely because both products are labelled “interest-rate derivatives.” What is the main problem?
A model gives a bond forward price of 103 based on spot value, funding and interim coupons. Which conclusion is justified by that calculation alone?

Key ideas

From the practice bank · 1

Under the posted NSE G-Sec futures specification, one contract represents 2,000 units of ₹100 face value. At a quoted bond price of ₹103.25 per ₹100 face, what is the contract value?

Contract value = ₹103.25 × 2,000 = ₹2,06,500. The face amount remains ₹2,00,000 because each of the 2,000 units has ₹100 face value. Contract value is neither nor the cash premium for an option. It scales the futures exposure. Remember: Keep face value, quoted price, contract value and margin separate.

Hint Common mistake: Using ₹2 lakh face value as the market value at every price.

IV-041

From the practice bank · 2

A futures contract has a tick size of ₹0.0025 per quoted unit and a multiplier of 2,000. A trader holds 12 contracts. What is the position’s rupee change for a one-tick favourable move?

Tick value per contract = 0.0025 × 2,000 = ₹5. For 12 contracts, a single favourable tick changes value by ₹5 × 12 = ₹60 before costs. Small quoted ticks can still create material P/L when many contracts are held. Remember: Rupee tick exposure equals price tick × multiplier × contracts.

Hint Common mistake: Confusing the displayed price increment with the cash value of the move.

IV-042

From the practice bank · 3

A futures order price must lie on a ₹0.0025 tick grid. Starting from a valid price of ₹100.0000, which proposed price is also on that grid?

A valid order increment is an integer multiple of tick size. The difference 100.0075 − 100.0000 = 0.0075 equals 3 × 0.0025. Tick-size validation is separate from price bands and other risk checks, so a grid-valid price is not by itself a guarantee of order acceptance. Remember: Check price discretisation independently of direction and order size.

Hint Common mistake: Assuming any number with four decimal places meets the tick rule.

IV-043

From the practice bank · 4

A trader enters a long futures contract rather than buying a call option. Which statement correctly distinguishes the futures position?

A long futures position benefits from a rise in the quoted underlying price and loses when it falls. Initial margin supports performance. It does not purchase a right to walk away. This bilateral obligation is the key distinction from the option buyer’s asymmetric contractual right. Remember: Margin does not turn a futures obligation into a limited-loss option.

Hint Common mistake: Using the phrase “exercise the futures” as though the holder could refuse a loss.

IV-044

From the practice bank · 5

A trader is long seven contracts of a particular G-Sec futures expiry. Which trade closes that position without creating a different maturity exposure?

Futures are fungible within a specified contract: underlying, and other terms must match. Selling the same number of identical contracts offsets the open long. A superficially similar bond or later expiry can be a hedge or spread, but it is not the same as eliminating the original position. Remember: Offsetting requires contract identity, not just similar interest-rate exposure.

Hint Common mistake: Mistaking a hedge in another contract for a closed original position.

IV-045

From the practice bank · 6

An investor holds a cash-settled G-Sec futures position until expiry. What does expiry normally involve under that stated settlement type?

Cash-settled futures reference an underlying security for valuation but do not confer ownership of that security. Expiry closes the remaining contractual price difference through final settlement under the exchange methodology. Direct coupon entitlement belongs to bond ownership, not simply to a long cash-settled futures position. Remember: Referencing an asset is different from owning or receiving it.

Hint Common mistake: Counting future bond coupons as income on a cash-settled futures position.

IV-046

From the practice bank · 7

A trader buys five bond futures at 101.20 and closes all five at 101.65. With a multiplier of 2,000 and no costs, what is the total profit?

The long earns the exit-minus-entry price difference. The 0.45-point gain is worth ₹900 per contract and ₹4,500 over five contracts. Daily variation payments may divide this profit across days, but their sum equals the entry-to-exit difference before financing effects and costs. Remember: Total futures P/L uses direction, price movement, multiplier and quantity.

Hint Common mistake: Adding daily variation gains again to an already calculated lifetime gain.

IV-047

From the practice bank · 8

A trader shorts ten futures at 99.80. The multiplier is 2,000 and total round-trip charges are ₹1,000. At what buyback price does the trade break even after those charges?

For a short, gross profit = (sale price − buyback price) × multiplier × contracts. The required favourable move is 1,000/(2,000 × 10) = 0.05. Therefore the buyback price is 99.80 − 0.05 = 99.75. Costs are provided as a hypothetical total rather than asserted as current statutory rates. Remember: Round-trip costs move a short trade’s break-even below its sale price.

Hint Common mistake: Treating the entry price as net break-even when trading charges are non-zero.

IV-048

From the practice bank · 9

A new buyer and a new seller open one futures contract with each other. How do that trade’s volume and market open interest change?

counts contracts traded during the period, while counts outstanding matched contracts. Both sides opening increases open interest by one. There are a long and a short but only one outstanding contract. Two parties closing would reduce open interest, and one opening against one closing would leave it unchanged. Remember: Do not double-count the long and short sides of the same outstanding contract.

Hint Common mistake: Treating every trade as necessarily increasing open interest.

IV-049

From the practice bank · 10

Define basis as spot price minus futures price. Spot is 100.40 and futures is 100.65. What is the basis?

Basis terminology is only useful when its sign and units are explicit. Here basis = S − F = −0.25 price point. Some discussions use the opposite convention. The economic relationship is unchanged, but signs in hedge calculations must follow the declared definition consistently. Remember: Write the basis definition before computing or interpreting a basis change.

Hint Common mistake: Assuming all sources use the same basis sign convention.

IV-050

From the practice bank · 11

For a cash-settled futures contract, why does the terminal settlement value align with its specified underlying reference rather than an unrelated bond quote?

Convergence means the expiring contract settles against the specified underlying reference. For cash settlement that reference may be an exchange-defined average or other prescribed calculation, not necessarily the last screen quote at one instant. A cross-hedged portfolio can still have residual basis risk relative to that reference. Remember: The final settlement reference is contract-specific.

Hint Common mistake: Assuming every correlated bond must converge to the same price.

IV-051

From the practice bank · 12

A zero-coupon security costs ₹98. No payment occurs before a three-month forward date. Assume simple financing at 8% per annum, a quarter-year period and no costs. What is its theoretical forward price?

Under these frictionless assumptions, buying and carrying the security costs its spot outlay plus financing through the forward date. F = 98 × (1 + 0.08 × 0.25) = ₹99.96. This calculation uses explicitly simple financing. Replacing it with another compounding convention changes the result. Remember: No-arbitrage carry pricing begins with the actual funded spot outlay.

Hint Common mistake: Using maturity yield as the financing rate when a separate funding rate is given.

IV-052

From the practice bank · 13

A bond has dirty spot price ₹102. A coupon payable before a six-month forward date has present value ₹2. Use a six-month growth factor of 1.03 and assume no other cash flows or costs. What is the theoretical dirty forward price?

A cash-and-carry owner receives the interim coupon, while the forward buyer does not own the bond during that earlier period. The financed value net of that coupon is (dirty spot − PV of income) × growth factor. Here (102 − 2) × 1.03 = ₹103. Using present value keeps cash flows at a consistent valuation date. Remember: Interim income reduces the amount that must be financed to replicate a forward.

Hint Common mistake: Subtracting an undiscounted interim coupon from a terminal value without a timing convention.

IV-053

From the practice bank · 14

A bond’s theoretical dirty forward value is ₹104.20 per ₹100 face. Accrued interest at delivery will be ₹1.60. If the forward is quoted on a clean-price basis, what is its theoretical quote?

Dirty and clean prices must refer to the same date. At delivery, dirty value = clean quote + delivery-date accrued interest. Thus the clean forward quote is 104.20 − 1.60 = ₹102.60. Subtracting today’s accrued interest instead would generally be wrong because the coupon clock changes before delivery. Remember: Use delivery-date accrued interest when converting a forward dirty value to a clean quote.

Hint Common mistake: Using spot accrued interest for the forward-date conversion.

IV-054

From the practice bank · 15

A bond’s spot price and expected pre-expiry coupon receipts remain unchanged. In a simple cost-of-carry model, what happens to its theoretical futures price when the funding cost rises?

The simplified relation is future value = spot cash outlay + financing cost − income benefit. If spot and coupon receipts are fixed, greater financing cost increases fair futures value. This conditional result must not be confused with the usual fall in bond spot price when its required yield rises. Remember: Separate a bond’s discount yield from the funding input in its carry model.

Hint Common mistake: Changing every interest-rate-related input when the question changes only one.

IV-055

From the practice bank · 16

Two hedges have similar terminal economic exposure: exchange-traded futures with daily variation settlement and a bilateral FRA settling under its agreed terms. Why might the futures hedge need more interim cash planning?

Daily marked-to-market futures can create short-term cash outflows during an otherwise effective hedge. The underlying bond or future borrowing benefit may not produce matching cash on the same day. FRA and futures comparisons should therefore include timing and counterparty arrangements, not just the final price exposure. Remember: An economically hedged position can still face a funding squeeze.

Hint Common mistake: Equating terminal risk offset with identical interim cash flows.

IV-056

From the practice bank · 17

A hypothetical futures position has market exposure ₹2,00,000 and initial margin ₹8,000. A price move creates a ₹4,000 loss. What percentage of the initially posted margin does the loss represent?

The loss is 4,000/8,000 = 50% of the initial margin although it is only 2% of the stated exposure. This illustrates collateral leverage. Margin is not a cap on loss: further adverse moves may create additional funding needs or losses beyond the original amount posted. Remember: Always state whether a return or loss percentage is measured on exposure or collateral.

Hint Common mistake: Assuming a small price movement implies a small loss relative to margin.

IV-057

From the practice bank · 18

For a 91-day T-bill futures settlement, use the NSE Clearing convention P = 100 − 0.25Y, where Y is the annualised yield expressed in percentage points. If Y is 6.40, what is P?

The supplied convention requires a percentage-point yield input: 100 − 0.25 × 6.40 = 98.40. Do not import the 100-minus-rate convention of another money-market product without checking its scaling. An increase in yield lowers this quote under the stated formula. Remember: Short-rate futures quotations are product-specific.

Hint Common mistake: Applying a familiar foreign futures quotation to a different Indian contract.

IV-058

From the practice bank · 19

A portfolio holds long-duration fixed-coupon government bonds. A trader selects an overnight-rate futures contract solely because both products are labelled “interest-rate derivatives.” What is the main problem?

Government bond prices embed a term structure of discount rates over many future cash-flow dates. An overnight-rate future focuses on a different segment of the curve. A useful hedge needs evidence of sensitivity alignment and correlation, including contract PVBP, rather than selection by product name alone. Remember: Identify the risk factor and maturity bucket before selecting a hedge contract.

Hint Common mistake: Assuming all interest-rate futures are interchangeable hedging instruments.

IV-059

From the practice bank · 20

A model gives a bond forward price of 103 based on spot value, funding and interim coupons. Which conclusion is justified by that calculation alone?

Cost-of-carry links spot and forward prices through a replication strategy under stated funding, income and trading assumptions. It does not remove uncertainty about the future bond market. Actual executable bid–ask spreads, funding constraints and contract settlement rules must also be considered before calling a price difference arbitrage. Remember: Keep pricing identities separate from predictive claims.

Hint Common mistake: Selling a fair-value calculation as a guaranteed trading outcome.

IV-060

Margin

Margin is the money a participant must keep in place to carry a leveraged position.

Expiry Day

Expiry day is the last day on which a derivative contract can be traded.

Breakeven

Breakeven is the point at which a defined result is exactly zero.

Traded Volume

Traded volume is the quantity that changed hands during a set period.

Open Interest

Open Interest (OI) is the number of futures or options contracts in the NSE F&O segment that are still open.

Liquidity

Liquidity describes how easily a given quantity can be traded.