Unit study guide · NISM Series IV
Trading Mechanism in Exchange Traded Interest Rate Derivatives
10 questions in this unit
What this unit covers
- A client sends an order to buy interest-rate futures through a trading member. Which activity belongs primarily to post-trade clearing rather than order matching?
- An order book offers 3 futures contracts at 100.00 and another 5 at 100.05. A market buy for 5 contracts executes immediately against this unchanged book. What is its average execution price?
- In a price-time-priority order book, sell order X for 2 contracts at 100.10 was entered before sell order Y for 20 contracts at the same price. No lower offers exist. Which order has first priority against an incoming buy?
- Where IOC orders are permitted, a trader enters an immediate-or-cancel limit buy for 10 contracts at 100.00. Only 6 can be bought immediately at or below that price. What happens?
- A sell stop-limit order has trigger 99.50 and limit 99.40. After the trigger condition is met, the best available bid is only 99.20. Assuming no bid at 99.40 or above appears, what happens?
- A trader will buy a bond future only at 100.20 or below and is willing to miss the trade rather than pay more. Which instruction best reflects that priority?
- A broker’s stated pre-trade rule requires ₹80,000 of available trading collateral for a proposed order. The client has only ₹65,000 available. What should happen before the order is routed under this rule?
- An exchange rejects an order outside a permitted price range. Which conclusion is justified?
- A bond future is quoted 99.90 bid and 99.95 offer. A trader buys 4 contracts at the offer and immediately sells all 4 at the unchanged bid. Each contract has a multiplier of 2,000. What is the spread cost, excluding other charges?
- A completed futures trade generates gross profit of ₹6,500. For this example, total round-trip brokerage is ₹240, other exchange and clearing charges are ₹110, and applicable taxes or levies on the trade total ₹70. What is net profit?
Key ideas
From the practice bank · 1
A client sends an order to buy interest-rate futures through a trading member. Which activity belongs primarily to post-trade clearing rather than order matching?
The trading system brings compatible orders together. Clearing determines the resulting positions, settlement amounts and financial safeguards. A trading member may also have clearing responsibilities if authorised, but that does not make matching and clearing the same function. Identifying the activity is more reliable than assuming every intermediary performs every role. Remember: Distinguish trade execution from the management of post-trade obligations.
Hint Common mistake: Attributing every exchange-related function to the order-matching engine.
IV-107From the practice bank · 2
An order book offers 3 futures contracts at 100.00 and another 5 at 100.05. A market buy for 5 contracts executes immediately against this unchanged book. What is its average execution price?
The buy first consumes the lowest available offers. It fills 3 at 100.00 and 2 at 100.05. Average execution price = (3×100.00 + 2×100.05)/5 = 100.02. matters: the top-of-book quote is not necessarily the price for an entire order larger than the displayed quantity. Remember: Calculate execution price using the quantities actually filled at each level.
Hint Common mistake: Assuming the best displayed quote applies to an unlimited order size.
IV-108From the practice bank · 3
In a price-time-priority order book, sell order X for 2 contracts at 100.10 was entered before sell order Y for 20 contracts at the same price. No lower offers exist. Which order has first priority against an incoming buy?
Orders are first ranked by price. When prices tie, the earlier eligible order is served before a later order. The larger size of Y does not displace X under the stated rule. Other matching algorithms exist, so the rule specified for the order book must be followed rather than assumed from order size. Remember: Price determines the queue. Time determines priority within an equal-price queue.
Hint Common mistake: Using order size to resolve a tie in a price-time-priority market.
IV-109From the practice bank · 4
Where IOC orders are permitted, a trader enters an immediate-or-cancel limit buy for 10 contracts at 100.00. Only 6 can be bought immediately at or below that price. What happens?
IOC combines an immediate execution opportunity with cancellation of whatever cannot be matched immediately. The limit price still applies. A partial fill is therefore possible: 6 are purchased and 4 are cancelled. This example defines the order condition. It does not assert availability of every order type in every current product interface. Remember: Order validity and price restrictions apply together.
Hint Common mistake: Treating IOC as either fill-or-kill or permission to disregard a limit price.
IV-110From the practice bank · 5
A sell stop-limit order has trigger 99.50 and limit 99.40. After the trigger condition is met, the best available bid is only 99.20. Assuming no bid at 99.40 or above appears, what happens?
A stop condition controls when an order enters the active market. The limit controls the minimum acceptable selling price. If bids have already fallen below the limit, activation alone does not produce a fill. This protects the specified execution price but can leave the underlying position exposed during a gap or illiquid move. Remember: A stop-limit order can limit execution price without ensuring execution.
Hint Common mistake: Assuming a stop trigger guarantees that a position has been closed.
IV-111From the practice bank · 6
A trader will buy a bond future only at 100.20 or below and is willing to miss the trade rather than pay more. Which instruction best reflects that priority?
A buy limit states the highest price the buyer will accept. Execution can occur at that price or a better, lower price, but sufficient eligible offers must be available. A market order does not express the same strict price constraint. The appropriate order reflects the trader’s choice between certainty of price and certainty of execution. Remember: Use a limit when the maximum purchase or minimum sale price is the priority.
Hint Common mistake: Believing a limit order both guarantees a fill and guarantees the requested price.
IV-112From the practice bank · 7
A broker’s stated pre-trade rule requires ₹80,000 of available trading collateral for a proposed order. The client has only ₹65,000 available. What should happen before the order is routed under this rule?
The question supplies a specific broker risk rule, not a universal fixed rupee . Required collateral exceeds available collateral by ₹15,000. Pre-trade checks are intended to prevent an order from creating exposure beyond authorised resources. A client’s confidence in a trade is not a substitute for meeting those checks. Remember: Risk checks should constrain exposure before it is created.
Hint Common mistake: Using expected profit to justify bypassing an explicit collateral requirement.
IV-113From the practice bank · 8
An exchange rejects an order outside a permitted price range. Which conclusion is justified?
A price filter limits which order prices are accepted under the applicable trading rules. It is different from a contractual payoff cap or a guaranteed exit. Existing exposures, changing reference ranges and liquidity can still produce losses. The example does not assume any particular current percentage band for Series products. Remember: Trading controls reduce specific operational risks, not every source of investment loss.
Hint Common mistake: Confusing an order-entry with guaranteed downside protection.
IV-114From the practice bank · 9
A bond future is quoted 99.90 bid and 99.95 offer. A trader buys 4 contracts at the offer and immediately sells all 4 at the unchanged bid. Each contract has a multiplier of 2,000. What is the spread cost, excluding other charges?
An immediate buyer pays the offer. An immediate seller receives the bid. The round-trip difference is 99.95 − 99.90 = 0.05 per unit. Multiplying by 2,000 units and 4 contracts gives ₹400. This cost exists even with no movement in the quoted prices and before brokerage or statutory charges. Remember: The bid-ask spread is an separate from explicit fees.
Hint Common mistake: Assuming no price movement means no trading cost.
IV-115From the practice bank · 10
A completed futures trade generates gross profit of ₹6,500. For this example, total round-trip brokerage is ₹240, other exchange and clearing charges are ₹110, and applicable taxes or levies on the trade total ₹70. What is net profit?
Net profit = ₹6,500 − ₹240 − ₹110 − ₹70 = ₹6,080. The supplied amounts already cover the full round trip, so they are not doubled. These are hypothetical amounts for cost accounting. They do not assert any current tax rate, levy applicability or broker tariff for interest-rate derivatives. Remember: Use all stated costs once and distinguish an assumed charge from a live tariff.
Hint Common mistake: Double-counting charges that are already described as round-trip totals.
IV-116Liquidity describes how easily a given quantity can be traded.
Read moreMargin is the money a participant must keep in place to carry a leveraged position.
Read moreImplied volatility is the market's assumption about how much the underlying will move before expiry.
Read moreOn NSE, a circuit limit (price band) is the most a security's price may move in one trading session, measured from the previous day's close.
Read moreImpact cost is the difference between the price shown on screen and the price a trade is actually filled at.
Read more