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Q 1.
An Equity based Mutual Fund can sell Index Futures to hedge its position - True or False ?
True
False

WRONG ANSWER

CORRET ANSWER:
True
Explanation:

Derivatives like futures & options are used by mutual funds for hedging their portfolio to manage the risk.

For example, if the fund manager foresees a downturn in the stocks held in his portfolio, he can hedge
the same by selling (stock/index futures) in the derivatives segment.

Q 2.
Which of these PUT's are In the Money ?
Spot 300 ; Strike Price 300
Spot 300 ; Strike Price 280
Spot 300 ; Strike Price 320
None of the above

WRONG ANSWER

CORRET ANSWER:
Spot 300 ; Strike Price 320
Explanation:

A Put option is In the Money when the Spot price is below the Strike price.

A Call option is In the Money when the Spot price is above the Strike price.

Q 3.
The beta of SBI is 0.9. If a trader has a buy position of Rs 3,00,000 of SBI, which of the following
will give him a complete hedge ?
Sell Nifty of 270000
Sell Nifty of 330000
Sell Nifty of 300000
Beta of below 1 cannot be hedged

WRONG ANSWER

CORRET ANSWER:
Sell Nifty of 270000
Explanation:

SBI has a beta of 0.9 means that if Nifty falls by 100, the SBI will fall by 90 ie. 10% less.

So wee need to hedge 10% less of NIfty, ie 10% of Rs 300000 = 30,000

So we need to sell 270000 of Nifty

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Q 4.
Theta is the rate of change in option premium for a unit change in ______ .
volatility
price of the underlying asset
time to expiry
interest rates

WRONG ANSWER

CORRET ANSWER:
time to expiry
Explanation:

Theta is the change in option price given a one-day decrease in time to expiration. It is a measure of
time decay.

(Please memorize the details for Delta, Gamma, Theta, Rho etc.)

Q 5.
Can the exercise price be more than or equal to or less than the cash spot price ?
Yes
No

WRONG ANSWER

CORRET ANSWER:
Yes
Explanation:

Exercise price means the Strike price for which options can be traded.

For eg. - A scrip ABC has options tarding at a strike price of Rs 100. The spot price (market price) can
easily fluctuate as per market sentiments and can be above, below or equal to Rs. 100.

Q 6.
When a PUT option on an index is exercised, the option holder receives from the option writer
_______ .
A cash amount that is equal to the excess of spot price over exercise price
A cash amount that is equal to the excess of exercise price over spot price
A cash amount that is equal to spot price
No amount

WRONG ANSWER

CORRET ANSWER:
A cash amount that is equal to the excess of exercise price over spot price
Explanation:

An option will only be exercised when its In the Money (Profitable)

A put option is In the Money when the Exercise price is higher than the spot price. So the excess of
exercise price over the spot price will be receivable by the option holder.

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(IN THE MONEY - A call option with a strike (exercise) price that is lower than the market (spot) price
of the underlying asset, or a put option with a strike price that is higher than the market price of the
underlying asset. In the money means that your stock option is worth money and you can turn around and
sell or exercise it.)

Q 7.
Can one sell assets in futures market even if he does not own any such assets ?
Yes
No

WRONG ANSWER

CORRET ANSWER:
Yes
Explanation:

One can sell futures / options etc. even if he does not own the underlying asset.

Q 8.
Which of the following options will result in the creation of a BEAR SPREAD ?
Selling one call at lower strike and buying another call at higher strike price
Buying one put and buying one call at the same strike
Selling one call and buying two puts at the same strike
None of the above

WRONG ANSWER

CORRET ANSWER:
Selling one call at lower strike and buying another call at higher strike price
Explanation:

Bear Spread can be created by :

1) Selling a low strike call and buying a high strike call OR

2) Selling a low strike Put and buying a high strike Put

Remember : Bear spread involves either 2 Calls or 2 Puts and not Call and Put.

Q 9.
On the derivatives futures market, if there are three series of one, two and three months open at
a point of time, how many calendar spread can one have ?
1
2
3
4

WRONG ANSWER

CORRET ANSWER:
3
Explanation:
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The three claendar spreads can be between months 1 and 2,  2 and 3 and 1 and 3.

Q 10.
Mr. A wants to sell stock options but he does not own the underlying stock. Can he do it in India
?
Yes
No

CORRECT ANSWER
Explanation:

One can buy / sell stock options even if he does not own the underlying stock.

Q 11.
The Clearing Corporation gives exposure limits to Clearing Members based on the number of
Trading Members using the services of that Clearing Member - State True or False ?
True
False

WRONG ANSWER

CORRET ANSWER:
True
Explanation:
As per rules - Both trading-cum-clearing member and professional clearing member are required to
bring in additional security deposits in respect of every trading member whose trades they undertake to
clear and settle.

Q 12.
Why are margins collected in the derivative segment ?
To earn revenue for the clearing corporation
To minimize the number of investors entering the derivatives market
To have friction in the market so facilitate arbitrage
To minimize the risk of default by all parties involved

WRONG ANSWER

CORRET ANSWER:
To minimize the risk of default by all parties involved
Explanation:
As exchange guarantees the settlement of all the trades, to protect itself against default by either
counterparty, it charges various margins from brokers. Brokers in turn charge margins from their
customers.

Q 13.
What is Unsystematic Risk ?
Unsystematic Risk is related to risk in a specific security and not pertaining to overall market
Unsystematic Risk can be reduced through diversification
Both 1 and 2
None of the above

WRONG ANSWER

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CORRET ANSWER:
Both 1 and 2
Explanation:
Unsystematic risk is the component of price risk that is unique to particular events of the company and/or
industry. For example : Strike in a factory or threats from cheaper imports to steel industry.

This risk is inseparable from investing in the securities. This risk could be reduced to a certain extent by
diversifying the portfolio.

Q 14.
Speculators are those who take risk whereas hedgers are those who wish to reduce risk - State
True or False ?
True
False

WRONG ANSWER

CORRET ANSWER:
True
Explanation:
Hedgers - They face risk associated with the prices of underlying assets and use derivatives to reduce
their risk.

Speculators/Traders - They try to predict the future movements in prices of underlying assets and based
on the view, take positions in derivative contracts.

Q 15.
Loss on derivative transactions can be set off against any other income during the year. In case
the same cannot be set off, it can be carried forward to subsequent assessment year and set off
against any other income of the subsequent year. Such losses can be carried forward for a
period of ____ assessment years.
4
8
12
16

WRONG ANSWER

CORRET ANSWER:
8
Explanation:

Loss incurred on derivatives transactions which are carried out in a recognized stock exchange can be
carried forward for a period of 8 assessment years.

Q 16.
As per the rules of European Call Option, it gives the right but not the obligation to buy from the
seller an underlying at the prevailing market price on or before the expiry - True or False ?
False
True

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WRONG ANSWER

CORRET ANSWER:
False
Explanation:

European Option is an an option that can only be exercised at the end of its life, at its maturity / expiry
and not before that. An American option can be exercised any time.

A buyer of an European option that does not want to wait for maturity to exercise it can sell the option
to close the position.

Q 17.
**If an investor buys a future contract but does not sell it till expiry than what happens to that
contract ?
The investor will receive the delivery of the underlying
The exchange will square up the position by the closing price
A new buy position will be automatically be created in the next month
The client has to pay a stiff penalty

WRONG ANSWER

CORRET ANSWER:
The exchange will square up the position by the closing price
Explanation:

As per the rules in the Indian Stock markets, if the open position of a trader is not squared up till
maturity ie. last Thrusday of the month, then the position is automatically squared up by the exchange by
the closing price.

For example - Mr A bought one Ambuja Cement contract of 1000 shares at Rs 180 on 8th January. He
does not sell it even by the last day ie. last Thrusday of January. If the closing price of Ambuja Cement
is Rs 184, his contract will be squared up at Rs 184 and Rs 4 x 1000 = Rs 4000 ( less brokerage etc. )
will be his profit. In case Ambuja Cement closes below Rs 180, then he will incur a loss.

Q 18.
**Margins in futures trading are applicable to -
Only Institutional players.
Both the buyer and the seller
Only the buyer
Only the Seller

WRONG ANSWER

CORRET ANSWER:
Both the buyer and the seller
Explanation:

In a futures market margins are payable by both the parties.

Q 19.
**Mr Manoj buys a put option on PQR stock for Rs 20 of strike price Rs 130. If on the exercise
day, the spot price of PQR is Rs 175, Mr Manoj will choose _______.

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Not to exercise the option

CORRECT ANSWER
Explanation:

Mr. Manoj bought a PUT option so he had a view that the stock will fall. On the exercise day the stock
has risen and so Mr Manoj is in a loss. So he will not exercise the option.

Q 20.
The Clearing Corporation can transfer a defaulting members client's position to ___________ .
Liability a/c.
Another solvent member
Investor Protection Fund a/c.
The Stock Exchange

WRONG ANSWER

CORRET ANSWER:
Another solvent member
Explanation:

As per SEBI rules, the Clearing Corporation can transfer client positions from one broker member to
another broker member in the event of a default by the first broker member.

Q 21.
The Spot Price of ABC Stock is Rs. 347. Rs. 325 strike call is quoted at Rs. 39. What is the
Intrinsic Value?
0
22
39
61

WRONG ANSWER

CORRET ANSWER:
22
Explanation:

When the Strike Price is below the Spot Price, the Call Option is 'In the Money' ie. profitable.

Intrinsic Value for a such a Call Option = Spot Price - Strike Price

                                            = 347 - 325

                                            = 22

Q 22.
**Mr. Deshmukh took a short position of one contract in May Nifty futures (Contract multiplier
50) at a price of Rs. 5600. When he closed this position after a few days, he realized that he has
made a profit of Rs.5000. Which of the following closing actions would have enabled him to
generate this profit ?
Selling 1 May Nifty futures contract at 5700
Buying 1 May Nifty futures contract at 5700
Buying 1 May Nifty futures contract at 5500
Selling 1 May Nifty futures contract at 5500
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WRONG ANSWER

CORRET ANSWER:
Buying 1 May Nifty futures contract at 5500
Explanation:

Mr Deshmukh is short ie. he has sold Nifty futures. He will make a profit when Nifty falls.  His profit is
Rs 5000 and lot size is 50, so per share he has to get Rs 100 to make a profit of Rs 5000  ( 50 x 100)

So when Nifty falls to 5500 and Mr Deshmukh buys it to square up his position, he will make a profit of
Rs 5000.

Q 23.
**By using Financial derivatives one can engage in _________.
Hedging
Arbitraging
Speculation
All of the above

WRONG ANSWER

CORRET ANSWER:
All of the above
Explanation:

Modern traders and investors also use financial derivatives for Arbitrage and Speculation, apart from
hedgeing.

Q 24.
**If an trader does an calender spread in index futures and the near leg of the calendar spread
expires, the Further leg becomes a regular open position. True or False ?
True
False

WRONG ANSWER

CORRET ANSWER:
True
Explanation:

Calendar spread means an options or futures spread established by simultaneously entering a long and
short position on the same underlying asset but with different delivery months.

In the above question, lets assume a trader has gone long in index options in current month and short in
index options in third month. Incase he does not close his position by the end of current month, his
current month option will expire and the third month option contract will become an open position as there
is no opposite option contract in his account.

Q 25.
**Mr. Nayar has purchased 8 contracts of March series and sold 6 contracts of April series of the
NSE Nifty futures. How many lots will get categorized as Regular (non-spread) open positions?
14
8

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2
6

WRONG ANSWER

CORRET ANSWER:
2
Explanation:

Various future contract position in the same underlying ( even at various expiry dates ) are netted off
before arriving at open postion.  Here in this case its 8 - 6 = 2.

This is because a long and a short position in the same underlying will have no risk (if one will make
profit, the other will be in a simillar loss) and only the open position will have the risks and margins will
be collected from these open positions.

Q 26.
If the price of a stock is volatile, then the option premium would be relatively ______.
Lower
Higher
No effect of volatility
zero

WRONG ANSWER

CORRET ANSWER:
Higher
Explanation:

Higher volatility means higher risk and higher risk means one has to pay a higher premium.

Q 27.
The strategy in which an trader buys a call option of lower strike price and sells another call
option with a higher strike price of the same share and same expiry date is called ___________.
Butterfly spread
Bearish spread
Calendar spread
Bullish spread

WRONG ANSWER

CORRET ANSWER:
Bullish spread
Q 28.
You sold a Put option on a share. The strike price of the put was Rs.245 and you received a
premium of Rs.49 from the option buyer. Theoretically, what can be the maximum loss on this
position?
206
196
49
NIL

WRONG ANSWER

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CORRET ANSWER:
196
Explanation:

When you sell a Put option you believe the share will go up. If the share goes down you will make a loss.

Theoretically the share of 245 can fall to zero. So you can make a loss of 245.

You have received a premium of 49.

So the maximum loss can be 245 - 49 = 196

Q 29.
**The spot price of Grasim Industries Ltd share is Rs 2900, the call option of Strike Price Rs 2800
is _____ .
At the money
Out of the money
In the money
None of the above

WRONG ANSWER

CORRET ANSWER:
In the money
Explanation:

In call options, when the Spot price is higher than Strike price - that call option is In the Money.

Q 30.
Of the below mentioned options, which would attract margins ?
Buyer of PUT Option
Seller of CALL Option
Seller of PUT Option
Both 2 and 3

WRONG ANSWER

CORRET ANSWER:
Both 2 and 3
Explanation:

Buyers of Options pay the premium and that is the maximum loss they can suffer - so they need not pay
any margin.

A seller of options receives the premium but he can suffer infinte losses - so margins are collected both
from sellers of Call and Put options

Out of 30 questions 2 correct and 28 wrong.

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