Revision Test-3

1. The Stock Exchanges and Stock Brokers decide the option premiums — True or False?
• True
• False
Explanation: Stock Exchanges decide the rules and provide the platform for trading and a
Stock Broker act as authorized mediatory.
The option prices are decided by the buyers and sellers based on the spot price, time value,
volatility and many other factors.

2. The Indian Stock Future Markets deals in __________

• Swaps
• Equity Cash
• Equity Derivative
• All of the above
Explanation: Swaps are series of forward contracts. Equity Cash is traded in the Spot Markets.
Equity Derivatives like Futures and Options are traded in the Stock Futures markets.

3. Usually as the level of risk rises, the expected rate of return on that investment should
also rise - True or False?
• True
• False
Explanation: Higher the risk (E.g., Equity Shares) higher is the return
Lower the risk (E.g., Bank Fixed Deposits) lower is the return.

4. The system of SEBI which enables investors to lodge and follow up their complaints and
track the status of redressal of such complaints from anywhere is called SCORES- True or
False?
• True
• False
Explanation: SEBI’s web-based complaints redressal system is called SCORES (Sebi
COmplaints REdress System).

5. A short seller has the time of one week to deliver the stocks - True or False?
• True
• False
Explanation: Selling Short means Seller does not own the stock he is supposed to deliver.
Even if a trader has stock, he has to deliver the shares in T+2 days.

6. For liquid Net-worth requirements, the total liquid assets comprise of at least 60% of the
cash component and the rest is non-cash component- True or False?
• True
• False
Explanation: The total liquid assets comprise of at least 50% of the cash component and the
rest is non-cash component.

7. In the accounting system of open options as on Balance Sheet Day, the “Provision for
Loss on Equity Index/ stock Option Account" is shown as deduction from “Equity Index/
stock Option Premium” which is shown under ________
• Current Assets
• Current Liabilities
• Short term Debts
• None of the above
Explanation: In the books of the buyer/ holder, a provision should be made for the amount by
which the premium paid for the option exceeds the premium prevailing on the balance sheet
date since the buyer/ holder can reduce his loss to the extent of the premium prevailing in the
market, by squaring off the transaction.
The excess of premium prevailing in the market on the balance sheet date over the premium
paid is not recognised on the consideration of prudence.
The provision so created should be credited to "Provision for Loss on Equity Index/stock Option
Account". The provision made as above should be shown as deduction from “Equity Index/
stock Option Premium" which is shown under ‘Current Assets’.

8. Operational risks include losses due to _________

• Inadequate disaster planning
• Too much of management control
• Government policies
• Income tax regulations
Explanation: An operational risk is defined as a risk incurred by an organisation's internal
activities. So, losses due to fraud, inadequate documentation, inadequate disaster
management, improper execution are all Operational risks.

9. A tax which is clearly mentioned in the Contract Note is ________

• Long Term Capital Gain Tax
• Short Term Capital Gain Tax
• Both 1 and 2
• Securities Transaction Tax (STT)
Explanation: STT is the Securities Transaction Tax that is levied on every purchase and sale of
securities that are listed on the Indian stock exchanges.

10. ________refers to when securities professionals making unnecessary and excessive

trades in customer accounts for the sole purpose of generating commissions.
• Hedging
• Arbitrage
• Churning
• Broking
Explanation: “Churning” refers to when securities professionals making unnecessary and
excessive trades in customer accounts for the sole purpose of generating commissions.
Investors should be careful to review their monthly account statements and investigate any
abnormally high trading activity.

11. What role do speculators play in the Futures Market?

• They add to the liquidity in the futures markets
• They produce the commodities traded at futures exchanges
• They take delivery of the commodities at expiration
• They transfer their risk to the hedgers
Explanation: Speculators try to predict the future movements in prices of underlying assets
and based on the view, take positions in derivative contracts. They regularly buy and sell
contracts thus adding to the liquidity in the futures market.

12. As per the L.C. Gupta Committee recommendations a separate Investor Protection Fund
must be created for derivatives segment- True or False?
• True
• False

13. An index option is a Money Market Instrument- True or False?

• True
• False
Explanation: An index option is a Derivative Product.

14. Option which gives buyer a right to sell the underlying asset, is called ________ option
• Call
• Put
• American
• European
Explanation: Option, which gives buyer a right to buy the underlying asset, is called Call option
and the option which gives buyer a righto sell the underlying asset, is called Put option.

15. If there is not much price movement, the OTM option will be beneficial to _________
• Buyer of Call Option
• Seller of Call Option
• Buyer of Put Option
• None of the above
Explanation: There is no Intrinsic Value in OTM (Out of the Money) option but only Time
Value. So, a buyer of an option will pay the premium and the seller will receive it.
If there is not much price movement, the seller will earn the premium received.
16. A Trading member can either clear his trades or use the services of Professional Clearing
members- True or False?
• True
• False
Explanation: A Trading member cannot clear his trades. Only a Trading cum Clearing
members can clear their own trades.

17. A Broker or Dealer who is already registered with an existing stock exchange will have
to get additional registration for the Derivative Exchange - True or False?
• True
• False
Explanation: In addition to their registration as brokers of existing stock exchanges,
Derivative brokers/dealers and clearing members are required to seek registration from SEBI.

18. The cash component of Liquid Securities can include Units of money market mutual
fund and Gilt funds where applicable haircut is 10%. — True or False?
• True
• False
Explanation: As per the recommendations of Prof. J.R. Verma Committee, hair cut on debt
securities is 10%.

19. As per J.R. Verma Committee recommendations, Volatility should be calculated based
on _________ of logarithmic daily returns.
• Variance
• Delta
• Standard Deviation
• CAGR

20. Impact cost is low when _________

• Volume/liquidity is low
• Volume/liquidity is high
• the scrip is trading at an all-time high
• the scrip is trading at an all-time low
Explanation: Impact cost is said to be low when large orders can be executed without moving
the prices in a big way.
So, when volumes will be high the impact cost will be low.

21. In the Options segment, if you buy a CALL, you expect the market / scrip to move
_______
• Down
• Up
• One cannot buy a call in options market
• Remain range bound
Explanation: A buyer of a CALL Option has a bullish view - so he will expect the market script
to move up to make a profit.

22. An investor who is less risk averse would like to have greater exposure to equity and
other risky investments compared to fixed income instruments - State True or False?
• False
• True
Explanation: Although Equity Markets can give good returns but they are quite risky to invest.
So only a less risk averse investor would prefer to invest in equity.
A more risk-averse investor would prefer investments that are more secure and thus would
have higher portfolio allocations to debt and fixed income instruments.
(Risk Averse person is reluctant to take risk. A more risk averse person plays very safe and
does not take any risk. A less risk averse person can take some risks)

23. Forward contracts are OTC contracts- True or False?

• True
• False
Explanation: The forward contracts are negotiated between two parties; the terms and
conditions of contracts are customized as per their requirements. These are OTC contracts.

24. You are bullish on a stock but feel that the overall market may fall. The action you
should take is:
• Buy Stock futures and sell Index futures
• Sell Index futures only
• Buy Stock Futures only
• Buy Index futures and sell stock futures
Explanation: When you are bullish on a stock, you feel it will rise and so you BUY its stock
futures.
When you feel the marker may fall, you SELL index futures like Nifty.

25. A trader sells a lower strike price CALL option and buys a higher strike price CALL option,
both of the same scrip and same expiry date. This strategy is called _____________
• Bearish Spread
• Bullish Spread
• Long term Investment
• Butterfly
Explanation: A bear call spread is a limited profit, limited risk option strategy that can be used
when the options trader is moderately bearish on the underlying security.
It is entered by buying call options of a certain strike price and selling the same number of call
options of lower strike price (in the money) on the same underlying security with the same
expiration month.
26. The Over the counter options are ___________
• calculated based on the delta
• standardised options
• customised options
• always in the money options
Explanation: Over the Counter options are made as per the needs of the trading parties - so
they are customised.
Future options are standardised as per the rules of stock exchange.

27. Financial Derivatives are used for-

• Speculation
• Hedging
• Arbitrage
• All of the above

28. If you buy a PUT option at premium of Rs 20 at the Strike Price of Rs 250, lot is of 400
shares, then the maximum possible loss is _____________
• Rs 5000
• Rs 8000
• Rs 20,00,000
• Unlimited
Explanation: When you buy an option, either Call or Put - the maximum loss is the premium
you have paid.
In this case the premium paid is Rs 20 x 400 shares = Rs 8000.

29. The future contracts are custom designed and hence each contract is different as per
the terms of the contracting parties.
• False
• True
Explanation: Future contracts are standardised and forward contracts are custom designed.

30. Which risks can be managed by selling Index Futures?

• Mark to Market risks
• Time value risks
• Systematic Risks
• Unsystematic Risks
Explanation: Unsystematic Risk Specific risk or Systematic risk is the component of price risk
that is unique to particular events of the company and/or industry. This risk is inseparable
from investing in the securities. This risk could be reduced to a certain extent by diversifying
the portfolio.
Systematic Risk An investor can diversify his portfolio and eliminate major part of price risk
i.e., the diversifiable/unsystematic risk but what is left is the non-diversifiable portion or the
market risk-called systematic risk. Variability in a security’s total returns that are directly
associated with overall movements in the general market or economy is called systematic
risk. Thus, every portfolio is exposed to market risk. This risk is separable from investment and
tradable in the market with the help of index-based derivatives. When this particular risk is
hedged perfectly with the help of index-based derivatives, only specific risk of the portfolio
remains.

31. A buyer of Put Option __________

• has the obligation to take delivery of asset
• has the right to buy the underlying asset
• has the right to sell the underlying asset
• has the obligation to give delivery of asset
Explanation: Put Option is an option contract giving the owner the right, but not the
obligation, to sell a specified amount of an underlying security at a specified price within a
specified time. This is the opposite of a call option, which gives the holder the right to buy
shares. So, an Option, which gives buyer a right to buy the underlying asset, is called Call
option and the option which gives buyer a right to sell the underlying asset, is called Put
option. There is no obligation when you buy an option.

32. A long position in a CALL option can be closed by taking a short position in PUT option.
• False
• True
Explanation: A long position in any option can be closed by selling that option and not in any
other way. So, a long position in a CALL option can be closed by selling that CALL option.

33. If a stock has very low volatility, then it would have a lower option premium.
• True
• False
Explanation: Lower the volatility lower the risk and so lower the premium.
The stocks which are highly volatile will have comparatively higher option premiums as there
involves a lot of risk trading in such stocks.

34. In index futures, if the near leg of the calendar spread transaction expires then the
farther leg becomes a regular open position.
• True
• False
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, let’s assume a trader has gone long in index options in current month
and short in index options in third month. In case 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.
35. In the derivatives market, all the margins are collected by ____________
• Margin House
• SEBI
• Clearing House
• Clearing Banks

36. A __________ is created by shorting a call and a put option of same strike and same
expiry.
• Long Straddle
• Short Straddle
• Bullish spread
• None of the above
Explanation: A Short Straddle strategy carried out by holding a short position in both a call
and a put that have the same strike price and expiration date. He sells a call and a put so that
he can profit from the premiums. The maximum profit is the amount of premium collected by
writing the options.
The short straddles a risky strategy an investor uses when he or she believes that a stock's
price will not move up or down significantly. Because of its riskiness, the short straddle should
be employed only by advanced traders due to the unlimited amount of risk associated with a
very large move up or down.

37. Theta is the rate of change in option premium for a change in the price of the underlying
asset.
• True
• False
Explanation: Delta is the rate of change in option premium for a change in the price of the
underlying asset.
Theta is the change in option price given a one-day decrease in time to expiration. It is a
measure of time decay.

38. When a call option is ‘In the Money ‘— the ______________

• Strike Price is lower than Spot Price
• Strike Price is higher than Spot Price
• Strike Price is same as Spot Price
• None of the Above
Explanation: An In the money (ITM) option would give holder a positive cash flow, if it were
exercised immediately.
A call option is said to be ITM, money (is higher than strike price. And, a put option is said to
be ITM when spot price is lower than strike price. In our examples, call option is in the money

39. Delta is the change in option price given a one-day decrease in time to expiration - State
True or False?
• True
• False
Explanation: The most important of the ‘Greeks’ is the option’s is “Delta”. This measures the
sensitivity of the option value to a given small change in the spot price of the underlying asset.
It may also be seen as the speed with which an option moves with respect to price of the
underlying asset.

40. ____________ is minimum move allowed in the price quotations.

• Theta
• Ask Price
• Tick Size
• Bid Price
Explanation: Tick size is the minimum price movement of a trading instrument.
Exchanges decide the tick sizes on traded contracts as part of contract specification. The
exchange informs the lot size and the tick size for each of the contracts traded on F&O
segment from time to time. Tick size for Nifty futures is 5 paisa.

41. In the Options segment, if you buy a PUT, you expect the market / scrip to move
_________
• Up
• Down
• Range bound
• One cannot buy a PUT in options market
Explanation: A buyer of a PUT option has a negative / bearish view and so he expects the
market/ script to move down to make profit.

42. Arbitrage activities would ensure that the prices of futures contract are aligned with
the prices of the underlying assets. True or False?
• False
• True
Explanation: Arbitrage occupies a prominent position in the futures world as a mechanism
that keeps the prices of futures contracts aligned properly with prices of the underlying assets.
Whenever the prices are not aligned, the arbitrageurs will step in to use the price difference
to make profits.

43. In futures contract the lot size is determined by __________

• The Stock Exchange
• Professional Clearing Member
• The Company
• SEBI
Explanation: It’s the duty of the stock exchange to inform of the lot size and the tick size for
each of the contracts traded on F&O segment from time to time.
44. As the expiry / maturity of a futures contract approaches, the spot price and future
price tend to become same. This is known as _________
• Covariance
• Cosetting
• Convergence
• Corelation

45. If you buy a PUT option at premium of Rs 37 at the Strike Price of Rs 260, then the
maximum possible loss on this position is ___________
• Unlimited
• Rs 37
• Rs 297
• Rs 223
Explanation: The maximum possible loss for a buyer of any option is the premium paid. Here
you have paid Rs 37 as premium to buy a put option, so the maximum possible loss is Rs 37.
Buying a PUT means expecting the price to fall. When the price falls, the premium rises and
you make a profit. When price rises, the premium falls so the buyer of put makes a loss. In
above case the premium can technically fall from Rs 37 to zero, so the maximum loss is Rs 37.

46. A low level of initial margin increases the possibility of defaults of a stock broker- State
True or False?
• True
• False
Explanation: A broker collects the initial margins from his clients as per their positions and
pays to the exchange.
A low level of initial margin collected from clients can lead to defaults of clients in case of
major movement of stock prices. So, if client default, it also increases the chances of the
broker defaulting.

47. A calendar spread contract in index futures attracts higher margin than sum of two
independent legs of futures contract.
• False
• True
Explanation: A calendar spread contract in index futures attracts LOWER margin than sum of
two independent legs of futures contract. This because the risk is very less on calendar
spreads.

48. An American Option can be exercised only on the expiry date - State True or False?
• False
• True
Explanation: European Options can be exercised only on expiry/maturity but American
Options can be exercised on or before expiry date.
49. If futures price is lower than spot price of an asset, market participants may expect the
spot price to come down in future. This situation is called ________
• Contango
• Reverse System
• Backwardation
• Impact costs
Explanation: As per the Expectancy Model of Future Pricing - If future prices are higher than
spot prices (over the normal cost of carry) we can expect the spot prices to go up in future.
This is called as Contango.
Similarly, if the future prices are lower than spot prices, we can expect the spot prices to go
down and this is called as Backwardation.

50. When the strike price decreases, the premium on call option increases.
• True
• False
Explanation: The lower strike price would have a higher call option premium because the
intrinsic value increases.
For e.g. - If the market price is Rs 200 and the Rs 180 strike price call option has a premium of
Rs 25 (Rs 20 intrinsic value and Rs 5 times value), then the 160 call option will have a premium
of appx Rs 45 (Rs 40 intrinsic value and Rs 5 time value)

51. In BID-ASK price, the bid price is the price at which _________
• the trader is willing to buy the asset
• the trader is willing to sell the asset
• the trader is willing to either buy or sell the asset
• All of the above
Explanation: Bid price is the price buyer is willing to pay and ask price is the price seller is
willing to sell.
For e.g.- If the price of State Bank of India as seen on the trading screen is Rs 200 - 201, this
means Rs 200 is the bid price and Rs 201 is the ask price.

52. The major reason for collecting high initial margin is to improve the solvency of the
clearing corporations.
• True
• False
Explanation: Higher the margins, lower the risks of client or broker defaulting. This improves
the solvency of the Clearing Corporations.

53. A Clearing member is required to provide liquid assets and these liquid assets should
be at least 75% in cash, bank FD’s etc and balance 25% in non cash assets. True or False?
• False
• True
Explanation: The total liquid assets should comprise of at least 50% (and not 75%) of the cash
component and the rest is non cash component.
54. Beta is the change in option price given a one percentage point change in the risk-free
interest rate.
• True
• False
Explanation: Rho is the change in option price given a one percentage point change in the
risk-free interest rate.
Beta a measure of systematic risk of a security that cannot be avoided through diversification.

55. In futures market, basis is referred to as ___________

• Beta of the future stock
• Volatility of the market
• Price difference between Spot and Future price
• The Bid-Ask price
Explanation: The difference between the spot price and the futures price is called basis.
If the futures price is greater than spot price, basis for the asset is negative. Similarly, if the
spot price is greater than futures price, basis for the asset is positive.

56. An option which would give a zero cashflow to its holder if it were exercised
immediately is known as _________
• At the money option
• Out of the money option
• In the money option
• None of the above
Explanation: A situation where an option's strike price is identical to the price of the
underlying security. Both call and put options will be simultaneously "at the money." For
example, if XYZ stock is trading at 75, then the XYZ 75 call option is at the money and so is the
XYZ 75 put option.
At the money option would lead to zero cashflow if it were exercised immediately. Therefore,
for both call and put ATM options, strike price is equal to spot price.

57. When a clearing member/ broker make unnecessary transactions in his clients account
with the sole aim of making commissions, this is known as ____________
• Technical Trading
• Stop Loss Trading
• Churning
• Portfolio Planning

58. You have sold one lot of JSW Steel futures for Rs 300 (lot size 2000) expecting that this
share price will go down. But you also want to protect yourself against any loss of more
than Rs 10,000. What should you do?
• Place a limit order to buy at Rs 305
• Place a stop loss buy order at Rs 295
• Place a stop loss buy order at Rs 305
• Place a limit sell order at Rs 305
Explanation: As you have sold a futures contract, you will make a loss when the price will
move up.
You do not want to make a loss of more than Rs 10,000. The lot size is 2000.
10,000 / 2000 = 5 - which means if the price moves up by Rs 5 (from 300 to 305), you will
make a loss of Rs 10,000.
So, you will put a STOP LOSS buy order at 305. Which means in case the prices move up, the
trade will be executed and the contract will be squared up at Rs 305, resulting in a maximum
loss of Rs 10,000.

59. A buyer of Call Option _________

• has the obligation to take delivery of asset
• has the obligation to give delivery of asset
• has the right to buy the underlying asset
• has the right to sell the underlying asset
Explanation: CALL OPTION: An agreement that gives an investor the right (but not the
obligation) to buy a stock, bond, commodity, or other instrument at a specified price within a
specific time period.
It may help you to remember that a call option gives you the right to "call in" (buy) an asset.
You profit on a call when the underlying asset increases in price.

60. You are interested in creating a perfect hedge for your portfolio. For this you need to
sell index futures and the index futures sold should be equal to ________
• Value of your portfolio + Beta of your portfolio
• Value of your portfolio / Beta of your portfolio
• Value of your portfolio * Beta of your portfolio
• Value of your portfolio - Beta of your portfolio
Explanation: To get a hedge, one has to multiply the beta of his portfolio with the value of
the portfolio and them sell that value of index futures.

61. The holder of an option has _______

• the obligation but no right
• the right but no obligation
• some rights but more obligations
• no rights and no obligations
Explanation: An Option is a contract that gives the right, but not an obligation, to buy or sell
the underlying asset on or before a stated date/day, at a stated price, for a price. The party
taking a long position i.e., buying the option is called buyer/ holder of the option and the party
taking a short position i.e., selling the option is called the seller/ writer of the option.
The option buyer has the right but no obligation with regards to buying or selling the
underlying asset, while the option writer has the obligation in the contract
62. The intrinsic value is the difference between Market Price and Strike Price of the option
and it can never be negative.
• True
• False
Explanation: For an option, intrinsic value refers to the amount by which option is in the
money i.e., the amount an option buyer will realize, before adjusting for premium paid, if he
exercises the option instantly.
For call option which is in-the-money, intrinsic value is the excess of market price over the
exercise price. For put option which is in-the-money, intrinsic value is the excess of exercise
price over the market price.

63. The risk return profile of an option contract is ___________

• symmetric
• asymmetric
• like treasury bond
• like mutual funds
Explanation: Asymmetric basically means not identical on both sides.
When one trades in Options, the gains when the share moves in one direction is significantly
different from the losses when the share moves in the opposite direction.
For e.g. - If one buys a call option and the share prices go down the loss will be limited i.e.,
restricted to the premium paid. But if the share prices move up, the profits can be
huge/unlimited. This is known an asymmetric return.
On the contrary in futures or cash market, the returns are symmetric i.e., equal value of profits
or loss is possible.

64. Arbitrage is a tool used to protects one’s portfolio against any downturn by going short
in index. True or False?
• True
• False
Explanation: To protect one’s portfolio against any downturn by going short in index is called
Hedging. Arbitrage is a tool to use price differences in different markets to make profit.

65. When a person buys a call option, he has _______

• Mixed View
• Slightly Long-term view
• Bullish view
• Bearish view

66. In the Option segment, if you buy a CALL at a premium of Rs35 at the Strike Price of Rs
400, lot is of 200 shares, then the maximum possible Profit is __________
• Rs 400
• Rs 7000
• Rs 43000
• Unlimited
Explanation: When you buy a CALL option, your losses are limited to the extent of premium
paid, but your profits, theoretically can be unlimited as the price of the underlying can rise to
any levels.
When the price of an underlying rises, the price of a CALL option will also rise and so you can
have unlimited profits.

67. In the Straddle Strategy both options have same strike price but in Strangle strategy,
the strike price are different and are mostly out of the money options- True or False?
• False
• True
Explanation: In the case of Straddle, the view is that the market will move substantially in
either direction, but while in straddle, both options have same strike price, in case of a
strangle, the strikes are different. Also, both the options (call and put) in this case are out-of-
the-money and hence the premium paid is low.

68. When compared to cash market, there are more chances that an investor does not
properly understand the risks involved in the derivatives market. True or False?
• True
• False
Explanation: Derivatives market and mainly the options market are difficult to understand
when compared to cash markets.

69. Hedging is a tool used to protects one’s portfolio against any downturn by going short
in index. True or False?
• True
• False
Explanation: Hedging basically means making an investment to reduce the risk of adverse
price movements in an asset. Normally, a hedge consists of taking an offsetting position in a
related security, such as a futures contract.
In the above question, if an investor owns 30-40 stocks and feels the market (and so his stocks)
will go down due to an upcoming event, he will short the index to minimise his losses.
Investors use this strategy when they are unsure of what the market will do.

70. The spot price of ABC share is Rs 500, the call option of Strike Price Rs 500 is —
• In the money
• Out of the money
• At the money
• None of the above
Explanation: At the Money - situation where an option's strike price is identical to the price
of the underlying security. Both call and put options will be simultaneously "at the money."
For example, if XYZ stock is trading at 100, then the XYZ 100 call option is at the money and
so is the XYZ 100 put option. An at-the-money option has no intrinsic value, but may still have
time value. Options trading activity tends to be high when options are at the money.
71. A client has bought 1 contract of ABC futures May series at Rs 3240. The closing price
of this share when the market closed on last Thursday of May was Rs 3188. What is his
Profit (+) or Loss (-)? (Market lot 100)
• -3240
• -5188
• 5600
• -5200
Explanation: Purchase Price - Rs 3240
Sale Price - Rs 3188
So, there is a loss: 3240 - 3188 = -52 x 100 = -5200

72. When a trader buys a put option, he has _________

• Mixed view
• Bearish view
• Bullish view
• Confused view

73. In a Derivatives Market, the person who takes the risk are _________
• Arbitrageurs
• Speculators
• Hedgers
• None of the Above
Explanation: Hedgers use derivatives to manage risks, Arbitrageurs use Cash market and
Derivative market to make money by using the price differences. Speculators take open
positions and take the risks.

74. The difference between the bid price and the ask price is __________
• forward premium
• bid-ask spread
• the same as the difference between futures and forwards price
• the same as the difference between call and put option prices
Explanation: The difference between the best buy and the best sell orders is called bid-ask
spread.
For e.g. If the price of a stock is Rs 100 and 100.50, then 0.50 paise is the bid-ask spread.

75. By meeting additional requirements, a Trading Member can also be a Clearing

Member— True or False?
• True
• False
Explanation: A Trading Member can also be a Clearing Member by meeting additional
requirements.
76. The option premium paid by the option buyer remains with the exchange till the time
it is closed out or expired.
• True
• False
Explanation: The Option premium is collected by the exchange but is given to the seller of
option.

77. Higher the interest rate, higher will be the option premium - True or False?
• True
• False
Explanation: Higher interest rates will lead to higher future price / higher option premium as
the cost of carry i.e., cost of financing increases.

78. A major recommendation of L.C. Gupta Committee was that a separate Investor
Protection Fund must be created for derivatives segment- State True or False?
• True
• False

79. A short seller _______

• Must own the share
• Must own at least 75% of the shares
• Need not own the shares
• None of the above
Explanation: Short Selling means the selling of a security that the seller does not own.
Short sellers assume that they will be able to buy the stock at a lower amount than the price
at which they sold short.

80. Position limits have been designed to __________

• prevent the markets from being wrongly influenced by Government policies
• support the market and determine its movements
• stop the markets being wrongly influenced by the trading activities of investor(s)
• all of the above
Explanation: Position limits are the maximum exposure levels which the entire market can go
up to and each Clearing Member or investor can go up to.
Position limits for the entire market and Clearing Members and investors are defined by SEBI.

81. The mark to mark debits for stock futures are done on a ________
• Daily basis
• Weekly basis
• Monthly basis
• Hourly basis when markets are very volatile
Explanation: In the futures market, profits and losses are settled on day-to-day basis — called
mark to market (MTM)settlement.
The exchange collects these margins (MTM margins) from the loss making participants and
pays to the gainers on day-to-day basis.
Therefore, all futures positions- for both Index and Stocks are marked to market on daily basis.

82. Derivatives market helps shift of speculative trades from unorganized market to
organized market. True or False?
• True
• False
Explanation: In the unorganized markets, there is a huge risk of counter party default etc. In
the organized markets for derivatives the Clearing Corporation guarantees the clearing and
settlement of all trades even if there is a default of any participant.

83. If you have a long position in futures contract, you can square up it by _______
• Buying call option of that security
• Selling the same futures contract
• Selling the far month future contract so that you have more time and can earn more
• Buying a put option of that security
Explanation: A future contract can be squared up by selling the same contract and in no other
way.

84. The Ask price is always greater than Bid price. True or False?
• True
• False
Explanation: Bid price is the price buyer is willing to pay and ask price is the price seller is
willing to sell.
For example, the prices as seen on the screen will be — Reliance Inds 900 — 901, where 900
is the bid price and 901 is the ask price. So, the Ask price is always greater than Bid price.

85. An investor who is risk averse will invest more in Fixed Income and Debt instruments
than to equity market related investments. True or False?
• True
• False
Explanation: A risk-averse investor i.e., an investor who wants to play safe and not take risks,
will prefer investments that are more secure and thus would have higher portfolio allocations
to debt and fixed income instruments.
On the other hand, an investor who is less risk averse would like to have greater exposure to
equity and other risky investments.

86. A stock broker has two clients P and Q, P has purchased 200 contracts and Q has sold
300 contracts in May Tata Steel futures series. What is the outstanding liability (open
Position) of the member towards Clearing Corporation in number of contracts?
• 200
• 300
• 500
Explanation: While calculating the outstanding liability of a member, the total of all clients
open position is taken into account. The positions cannot be netted against two clients.
So, in the above case the total open position is 200 + 300 = 500 contracts.

87. Impact Cost is the measure of liquidity — True or False?

• False
• True
Explanation: Impact cost basically means what additionally a trader must pay because of the
order size i.e., due to price increase if there it is a big buy order and price decrease if there is
a big sell order.
If the scrip is very liquid i.e., there are huge buyers and sellers, the impact cost will be very
low. Therefore, if the liquidity is high - the impact cost is low and if the liquidity is poor, the
impact cost is high.

88. The difference between the spot price and the futures price is called tick.
• False
• True
Explanation: The difference between the spot price and the futures price is called BASIS.

89. In the Options segment, if you sell a PUT, you expect the market scrip to move
• Either up or down as you profit in both directions
• One cannot sell a PUT in the options market
• Up
• Down
Explanation: A seller of a PUT option has a positive / bullish view and he expects the market
script to go up to make profit.

90. A put option gives the buyer the right to ________

• Buy the underlying at market price
• Buy the underlying at set price
• Sell the underlying at market price
• Sell the underlying at set price
Explanation: A put option is a financial instrument that gives the buyer the right, but not an
obligation, to sell a set quantity of a security at a set strike price at some time on or before
expiration.
In easy terms- whatever may be the market price, the buyer of put option will be able to sell
security at the set price or strike price as he has paid a premium for it.

91. A person sells a put option of Strike Price 265, market lot 1000, at a premium of Rs 40,
the maximum profit he can make is _______
• Rs 25,000
• Rs 2,65,000
• Rs 40,000
• Unlimited
Explanation: The maximum profit for a seller of an option is the premium he receives. In this
case he has received Rs 40. The Lot size is 1000.
So, the maximum profit is 40 x 1000 = Rs 40,000.

92. _______ pays the initial margin when entering into a futures contract.
• The Buyer
• The Seller
• Both Buyers and Sellers
• None of the above
Explanation: In futures both buyer and seller pay the margin as both are heavily exposed to
market risks.
In options, only the seller has to pay the margin as buyers have a limited risk.

93. The Clearing Corporation has the power to charge special margin if it may think fit.
• True
• False
Explanation: The Clearing Corporation has powers to levy additional margins, special
margins, define maximum exposure limits and disable brokers from trading.

94. The right to buy an asset for a certain price on or before a specified date is the
characteristics of a _______
• American Put Option
• American Call Option
• European Put Option
• European Call Option

95. Contract month is the month in which futures contract __________

• Expires
• Are at the lowest price
• Are at its highest price
• None of the above
Explanation: Contract month is the month in which futures contract expires.
At the expiry of the nearest month contract, a new contract with 3 months maturity will start.
Thus, at any point of time, there will be 3 contracts available for trading.

96. Derivative markets mostly comprises of __________

• Long term investors
• Speculators
• Hedgers
• Both 2 & 3
Explanation: Long term investors buy stocks in the Spot / Cash market and take their delivery
and keep it for long term.
The active participants in Derivative markets are Hedgers, Speculators, Arbitrageurs etc.
97. Liquid Assets offered by a Clearing Member to the Clearing Corporation can include
Mutual Fund Units and Bank Guarantees. True or False?
• False
• True
Explanation: Clearing member is required to provide liquid assets to cover various margins
and liquid net worth requirements. The total liquid assets comprise of at least 50% of the cash
component and the rest is non cash component.
1. Cash Component:
*Cash
* Bank fixed deposits (FDRs) issued by approved banks and deposited with approved
custodians or Clearing Corporation.
* Bank Guarantees (BGs) in favour of clearing corporation from approved banks in the
specified format.
* Units of money market mutual fund and Gilt funds where applicable haircut is 10%.
+ Government Securities and T-Bills
2. Non Cash Component:
* Liquid (Group I) Equity Shares as per Capital Market Segment which are in demat form, as
specified by clearing corporation from time to time deposited with approved custodians.
* Mutual fund units other than those listed under cash component decided by clearing
corporation from time to time deposited with approved custodians.

98. In the Option segment, if you sell a CALL at a premium of Rs 45 at the Strike Price of Rs
400, lot is of 200 shares, then the maximum possible loss is _________
• Rs 9,000
• Rs 20,000
• Rs 80,000
• Unlimited
Explanation: For a seller of a Call option - the maximum profit is the premium he receives and
the maximum loss is unlimited because the price can rise to any level.
(Seller of a call option believes that price will fall. He makes a loss if prices rise and
theoretically prices can rise to any levels)

99. When a person sells a call option, he has __________

• Bullish view
• Bearish view
• Long term view
• None of the above

100. The Stock Broker/ Clearing Member has full authority to close out a transaction of his
client if ___________
• the client has not paid the daily settlement amount
• the client not paid the initial margin
• Both 1 and 2
• A broker cannot close out a transaction