Revision Test-2

1. Can Professional Clearing members act only on behalf of institutional clients?

• Yes
• No
Explanation: Professional clearing member clears the trades of his associate Trading Member
and institutional clients.

2. Trading members shall maintain a higher level of Book net worth than the clearing
members - State True or False?
• True
• False
Explanation: Clearing Members have to maintain higher book net worth than trading
members.

3. If you have a long or short position in a futures contract, this can be closed by initiating
a reverse trade - True or False?
• True
• False
Explanation: Closing a position means either buying or selling a contract, which essentially
results in reduction of client’s open position (long or short). A client is said to be closed a
position if he sells a contract which he had bought before or he buys a contract which he had
sold earlier.

4. The idea and economic rational of introducing forward contracts is to ____________

• help arbitrage
• help trading
• help hedging
• both 1 and 3
Explanation: The essential idea of entering into a forward is to fix the price and thereby avoid
the price risk. By entering into forwards, one is assured of the price at which one can buy/sell
an underlying asset.
Thus, Forward contracts are basically meant for hedging / managing the risks.

5. As per Accounting Standards, the initial margin paid by an option seller is shown under
________ in the balance sheet
• Bad Debts
• Fixed Assets
• Current Assets
• Current Liabilities
Explanation: The seller/ writer of the option is required to pay initial margin for entering into
the option contract and its should be debited to an appropriate account, say, "Equity Index/
Stock Option Margin Account".
In the balance sheet, such account should be shown separately under the head "Current
Assets".

6. A person who’s bullish and a payer of premium is a __________

• buyer of call option
• seller of call option
• buyer of put option
• seller of put option
Explanation: A buyer of a Call is bullish and believes that the price will rise. He pays a premium
which is his maximum loss but the profits can be unlimited.

7. Investor Mr. X wants to sell 11 contracts of Feb series at Rs.6300 & investor Mr. Y wants
to sell 13 contracts of March series at Rs.6450. Lot size is 50 for both these contracts. The
initial margin is fixed at 6%. How much initial margin is required to be collected from both
these investors (sum of initial margin of X and Y) by the broker?
• Rs 251550
• Rs 459450
• Rs 640000
• Rs 374900
Explanation: Margin from Mr. X
Rs 6300 X 11 contracts X 50 (lot size) X 6% = 207900
Margin from Mr. Y
Rs 6450 X 13 contracts X 50 (lot size) X 6% = 251550
Total Margin = 207900 + 251550 = 459450.

8. A trader has taken a short position of one contract in Sept ABC futures (contract
multiplier 50) at a price of Rs.1800. When he closed this position after a few days, he
realized that he has made a profit a Rs.5000. Which of the following closing actions would
have enabled him to generate the profit? (Please ignore brokerage costs).
• Buying 1 Sept ABC futures contract at 1900
• Buying 1 Sept ABC futures contract at 1700
• Selling 1 Sept ABC futures contract at 1900
• Selling 1 Sept ABC futures contract at 1700
Explanation: To make a profit of Rs 5000, he has to earn Rs 100 per share (5000 / 50 (lot size)
= 100)
Since he has gone short, he will make a profit when the price falls and He buy at the reduced
price.
He has sold at Rs 1800, so when he buys back at Rs 1700 he makes Rs100 profit per share.
Rs 100 X 50 (Lot size) = Rs 5000 profit.
9. The option which gives the holder a right to buy the underlying asset on or before a
particular date for a certain price, is called as _________
• European put option
• American put option
• American call option
• European call option
Explanation: In case of American options, buyers can exercise their option any time before
the maturity of contract.
In case of European options, owner of such option can exercise his right only on the expiry
date/day of the contract.

10. A call option gives the holder a right to buy how much of the underlying from the writer
of the option?
• The specified quantity or less than the specified quantity
• The specified quantity or more than the specified quantity
• Only the specified quantity
• None of the above
Explanation: Only the specified quantity as per the lot size of the option contract.

11. Which of the following is closest to the forward price of a share if cash price is Rs 425,
forward contract maturity = 12 months from date, market interest rate 12%
• 425
• 482
• 476
• 437
Explanation: 12 months maturity means full one year of interest cost.
So, 12% of 425 = 425x 12/100 =51
425 + 51 = 476 is closest to the one year forward price

12. A trader is very bearish on specific companies. However, he is bullish on the market as
a whole. Which of the following is the most appropriate strategy to take advantage from
this view?
• sell the shares of those specific companies in futures and also sell index futures
• sell the shares of those specific companies in futures and buy index futures
• buy the shares of those specific companies in futures and sell index futures
• do nothing
Explanation: The trader should sell the shares of those specific companies in futures and buy
index futures. By this he will profit when the stock prices of those specific companies fall and
index rises - if his view proves correct.
13. The concept in which the derivative trader gets a higher exposure for the small portion
of margin amount brought by him is called as __________
• Arbitrage
• Leverage
• Delta Hedging
• Speculation
Explanation: A trader in the future’s market pays a relatively small margin for market
exposure in relation to the contract value. This is known as leverage.

14. Which of the following problem(s) that exist in the forward contracts are solved by the
Futures contracts?
• a central agency for monitoring
• settlement problems
• counterparty risk
• all of the above

15. Loss incurred on derivatives transactions can be carried forward for a period of 12
assessment years - State whether True or False?
• True
• False
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.

16. A short position in a CALL option can be closed out by taking a long position in a PUT
option with same exercise date and exercise price - State True or False?
• True
• False
Explanation: A short position in a CALL option can be closed out by taking a long position in
a same CALL option with same exercise date and exercise price.

17. Which of the following complaints can be taken up by the exchange for redressal?
• Claims for notional loss, opportunity loss for the disputed period or trade
• Complaints pertaining to trades not executed on the Exchange by the complainant
• Claims of sub-broker/authorized persons for private commercial dealings with the
trading member
• Excess Brokerage charged by Trading Member/ Sub-broker
Explanation: Exchanges provide assistance if the complaints fall within the purview of the
Exchange and are related to trades that are executed on the Exchange Platform. Excess
Brokerage charged by Trading Member/ Sub-broker comes under this assistance.
18. Mr. Ravi purchases 10 call option on stock at Rs. 20 per call with strike price of Rs 350.
If on exercise date, stock price is Rs. 310, ignoring transaction cost, Mr. Ravi will choose
________
• to exercise the option
• not to exercise the option
• may or may not exercise the option depending on whether he likes the company or
not
• may or may not depending on whether he is in town or not
Explanation: Mr. Ravi has bought a Call Option assuming that the price will rise.
The price has fallen and he is in a loss. So, he will not choose to exercise his option.
His loss is restricted to the premium he has paid.

19. Trading members are required to possess a higher level of Capital Adequacy (as per
balance sheet) than clearing members- True or False?
• True
• False
Explanation: Clearing Members are permitted to settle their own trades as well as the trades
of the other non-clearing members known as Trading Members who have agreed to settle the
trades through them.
Thus, the Capital Adequacy requirement is higher for Clearing Members.

20. A trader sold a call option on a share of strike price Rs. 200 and received a premium of
Rs. 12 from the option buyer. What can be his maximum loss on this position?
• Rs 200
• Rs 188
• Rs 12
• Unlimited
Explanation: When trader sells a Call option, he is bearish / neutral on that scrip.
But in case the price rises, he makes losses and theoretically price can rise to any levels - so
his losses can be unlimited.
In this e.g., he has sold Rs 200 call at Rs 12. In case the price rises, the call price will also rise
and theoretically it can rise to any levels leading to ‘unlimited losses’

21. Investor protection fund for the derivatives segment is __________

• same as that of cash segment
• Independent of that of cash segment
• contributed by ministry of finance
• Independent of fund is there for the derivative segment

22. The contract size in futures market is defined by ___________

• The Stock Brokers
• The Stock Exchange
• The Parties to the contract
• SEBI
Explanation: The Contract size (Lot size) is specified by the exchange. (Minimum value of Rs
5,00,000).

23. In Options- the seller of a contract pays an upfront premium at the time of entering into
the contract - State whether True or False?
• True
• False as the premium is paid on maturity
• False as the premium is paid by the buyer and not the seller
• None of the above

24. The mark-to-market margin debits for index options are made on ___________
• weekly basis
• daily basis
• fortnightly basis
• every Friday
Explanation: All types of Mark to Market margin debits are made on daily basis.

25. A calendar spread in index futures is treated as ________ in a far month contract when
the near months contract is expired.
• long position
• hedged position
• naked position
• Short position
Explanation: A calendar spread becomes a naked/open position, when the near month
contract expires or either of the legs of spread is closed.

26. The main objective of derivatives is to enable market participants to ___________

• Trade
• Manage the risks
• Speculate
• Arbitrage

27. Higher the interest rate, the higher the CALL option premium - State True or False?
• True
• False
Explanation: High interest rates will result in an increase in the value of a call option and a
decrease in the value of a put option.

28. A Buyer or holder of the option is the party to the contract who has __________
• the obligation but not the right
• the right but not the obligation
• the right and the obligation
• None of the above
Explanation: A Call option gives the buyer the right, but not the obligation to buy the
underlying at the strike price.
A put option gives the buyer of the option the right, but not the obligation, to sell the
underlying at the strike price.

29. The Trading members on the exchange’s derivatives segment are not required to be
registered with SEBI. - State whether True or False?
• False
• True

30. A unique principle of futures trading makes trading possible for those who do not want
to make or take delivery of underlying assets. Which is that principle?
• Traded on a recognised exchange
• Price uncertainty
• Standardisation of contracts
• Cash settlement
Explanation: In a cash settlement method, the parties to a transaction settle by receiving or
paying the gains or losses related to a contract in cash (i.e., money transfer)

31. On the National Stock Exchange, for its index futures, what would be the opening day
of its April series?
• Last Friday of March month
• Last Friday of April month
• Last Friday of Jan month
• Last Friday of February month
Explanation: There are 3 series of index futures active all the time. A new series is introduced
as the older series expires.
Let’s assume the Jan, Feb and March series are active currently.
On the last Thursday of Jan, the Jan series will expire.
So that next day i.e., on the last Friday of Jan, the April series will be activated. This will be
the opening day for April series. Thus, we will have three series active i.e., Feb, March and
April.

32. Operational risks include losses due to _________

• natural calamities
• inadequate contingency planning
• power failure
• all of the above
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.
33. The total number of outstanding / unsettled contracts in the market, at any point of
time is known as “OPEN INTEREST”- True or False?
• True
• False
Explanation: An open interest is the total number of contracts outstanding (yet to be settled)
for an underlying asset.

34. The clearing corporation may utilize the client account margins deposited with it for
fulfilling the dues which a clearing member may owe to the clearing corporation for the
trades on the clearing members own account. State True or False?
• True
• False
Explanation: Clients money cannot be used by the Clearing or Trading member for his trades.

35. A clearing member has deposited eligible liquid assets of Rs.75 lacs. The exchange has
minimum liquid net worth requirement of Rs. 50 lakhs. The member has not entered into
any transactions so far. What is the margin available for trading? (In lakhs)
• 75
• 50
• 25
• 125
Explanation: Liquid Net worth is defined as Liquid Assets minus Initial Margin.
In above case he has deposited Rs 75 lakhs as liquid assets. Rs 50 lakhs is the requirement, so
the balance Rs 25 lakhs will be used as initial margin.

36. Is it true that an efficient cash market is required for an efficient futures market? Yes
or No?
• Yes
• No
Explanation: The prices of futures are derived from the underlying cash market prices. So, an
efficient cash market is required for an efficient futures market.

37. If the price of a future contract increases, the mark to market margin account of the
holder of the short position in that contract is credited for the gain. State whether True or
False?
• True
• False
Explanation: In a short position, if the price increases there is a loss. So, the mark to market
margin will be debited.

38. The absolute amount of minimum capital adequacy requirement for derivative brokers
is same as that for cash market- True or False?
• True
• False
Explanation: The absolute amount of minimum capital adequacy requirement for derivative
brokers/dealers has to be much higher than for cash market.
Further, if a broker/dealer is involved both in cash and futures segments, or in several
exchanges, the capital adequacy requirement should be satisfied for each exchange/segment
separately.

39. Change in option premium for a unit change in _________ is known as Rho.
• market volatility
• Price of the underlying asset
• Risk-free interest rate
• liquidity
Explanation: Rho is the change in option price given a one percentage point change in the
risk-free interest rate.

40. The ask price is the price at which __________

• the clearing corporation settles the transaction
• the trader is prepared to sell the share
• the trader is prepared to purchase the share
• the trader is prepared to either buy or sell the share
Explanation: BID ASK price means Buyer and Seller price - e.g., Rs 100 - 101
So, Ask price is the price at which the trader is prepared to sell the share.

41. In India, futures and options on individual stocks are allowed on __________
• A few selected stocks only
• All stocks listed on any of the exchanges
• All stocks with stock price of more than Rs.100 or Rs 50 in A and B group resp.
• Only those stocks which are simultaneously listed on all the stock exchange in India
Explanation: Only those stocks are included to be traded in the derivatives segment which
meet the SEBI / Exchange criteria for derivatives trading.

42. Higher the price volatility, higher would be the initial margin requirement - State True
or False?
• True
• False
Explanation: If the price of a stock is very volatile, the risk of losses increases. So, the Stock
Exchanges collect higher initial margins in such cases.

43. In a derivative exchange, the net worth requirement for a clearing member is higher
than that of a non-clearing member (i.e., a member who only clears his trades).
• True
• False
Explanation: Clearing Member Eligibility Norms: Net-worth of at least Rs.300 lakhs.
The Net-worth requirement for a Clearing Member who clears and settles only deals executed
by him is Rs. 100 lakhs.
44. Money and securities deposited by clients with the trading members should be kept by
them in a separate clients account- True or False?
• True
• False

45. All active members of the Exchange are required to make initial contribution towards
Trade Guarantee Fund of the Exchange- State True or False?
• True
• False
Explanation: Main objectives of Trade Guarantee Fund (TGF):
- To guarantee settlement of bonafide transactions of the members of the exchange.
- To inculcate confidence in the minds of market participants.
- To protect the interest of the investors in securities.
All active members of the Exchange are required to make initial contribution towards Trade
Guarantee Fund of the Exchange.

46. An increase in the interest rates will lead to __________

• increase the premium on put options
• decrease the premium on put options
• No effect on put options
• Expiration of the option automatically
Explanation: High interest rates means high cost of capital and this will result in an increase
in the value of a call option and a decrease in the value of a put option.

47. In a forward contract, the party that’s agrees to sell the underlying asset on a certain
specified date for a certain specified price is said to have assumed ___________
• a long position
• a square off position
• a short position
• a trade off position
Explanation: Trade off basically means- an exchange where you give up one thing in order to
get something else. In a forward contract for e.g. - the farmers sell his crop two months hence
in exchange of some amount of money.

48. Mr. Hitesh is a trading member. One of his clients has purchased 12 contracts of March
series index futures and another client as has sold 10 contracts of March series index
futures. The exposure of Mr. Hitesh as trading member is _________
• grossed up at 22 contracts
• netted out at 2 contracts
• maximum of 10 and 12 which is 12 contracts
• The Exchange will decide to either gross up or net out the exposure depending upon
his past record
Explanation: The open position of all the clients of a trading member is grossed up to arrive
at the total exposure of the trading member.
49. In case of Call options, if the market price is less than the exercise (strike) price, the
option will ___________
• expire worthless
• seller of the option will exercise it
• will definitely get exercised
• none of the above
Explanation: If market price is below strike price, the option expires worthless as the buyer
will incur the maximum loss of his premium paid and the seller will earn the premium received.

50. Does the difference between exercise price of the option and spot price affects option
premium? State Yes or No.
• Yes
• No
Explanation: The Option premium is a combination of intrinsic value and time value and other
factors.
The Intrinsic value is difference between Spot and Exercise Price (Strike Price).
Exercise price remains constant whereas the Spot price fluctuates.
So, the option premium will fluctuate as per the movement in Spot price.

51. A high initial margin level improves solvency & financial capability of the clearing
corporation - True or False?
• True
• False
Explanation: Higher initial margin collection from trading members reduces the chances of
their defaults thus improving the solvency & financial capability of the clearing corporation.

52. An American put option gives the buyer the right but not the obligations to sell to the
writer an underlying asset at a specified price on or before the expiry date - State whether
True or False?
• True
• False
Explanation: The owner of American option can exercise his right at any time on or before the
expiry date/day of the contract.
The owner of European option can exercise his right only on the expiry date/day of the
contract.

53. State True or False - A futures contract is usually referred to by its delivery month.
• True
• False
Explanation: A key characteristic of a futures contract that designates when the contract
expires and when the underlying asset must be delivered. The exchange on the futures
contract is traded will also establish a delivery location and a date within the delivery month
when the delivery can take place.
Not all futures contracts require physical delivery of a commodity, and many are settled in
cash.
Delivery Month is also referred to as "contract month."

54. Mr A sold a put option of strike Rs.400 on PQR stock for a premium of Rs.32. The lot
size is 500. On the expiry day, PQR stock closed at Rs. 350. What is your net profit or loss?
• -25000 (Loss)
• -9000 (Loss)
• 9000 (Profit)
• 25000 (Profit)
Explanation: Mr. A sold a PUT option, that means he has a bullish or neutral view on PQR
stock.
However, PQR stock has fallen by Rs 50 (400 - 350).
Which means he has lost Rs 50.
Since he has sold a PUT, he will receive the premium which is Rs 32.
So, his net loss will be Rs 50 (Loss) - Rs 32 (Premium Recd) = Rs 18
Total Loss = Rs 18 x 500(lot size) = Rs. 9000

55. In an Index Futures contract, the tick size is 0.2 of an index point & the index multiple
is Rs 50, then ‘a tick’ is valued at __________
• Rs 50
• Rs 100
• Rs 10
• Rs 2.50
Explanation: Rs 50 X 0.2 =Rs 10.
Each tick movement will result in profit or loss of Rs 10 for the Index buyer or seller resp.

56. The securities which are placed by clearing members with the clearing corporation as a
part of liquid assets are ______________
• marked to market on a periodical basis
• is not marked to market as they are blue chip shares
• may or may not be marked to market depending on the decision of the Stock Exchange
• None of the above
Explanation: As per Prof. J. R. Verma Committee recommendations the securities placed with
the Clearing Corporation shall be marked to market on a periodical basis (weekly).

57. Contract month means ___________

• Month in which the transaction is done
• Month of expiry of the futures contract
• Month of beginning of the futures contract
• None of the above
Explanation: Contract month is the maturity month of the contract.
For e.g. - A trader may buy a March month contract in January.
So, March will be the contract month.
58. Initial margin is calculated based on __________
• Average price movement in the last 5 working days
• Value-At-Risk (VAR) based margining
• fixed at 25% for most of the scrips and 35% for volatile scrips
• As per the most of Black & Scholes Model
Explanation: Initial margin requirements are based on 99% value at risk over a one day time
horizon.

59. Daily ‘Trading Price Limits’ define the maximum percentage by which the price of a
future contract can rise above or fall below the previous days settlement price - State
whether True or False?
• True
• False

60. For portfolio hedging by institutions and mutual funds, index based derivatives are
more suitable and are much more cost effective than derivative based on individual stocks
- State True or False?
• True
• False

61. A Clearing Member is responsible to the exchange for his transactions & also for the
position of his trading members under him - True or False?
• False
• True

62. A default by a member in the derivatives segment will be not be treated as default in
the cash segments of that exchange - State True or False?
• False
• True
Explanation: A default by a member in the derivatives segment will be treated as default in
all segments of that exchange and as default on all exchanges where he is a member.

63. Does trading in derivatives become expensive due to high margins? State Yes or No.
• Yes
• No
Explanation: Cost components of futures transaction include margins, transaction costs
(commissions), taxes etc. So higher the margins more expensive the trading.
64. _________ risk is the component of price risk that is unique to particular events of the
company and/or industry and this risk could be reduced to a certain extent by diversifying
the portfolio.
• Unsystematic Risk
• Systematic Risk
• Arbitrage Risk
• Interest Rate Risk
Explanation: The risk that is specific to an industry or firm. Examples of unsystematic risk
include losses caused by labour problems, nationalization of assets etc. Also called
diversifiable risk

65. The Clearing of trades on a stock exchange can be done by __________

• by the trading members
• by the clearing members
• both by clearing members and trading members
• none of the above

66. In an In-the-money put option _________

• strike price would be lower than the market price
• exercise price would be equal to the market price
• strike price would be higher than the market price
• strike price would be zero
Explanation: A put option is said to be In-The-Money when market price is lower than strike
price.

67. Delta measures the expected change in the option premium for a unit change in
__________
• Volatility of underlying asset
• treasury interest rates
• time to option expiry
• spot price of underlying asset
Explanation: Delta measures the sensitivity of the option value to a given small change in the
price of the underlying asset.

68. In an Out-of-the Money (OTM) Put option___________

• Strike price would be higher than the market price
• Exercise price would be equal to the market
• Strike price would be lower than the market price
• strike price would be zero
Explanation: A put option is said to be OTM when spot (market) price is higher than strike
price.
A call option is said to be OTM, when spot (market) price is lower than strike price.
69. Liquid assets criterion for professional clearing members is different from that of the
trading cum clearing members- True or False?
• True
• False

70. A trader sold on ABC Stock Futures Contract at Rs.354 & the lot size is 900. What is the
traders profit or loss if he purchases the contract back at Rs.341?
• Rs 11700
• Rs -11700 (Loss)
• Rs 8300
• Rs -8300 (Loss)
Explanation: He sold at Rs 354 and bought back at Rs 341 which means he has made a profit.
Rs 354 - Rs 341 = Rs 13
Rs 13 X 900 (Lot size) = Rs 11,700 Profit

71. When would a trader make a profit on a short position of September futures?
• when he buys an October futures at a lower price
• when he sells another September futures at a lower price
• When he square off this short position by buying the September futures at lower price
• When he sells October futures at a lower price
Explanation: Profit can be made in a short position when the price falls and the same is
bought back.
For e.g. - You sold a stock at Rs 100 i.e., created a short position. When price falls to say Rs 80
and you buy it back, you make a profit of Rs 20.
In case of futures, you have to square up in the same expiry month.

72. Which of the following is not an application of indices?

• index derivatives
• exchange traded funds
• private equity funds
• Index funds
Explanation: Private Equity Funds are not connected to any index and they are not listed on
any stock exchange.

73. Options contracts are not symmetrical with respect to rights & obligations of the parties
involved - State True or False?
• True
• False
Explanation: The buyer of an option has a right but not the obligation in the contract. Also,
his risks are limited to the extent of premium paid.
The writer/seller of an option is one who receives the option premium and is thereby obliged
to sell/buy the asset if the buyer of option exercises his right. His risks are unlimited.
Thus, Option contracts are not symmetrical as the buyers and sellers have different
obligations and risk factors.
On the other hand, obligations and returns in Futures are symmetrical for both buyer and
sellers.

74. Time value and intrinsic value of a call option are always either positive or zero- True
or False?
• True
• False
Explanation: Only in-the-money options have intrinsic value whereas at-the-money(A-T-M)
and out-of-the-money(O-T-M) options have zero intrinsic value. The intrinsic value of an
option can never be negative.
Time value also can never be negative.

75. The gain or loss is realized on daily basis due to mark to market mechanism in which of
the following contracts?
• Forward Contracts
• Contracts in Swaps
• Future market contracts
• Equity Cash Market contracts

76. The market price of a share is Rs 120 and the 110 Call is quoted at Rs 24, what is the
intrinsic value of this Call option?
• Rs. 10
• Rs. 20
• Rs. 34
• Rs. 130
Explanation: Option Premium consists of two variables- Intrinsic Value and Time Value.
In the above case, the cash market price is 120 and the strike price is Rs 110. So, the Intrinsic
value is Rs 10 (120 - 110). The balance of option premium (24 - 10) i.e., Rs 14 is the time value.

77. The main logic behind Position limits is to __________

• prevent the market being unduly influenced by the activities of an individual/group of
investors
• prevent the market being unduly influenced by Central Govt policies
• give direction to the market to move up or down as determined by SEBI
• to encourage high net worth investors to provide direction to the market
Explanation: Position limits are the maximum exposure levels which the entire market can go
up to and each Clearing Member/ Trading member or investor can go up to.
Thus, no investor can take an extra ordinary large position and influence the direction of a
scrip / market.
78. The seller of the put option gains if price of underlying asset __________
• Decreases
• Increases
• Does not change
• Both 2 and 3
Explanation: The seller of PUT option is either bullish or neutral. He gains the premium
received if the underlying increases or remains flat.

79. A portfolio with 50 different stocks is twice as risky as another portfolio with 100 stocks
in it - State whether True or False?
• True
• False
Explanation: A good index is a trade-off between diversification and liquidity. A well-
diversified index reflects the behaviour of the overall market/ economy. While diversification
helps in reducing risk, beyond point it may not help in the context.
Going from 10 stocks to 20 stocks gives a sharp reduction in risk. Going from 50 stocks to 100
stocks gives very little reduction in risk. Going beyond 100 stocks gives almost zero reduction
in risk. Hence, there is little to gain by diversifying beyond a point.

80. Mr. A buys a call option with lower strike price and sells another call option with higher
strike price both on the same underlying share and same expiration date, the strategy is
called __________
• Bull Spread
• Bear Spread
• Butterfly Spread
• Calendar Spread
Explanation: A bull call spread is constructed by buying a call option with a low strike price,
and selling another call option with a higher strike price.

81. Futures trading is considered more risky than equity trading due to ___________
• high leverage
• high pressure
• high volatility
• high liquidity
Explanation: Traders can trade in derivatives by paying a small margin (around 25 to 30% of
the total contract value), This leverage increases the risk as the trader can take up positions
beyond his capacity.

82. Institutional investors pay higher margins than the individual investors for derivatives
trading - State True or False?
• True
• False
Explanation: The margin requirement is same for both individual investors and institutional
investors.
83. The derivatives segment of a Stock Exchange is under the same governing council as the
cash segment- State True or False?
• True
• False
Explanation: The derivatives exchange/segment has a separate governing council and no
common members are allowed between the Cash segment Governing Board and the
Derivatives segment Governing Council of the exchange.

84. You have bought a futures contract and the price drops, you will ___________
• Make a profit
• Make a loss
• given information is incomplete to arrive at a conclusion
• none of the above

85. Stock price is ____________

• same as in the near month future contract
• same as exercise price of an option
• same as strike price of an option
• the price of the underlying in the spot market
Explanation: Stock price or Spot price means the current market price of that stock in the cash
market.

86. A naked call option means that the writer does not currently owns the underlying -
State True or False?
• True
• False
Explanation: An options strategy in which an investor writes (sells) call options on the open
market without owning the underlying security.
This strategy is sometimes referred to as an "uncovered call" or a "short call".

87. Factor(s) influencing option pricing include which of the following?

• time to expire
• volatility of the underlying shares
• dividend pay out
• all of the above

88. When ordinary cash dividends are declared, put option values will decrease - State True
or False?
• True
• False
Explanation: Cash dividends issued by stocks have big impact on their option prices. This is
because the underlying stock price is expected to drop by the dividend amount on the ex-
dividend date.
Put options gets more expensive due to the fact that stock price always drops by the dividend
amount after ex-dividend date.
In case of call options, they can get discounted by as much as the dividend amount.

89. A Writer of an option ________

• has obligation in the contract
• receives the premium
• has choice in the contract
• Both 1 and 2
Explanation: The writer of an option is one who receives the option premium and is thereby
obliged to sell/buy the asset if the buyer of option exercises his right.

90. The daily settlement prices of equity derivatives are decided by ___________
• Clearing Corporation
• SEBI
• Brokers Association
• RBI
Explanation: One of the responsibilities of the Clearing Corporation is to decide the Daily
Settlement Prices.

91. The maximum possible loss for the option buyer is the premium paid, but the profits
can be higher depending on the underlying price movement. This is true for which type of
options?
• true for all types of options
• true for American options only
• true for European options only
• false for all types options
Explanation: The difference between American and European options is relating to the time
of exercising the contract. Profit potential in both of them is same.

92. If a Clearing members defaults, the margin paid on his own account only is allowed to
be used by the clearing corporation for realizing its dues from the member. The clients
margin remains unaffected - State True or False?
• True
• False
Explanation: In case of Clearing Member default, margins paid by the Clearing Member on
his own account alone would be used to settle his dues.

93. A future contract is a very standardized contract that leaves very little (except the price)
open to negotiation - State True or False?
• False
• True
Explanation: Terms of the future contracts are standardized wrt. quantity, time period etc.
Only price is decided by the demand supply and other market situations.
A forward contract on the other hand is not standardized.

94. Shorter the time to maturity of the call option, higher will be the time value - State
whether True or False?
• True
• False
Explanation: Other things being equal, options tend to lose time value each day throughout
their life. This is due to the fact that the uncertainty element in the price decreases.
Thus, shorter the time to maturity, lower will be the time value.

95. Mr. Anand asks his broker to buy certain number of contracts at the market price, this
instruction is called _________
• arbitrage order
• limit order
• stop loss order
• market order
Explanation: A market order is an order to buy or sell a contract at the best bid/offer price
currently available in the market. Price is not specified at the time of placing this order.

96. A client registration form contains client’s __________

• investment objectives
• background
• beneficial identity
• all of the above

97. Any person who wishes to open a Trading Account must be given the following
documents by his trading member-
• Complete version of all the laws of SEBI
• Risk disclosure document
• All the rules & regulations of the exchange
• SEBI guidelines on the subject
Explanation: The broker is required to get a Risk Disclosure Document signed by the client, at
the time of client registration.

98. The ‘ASK’ price is always _________

• greater than the bid price
• equal to bid price
• lower than the bid price
• none of the above
Explanation: Bid and Ask price means the Buyer and Seller price.
For e.g., price of a stock as quoted on a stock market is Rs. 100 - 101.
So, 100 is the Bid price and 101 is the Ask price.
The Ask will always be higher than Bid price.
99. Mr. Mohan entered into a contract with Mr. Soham to buy 500 bags of Cotton at a price
of Rs 800 per bag. Delivery of goods and payment of money will take place 4 months from
now. Both Mr. Mohan and Mr. Soham have a right as well as an obligation under this
contract. What type of contract is this?
• Options
• Forwards
• Futures
• Swaps
Explanation: Forward contract is an agreement made directly between two parties to buy or
sell an asset on a specific date in the future, at the terms decided today. There is no Stock
Exchange, Commodity Exchange etc. involved.

100. The process by which a futures contract is terminated by a transaction that is equal
and opposite to the original transaction is called _________
• netting
• off setting
• hedging
• mark to market
Explanation: A closing transaction is one that reduces or eliminates an existing position by an
appropriate offsetting purchase or sale.