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Q 1.
Welcome to Pass4Sure
Over-the-counter options are always standardised - State whether True or False ?
True
False
CORRECT ANSWER
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.
Q 2.
A seller of call option can lose unlimited amount of money - State True or False?
True
False
WRONG ANSWER
CORRET ANSWER:
True
Explanation:
A seller of a Call Option expects the price to fall. But as the price of the underlying rises, he
begins to make losses. Theoretically the price can rise to any levels and so the call option
seller may make unlimited losses.
Q 3.
The broker is compulsorily required to get a Risk Disclosure Document signed
by the client, at the time of client registration - State True or False?
True
False
WRONG ANSWER
CORRET ANSWER:
True
Explanation:
The broker is required to get a Risk Disclosure Document signed by the client, at the time of
client registration. This document informs clients about the kind of risks that derivatives can
involve for the client. It makes the client aware and well informed.
Q 4.
A long position in futures market can be reversed only with the same
counterparty from whom the contract was initially purchased - State whether
True or False?
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True
False
WRONG ANSWER
CORRET ANSWER:
False
Explanation:
Futures contracts are traded on screen based derivatives market where the identity of the
buyer and seller is unknown to each other. A trade can be squared off with any buyer or
seller whose quotes are available on the screen.
The Clearing Corporation acts as a legal counterparty for every contract and guarantees the
trades.
Q 5.
Intrinsic value of an option is sum of Option premium and Time value - State
whether True or False?
True
False
CORRECT ANSWER
Explanation:
Intrinsic value is basically the difference between Spot price and Strike price.
Option premium consists of two components - intrinsic value and time value
For eg. If the current option premium for a Rs 500 strike price Call option is Rs 70 and the
current spot price is Rs 550, than Rs 50 is the intrinsic value (550 -500) and the balance Rs
20 (70 - 50) is the time value.
Q 6.
Its the duty of the Clearing Corporation to continuously analyse and modify the
initial margin requirements as the stock markets tend to be very volatile - State
whether True or False?
False
True
WRONG ANSWER
CORRET ANSWER:
True
Explanation:
As per Prof. J.R.Verma Committee recommendations - Initial Margin levels should be
dynamic and recalculated continuously based on volatility levels. The Clearing Corporation
does this activity using modern mathematical tools.
Q 7.
In exercising call option on an index, the option holder receives from the option
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writer cash amount equal to excess of spot price (at the time of exercise) over
the strike price of the call option - State whether True or False ?
True
False
CORRECT ANSWER
Explanation:
When a person buys a Call Option of an index, he is expecting the index to rise. On exercise,
if the spot price of the index is over and above the strike price at which the buyer had
bought the Call, he will receive the difference between the spot price and strike price.
Q 8.
In a derivatives exchange, the networth requirement for a clearing member is
higher than that of a non-clearing member – State whether True or False?
True
False
CORRECT ANSWER
Explanation:
In a derivative exchange, the networth requirement for a clearing member is higher than that
of a non-clearing member.
Q 9.
At the time of final settlement, the seller / writer of the option will recognize the
adverse difference he paid to the buyer as ____ in his profit and loss account.
Expenses
Loss
Debt
Profit
WRONG ANSWER
CORRET ANSWER:
Loss
Explanation:
On exercise of the option, the seller/writer will pay the adverse difference, between the final
settlement price as on the exercise/ expiry date and the strike price. Such payment will be
recognised as a loss.
Q 10.
At price level of Rs. 6900, what will be the value of one lot of ABC futures
contract (contract multiplier 50)?
Rs. 289000
Rs. 690000
Rs. 345000
Rs. 460000
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WRONG ANSWER
CORRET ANSWER:
Rs. 345000
Explanation:
The value of the futures contract is the Price X Lot size
= Rs 6900 X 50 = Rs 345000
Q 11.
What does hedging do?
It maximises business profits
It minimises business losses
It produces a more clearer outcome
Hedging can be used only in currency markets and not in equity markets
WRONG ANSWER
CORRET ANSWER:
It produces a more clearer outcome
Explanation:
Hedging produces a more clearer outcome. The classic example is the farmer who sells
futures contracts to lock into a price for delivering a crop on a future date. The buyer might
be a food-processing company, which wishes to fix a price for taking delivery of the crop in
the future.
Another case is that of a company due to receive a payment in a foreign currency on a future
date. It enters into a forward transaction with a bank agreeing to sell the foreign currency
and receive a predetermined quantity of domestic currency.
Q 12.
Which of these statements id True?
Money and securities deposited by clients can be attached for meeting the brokers
obligation on his proprietary account
Money and securities deposited by clients cannot be attached for meeting the
brokers obligation on his proprietary account
Money and securities deposited by clients can be attached as per the decision of the
clearing corporation
Money and securities deposited by clients can be attached as per the decision of the
Stock Exchange
WRONG ANSWER
CORRET ANSWER:
Money and securities deposited by clients cannot be attached for meeting the brokers
obligation on his proprietary account
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Explanation:
The securities or money deposited by clients cannot be attached for meeting broker’s
obligation on his proprietary account.
The broker has to maintain separate client bank account for segregation of client money.
Also brokers should keep margins collected from clients in a separate bank account.
Q 13.
Initial margin to be paid in derivatives is set up taking into account the volatility
of the underlying market. Generally ___
Lower the volatility, higher the initial margin
Higher the volatility, lower the initial margin
Higher the volatility, higher the initial margin
None of the above
WRONG ANSWER
CORRET ANSWER:
Higher the volatility, higher the initial margin
Explanation:
When the markets are very volatile, it could results in losses to the traders. So to safe guard
the trading member and the trader, higher initial margin are levied on when volatility is high.
Q 14.
Meghna wants to sell 34 contracts of ABC futures at Rs. 2450 (contract multiplier
is 50) . Initial margin is 7%. How much will be the initial margin to be paid ?
Rs. 4165000
Rs. 83300
Rs. 5831
Rs. 291550
WRONG ANSWER
CORRET ANSWER:
Rs. 291550
Explanation:
Margin to be collected from Meghna : Rs 2450 X 34 contracts X 50 (Market lot) at 7%
= Rs 4165000 x 7% = Rs 291550
Q 15.
In the derivatives market, as the strike price goes down, the premium of PUT
option ______
will increase
will decrease
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there will be no change
can increase or decrease
WRONG ANSWER
CORRET ANSWER:
will decrease
Explanation:
For eg. If the Spot Price is Rs 900, and the premium for Put Option of Strike price 900 is Rs 5.
The premium for Strike price Rs 880 can be around Rs. 1.
(For a call option, the premium decreases as the strike price moves up)
Q 16.
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 trading 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 17.
In a derivative segment, the initial margin is collected from the clearing member
on a net basis ie. after netting all buy and sell positions of all clients together State True or False ?
True
False
CORRECT ANSWER
Explanation:
In the derivatives segment , Clients' positions cannot be netted off against each other while
calculating initial margin. Margin for each client has to be paid separately as per his
outstanding trades / position.
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Q 18.
Welcome to Pass4Sure
Derivatives brokers/ dealers are expected to know their clients and to exercise
care to ensure that the derivative product being sold by them to a particular
client is suitable to his understanding and financial capabilities - State True or
False ?
True
False
WRONG ANSWER
CORRET ANSWER:
True
Explanation:
Derivatives brokers/ dealers should avoid recommending opening futures/
options transaction unless they have a reasonable basis for believing that the customer has
such knowledge and financial experience that he or she is capable of evaluating,
and financially able to bear, the risks of the transaction.
Q 19.
Trading is allowed in Indian Equity markets in which of the following Index Options
Individual stock options
Individual stock futures options
All of the above
CORRECT ANSWER
Q 20.
Suppose you are a trading member and have bought 14 contracts of April series
index futures and sold 7 contracts of April series index futures on your own
account. What will be your exposure on these transactions ?
It will grossed up to 21 contracts
It will be netted to 7 contracts
Higher of 14 and 7 ie. 14 contracts
The Stock Exchange can decide to either to gross up or net out the exposure
depending on the past record of the trading member
WRONG ANSWER
CORRET ANSWER:
It will be netted to 7 contracts
Explanation:
The exposure will be netted ie. 14 -7 = 7 contracts.
Q 21.
A person has buy position in a stock, how can he cover his long position in the
stock ?
by Selling any security of equal quantity
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by Selling any index stock of equal quantity
by Selling the same stock and same quantity
by Selling any ‘A’ group stock of equal quantity
WRONG ANSWER
CORRET ANSWER:
by Selling the same stock and same quantity
Explanation:
To square up / cover a long position, the same quantity of the same stock has to be sold.
Q 22.
Mr. X does not hold any shares of ABC company so he cannot write a CALL
option on it - State True or False ?
True
False
CORRECT ANSWER
Explanation:
Any one, whether he holds the underlying asset or not, can buy / write options.
Q 23.
Two stocks A and B stocks are quoted at Rs 500 per share. Keeping everything
else constant, if A is more volatile than B, which ‘Put’ will be priced higher ?
The put of stock A
The put of stock B
Both the puts will be equally priced
WRONG ANSWER
CORRET ANSWER:
The put of stock A
Explanation:
Vega, which measure of the sensitivity of an option price to changes in market volatility is
positive for a long call and a long put.
An increase in the volatility of the underlying increases the expected payout from a buy
option, whether it is a call or a put.
Q 24.
On the derivatives futures market, if there are three series of one, two and three
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months open at a point of time, how many calendar spread can one have ?
1
2
3
4
CORRECT ANSWER
Explanation:
The three calendar spreads can be between months 1 and 2, 2 and 3 and 1 and 3.
Q 25.
______ can write an option in the Indian stock market .
Common individuals
Market makers
Foreign Financial Institutions (FII)
All of the above
CORRECT ANSWER
Explanation:
All of the above can write (sell) options in Indian stock market.
Q 26.
For a derivative exchange, the networth requirement for a clearing member is
always less than that for a non clearing member - State True or False ?
True
False
CORRECT ANSWER
Explanation:
In a derivative exchange, the networth requirement for a clearing member is higher than that
of a non-clearing member.
Q 27.
When an option moves more in the money, the absolute value of Delta will
_________ .
Increase
Decrease
No effect on delta
tend to become zero
WRONG ANSWER
CORRET ANSWER:
Increase
Explanation:
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The value of delta increases as an option moves more in the money.
For a Call option, the delta increases as price rises and for a put option, the delta increases
as price falls.
Q 28.
A Professional Clearing Member can act only for Institutional clients - State True
or False ?
True
False
CORRECT ANSWER
Explanation:
Professional clearing member clears the trades of his associate Trading Member and
institutional clients.
Q 29.
The price at which the market maker is ready to buy is known as BID price - State
True or False ?
True
False
WRONG ANSWER
CORRET ANSWER:
True
Explanation:
Bid price is the price buyer / market maker is willing to pay and ask price is the price seller is
willing to sell.
For eg - If the price of Reliance Industries Ltd as seen on the trading screen is Rs 1000 1001, this means Rs 1000 is the bid price and Rs 1001 is the ask price.
Q 30.
If a Day Order is not executed during the day, it will __________ .
get cancelled automatically once the trading time for the day is over
get executed the next day if its in the price range
get executed in the special auction market
None of the above
WRONG ANSWER
CORRET ANSWER:
get cancelled automatically once the trading time for the day is over
Explanation:
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A Day order is an order which is valid for a single day on which it is entered.
If the order is not executed during the day, the trading system cancels the order
automatically at the end of the day.
Q 31.
The Intrinsic value of an In the Money option is the difference between the Market
Price and the Exercise price - State True or False ?
True
False
WRONG ANSWER
CORRET ANSWER:
True
Explanation:
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 spot price over the
exercise price.
For put option which is in-the-money, intrinsic value is the excess of exercise price over the
spot price.
Q 32.
If the price of the underlying stock of a PUT option is very volatile, _________ .
the premium will comparatively be lower
the premium will comparatively be higher
the premium will be zero
No effect on option premium
WRONG ANSWER
CORRET ANSWER:
the premium will comparatively be higher
Explanation:
Vega, which measure of the sensitivity of an option price to changes in market volatility is
positive for a long call and a long put.
An increase in the volatility of the underlying increases the expected payout from a buy
option, whether it is a call or a put.
Q 33.
There is only CASH settlement for Nifty futures contract - State True or False ?
True
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False
WRONG ANSWER
CORRET ANSWER:
True
Explanation:
In Nifty, there is only cash settlement.
In some securities, SEBI has permitted physical settlement for futures contract.
Q 34.
A Mutual Fund floats a new fund offer of a 100% equity scheme. Till the time it
invests this cash in equities, the fund can take equity exposure by buying stock
index futures - State True or False ?
True
False
WRONG ANSWER
CORRET ANSWER:
True
Explanation:
FIIs & MF’s can take exposure in equity index derivatives subject to the following limits:
Long positions in index derivatives (long futures, long calls and short puts) not exceeding
(in notional value) the FII’s / MF’s holding of cash, government securities, T-Bills and similar
instruments.
Short positions in index derivatives (short futures, short calls and long puts) not exceeding
(in notional value) the FII’s / MF’s holding of stocks.
Q 35.
A writer of a naked PUT option is _______ .
Bullish and pays the premium
Bullish and receives the premium
Bearish and pays the premium
Bearish and receives the premium
WRONG ANSWER
CORRET ANSWER:
Bullish and receives the premium
Explanation:
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A writer ie. seller of a PUT option is bullish or neutral and receives the premium
A writer ie. seller of a CALL option is bearish or neutral and receives the premium
In options - A writer always receives the premium and the buyer always pays the premium
Q 36.
The potential exposure is calculated by the clearing corporation ______ .
on the last trading day of the contract month
on the last trading day of the week
at the end of the trading day
on real time basis
CORRECT ANSWER
Explanation:
Clearing corporation’s on-line position monitoring system monitors a CM’s open position on
a real-time basis.
Clearing corporation monitors the CMs for Initial Margin violation, Exposure margin
violation, while TMs are monitored for Initial Margin violation and position limit violation.
Q 37.
If a Trading member defaults in the derivative segment, he can still continue the
trading business in the cash segment. - True or False ?
False
True
WRONG ANSWER
CORRET ANSWER:
False
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.
Q 38.
The Spot price ie. the market price of a share is Rs 200 and the interest rate is
12% pa. Which of the below price is closest to 3 months future maturity ?
206
200
203
224
WRONG ANSWER
CORRET ANSWER:
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206
Explanation:
Price of a future contract is generally the spot price plus interest for the time period.
Yearly Interest Rate is 12%. Full year's interest = 12% of 200 ie. Rs 24 (200 x 12 / 100)
So for 3 months the cost of interest is Rs 6. ( 24/12 x 3)
Therefore the 3 month future contract will have an price of appx. Rs 206. (200 + 6)
Q 39.
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 _______.
Not to exercise the option
To exercise the option
May or may not exercise the option depending on whether he is in his city or not at
that time
May or may not exercise the option depending on whether he likes the company or
not
WRONG ANSWER
CORRET ANSWER:
Not to exercise the option
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 40.
If you have sold a ITC Ltd. futures contract (contract multiplier 500) at 200 and
bought it back at 228, what is your gain/loss?
A gain of RS. 6,800
A loss of Rs. 6,800
A loss of Rs. 14,000
A gain of Rs. 14,000
WRONG ANSWER
CORRET ANSWER:
A loss of Rs. 14,000
Explanation:
You had sold ITC believing that it will fall down, but it has risen - so there will be a loss.
200 - 228 = -28 Loss
-28 x 500 shares = - Rs 14000
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Q 41.
Welcome to Pass4Sure
If the price of a stock is volatile, then the option premium would be relatively
______.
Lower
Higher
No effect of volatility
zero
CORRECT ANSWER
Explanation:
Higher volatility means higher risk and higher risk means one has to pay a higher premium.
Q 42.
If the liquid assets maintained by clearing member Mr. Ram are higher than that
clearing member Mr. Shyam, which of the below options is/are true ?
There is no need to maintain liquid assets
Both Mr. Ram and Mr. Shyam have the same level of exposure
Mr Ram has a higher exposure level than Mr. Shyam
Mr Shyam has a higher exposure level than Mr. Ram
WRONG ANSWER
CORRET ANSWER:
Mr Ram has a higher exposure level than Mr. Shyam
Explanation:
As per the rules of SEBI and Stock Exchanges,the notional value of gross open positions at
any point in time in the case of all Futures and Options shall not exceed a particular
percentage of the liquid networth of a member.
So a member (Mr Ram) who keeps higher liquid assets as security and margin with the stock
exchanges will get higher exposure limits.
Q 43.
As per SEBI rules , a stock broker can be suspended from the derivatives
segment if ________ .
he violates the conditions of registration
he is suspended by the stock exchange
he fails to pay fees
Any of above
CORRECT ANSWER
Explanation:
A penalty or suspension of registration of a stock - broker under the SEBI (Stock Broker &
Sub - Broker) Regulations, 1992 can be ordered if:
• The stock broker violates the provisions of the Act
• The stock broker does not follow the code of conduct
• The stock broker fails to resolve the complaints of the investors
• The stock broker indulges in manipulating, or price rigging or cornering of the market
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• The stock broker’s financial position deteriorates substantially
• The stock broker fails to pay fees
• The stock broker violates the conditions of registration
• The stock broker is suspended by the stock exchange
Q 44.
Cost of carry model means price of futures is equal to _______ .
Spot price + Cost of Carry
Spot Price
Cost of Carry
Spot price – Cost of Carry
WRONG ANSWER
CORRET ANSWER:
Spot price + Cost of Carry
Explanation:
Cost of Carry is the relationship between futures prices and spot prices.
derivatives, carrying cost is the interest paid to finance the purchase.
For stock
For example, assume the share of XYZ Ltd is trading at Rs. 200 in the cash market. A person
wishes to buy the share, but does not have money. In that case he would have to borrow Rs.
200 at the rate of, say, 12% per annum. So 1% ie. Rs 2 ( 1% of Rs 200) is the per month
interest cost. and this Rs 2 is the cost of carry.
The future price (ideally) at the beginning of month will be Spot Price + Cost of Carry ie. Rs
200 + Rs 2 = Rs 202.
Q 45.
**Mr Gautam has sold a put option with strike of Rs.650 at a premium of Rs.60.
What is the maximum gain per share that he may have on expiry of this positon?
650
590
60
0
WRONG ANSWER
CORRET ANSWER:
60
Explanation:
The maximum a seller of an option (either CALL or PUT) can gain is the premium he
receives. In this case Mr. Gautam is receiving Rs 60 per share as premium and that can be
his maximum profit.
Q 46.
The Strangle strategy is similar to straddle strategy in outlook but different in
_______________ .
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implementation
aggression
cost
All of the above
CORRECT ANSWER
Explanation:
Long Strangle As in case of straddle, the outlook here (for the long strangle position) 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.
Q 47.
Theta is ___________.
is the change in option price given a one percentage point change in the risk-free
interest rate
a measure of the sensitivity of an option price to changes in market volatility
the change in option price given a one-day decrease in time to expiration.
speed with which an option moves with respect to price of the underlying asset.
WRONG ANSWER
CORRET ANSWER:
the change in option price given a one-day decrease in time to expiration.
Q 48.
The networth of clearing members does not include Bad Deliveries
Doubtful Debts
Unlisted Securities
All of the Above
CORRECT ANSWER
Explanation:
The minimum networth for clearing members of the derivatives clearing corporation/house
shall be Rs.300 Lakhs. The networth of the member shall be computed as follows:
- Capital + Free reserves
- Less non-allowable assets which are :
o Fixed assets
o Pledged securities
o Member’s card
o Non-allowable securities (unlisted securities)
o Bad deliveries
o Doubtful debts and advances
o Prepaid expenses
o Intangible assets
o 30% marketable securities
Q 49.
Option Premium consists of two components –
Intrinsic value and time value
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Sum of Call and Put premium
Premium value and time value
Intrinsic value and premium
WRONG ANSWER
CORRET ANSWER:
Intrinsic value and time value
Explanation:
Option premium consists of two components - intrinsic value and time value. 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. Therefore, only in-the-money options have intrinsic value whereas at-the-money
and out-of-the-money options have zero intrinsic value. The intrinsic value of an option can
never be negative.
For eg - If the spot price is Rs 200, and the call option premium of a Rs 195 strike price is Rs
25, then Rs 5 is the intrinsic value ( 200 - 195 ) and balance Rs 20 is time value.
Q 50.
The liquid asset which are to be maintained by clearing members with clearing
corporation can include gold and silver jewellery after applying standard 20%
haircut.
True
False
CORRECT ANSWER
Explanation:
Clearing member is required to provide liquid assets which adequately cover various
margins and liquid networth requirements. He may deposit liquid assets in the form of cash,
bank guarantees, fixed deposit receipts, approved securities and any other form of collateral
as may be prescribed from time to time. 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.
Out of 50 questions 17 correct and 33 wrong.
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