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Q 1.
Welcome to Pass4Sure
The risk that cannot be controlled by diversification of portfolio is _____ .
Systematic Risk
Unsystematic Risk
Credit Risk
Operational Risk
WRONG ANSWER
CORRET ANSWER:
Systematic Risk
Explanation:
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.
Systematic risk can be caused due to unfavourable reasons such as act of nature like a
natural disaster, changes in government policy etc.
Q 2.
The margining system for index futures is based on _______ .
Margin at risk
Price at risk
Volume at risk
Value at risk
WRONG ANSWER
CORRET ANSWER:
Value at risk
Explanation:
As per the recommendations of Dr. L.C.Gupta Committee - Margins should
be based on Value at Risk Methodology at 99% confidence.
Clearing corporation charges an upfront initial margin for all the open
positions of a Clearing Member. It specifies the initial margin requirements
for each futures/ options contract on a daily basis and also follows ValueAt-Risk (VAR) based margining.
Q 3.
Future contracts are not symmetrical with respect to rights & obligations of the
parties involved - State True or False?
True
False
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CORRECT ANSWER
Explanation:
Option contracts are not symmetrical as the buyers and sellers have different obligations
and risk factors. The buyer has limited risk where as seller of an option has unlimited risk.
On the other hand, obligations and returns in Futures are symmetrical for both buyer and
sellers. Both gain or lose in equal proportion as per the price movements.
Q 4.
The option which gives the holder a right to SELL the underlying asset on or
before a particular date for a certain price, is called as _________
American Call option
American Put option
European Call option
European Put option
WRONG ANSWER
CORRET ANSWER:
American Put option
Explanation:
American option: The owner of such option can exercise his right at any time on or before
the expiry date/day of the contract.
A Put Option gives the holder the right to sell the underlying asset on or before a particular
date for a certain price
(European option: The owner of such option can exercise his right only on the
expiry date/day of the contract. In India, Index options are European)
Q 5.
The rate of change in option premium for a unit change in price of the underlying
asset is known as Delta - State True or False ?
False
True
CORRECT ANSWER
Explanation:
Delta measures the sensitivity of the option value to a given small change in the price of the
underlying asset.
Q 6.
A tick is __________ .
Minimum price difference between two buy quotes
Minimum price difference between two sell quotes
Both 1 and 2
None of the above
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WRONG ANSWER
CORRET ANSWER:
Both 1 and 2
Explanation:
Tick Size is the minimum move allowed in the price quotations.
(Eg - Suppose the tick size 5 paise. A buyer has entered an order to buy at Rs 100. If some
other buyer wants to enter a buying quote at a higher price, he can quote the price as Rs
100.05 and not 100.01)
Q 7.
Calendar spreads carry basis risk and no market risk - hence _____ margins are
charged.
Higher
Lower
NIL
Very high
CORRECT ANSWER
Explanation:
Calendar spreads carry only basis risk and no market risk - hence lower margins are
adequate.
That is why margin on calendar spread transaction in index futures is lower than the sum of
regular margin on two independent legs of spread transaction.
(Basis risk arises when the price of a futures contract does not have a predictable
relationship with the spot price, which is very rare.
Market risk is the risk that the price of a stock etc. will increase or decrease due to changes
in market factors)
Q 8.
Professional clearing member clears the trades of his associate Trading Member
only - State True or False ?
True
False
CORRECT ANSWER
Explanation:
Professional clearing member clears the trades of his associate Trading Member and
Institutional clients.
Q 9.
Tick size is _________ .
Contract Lot size
Average of the high and low prices
The maximum permitted movement in the price of the contract
The minimum permitted movement in the price of the contract
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WRONG ANSWER
CORRET ANSWER:
The minimum permitted movement in the price of the contract
Explanation:
Tick Size is minimum move allowed in the price quotations.
Exchanges decide the tick sizes on traded contracts as part of contract specification. For eg.
- Tick size for Nifty futures is 5 paisa.
Q 10.
How many shares should be ideally there in an index ?
Depends on the objective of the index
Around 100 to comprehensively cover all sectors
Exactly 50
Below 50
WRONG ANSWER
CORRET ANSWER:
Depends on the objective of the index
Explanation:
Stocks in the index are chosen based on certain pre-determined qualitative and quantitative
parameters, laid down by the Index Construction Managers. Once a stock satisfies the
eligibility criterion, it is entitled for inclusion in the index.
Generally, final decision of inclusion or removal of a security from the index is taken by a
specialized committee known as Index Committee.
Q 11.
In Option Spreads there is a combination of options constructed in such a way
that there is limited profit or limited loss - State True or False ?
True
False
CORRECT ANSWER
Explanation:
Option Spreads involve combining options on the same underlying and of same type (call/
put) but with different strikes and maturities. These are limited profit and limited
loss positions.
Q 12.
The Exercise price of an option is same as its position limit - State whether True
or False?
True
False
CORRECT ANSWER
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.
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Strike price or Exercise price is the price for which the underlying security may be
purchased or sold by the option holder.
Q 13.
In exercising a Put option on a stock, the option holder acquires from the option
writer _____ .
a short position in the underlying stock
a long position in the underlying stock
a strangle position in the underlying stock
a butterfly position in the underlying stock
WRONG ANSWER
CORRET ANSWER:
a short position in the underlying stock
Explanation:
The buyer / holder of a Put option is of the view that price of the underlying will fall.
He thus acquires a short position on exercise.
Q 14.
As a Call option moves more Out-Of-The-Money, the absolute value of Delta will
______.
Increase
Decrease
Not change
None of the above
WRONG ANSWER
CORRET ANSWER:
Decrease
Explanation:
A Call option moving more Out of the Money means the price of its underlying has fallen.
Delta for call option buyer is positive. This means that the value of the contract increases as
the share price rises and falls as the share price falls.
Q 15.
Mr P and Mr Q are clearing members of a stock exchange . Both of them have
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maintained Rs 7 crores of liquid assets consisting of equity shares and other
assets. Both have the same exposure limits on day one. Based on this, which of
the following statements is true ?
The minimum exposure possible for the two brokers may change from time to time
based on the changes in those asset valuations, even if they do not withdraw the
assets deposited
The minimum exposure possible for the two brokers will remain same for ever, even
if they withdraw the asset deposited subsequently
The minimum exposure possible for the two brokers will remain the same forever as
long as they do not withdraw the assets deposited
None of the above
WRONG ANSWER
CORRET ANSWER:
The minimum exposure possible for the two brokers may change from time to time
based on the changes in those asset valuations, even if they do not withdraw the
assets deposited
Explanation:
The exposure depends on the value of assets deposited. Although both P and Q have
deposited assets worth Rs.7 crores, the assets could be different (equity shares of different
companies) and the value of these will become higher or lower as time passes. So the
exposure limits will also change accordingly.
Q 16.
A feature of a forward contract is ______ .
Its traded one-to-one between counterparties
It has good liquidity
It cannot be of a tenor of more than one year
It does not carry any credit risk
WRONG ANSWER
CORRET ANSWER:
Its traded one-to-one between counterparties
Explanation:
Forward Contract - It is a contractual agreement between two parties to buy/sell an
underlying asset at a certain future date for a particular price that is pre-decided on the date
of contract.
Q 17.
What is the beta of a portfolio ?
Its the value weighted average of the beta’s of the constituent securities in that
portfolio
Its the same as the beta of the stock with the highest market capitalization
Its the sum of the betas the constituent securities in that portfolio
Its the simple average of the beta’s of the constituent securities in that portfolio
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WRONG ANSWER
CORRET ANSWER:
Its the value weighted average of the beta’s of the constituent securities in that portfolio
Explanation:
Beta of a portfolio is calculated as weighted average of betas of individual stocks in the
portfolio based on their investment proportion.
Q 18.
Speculators are those who take risk whereas hedgers are those who wish to
reduce risk - State True or False ?
True
False
WRONG ANSWER
CORRET ANSWER:
True
Explanation:
Hedgers - They face risk associated with the prices of underlying assets and use derivatives
to reduce their risk.
Speculators/Traders - They try to predict the future movements in prices of underlying
assets and based on the view, take positions in derivative contracts.
Q 19.
The Time value of an option is the portion of option premium that is linked to the
amount of time left till expiry of the option contract and also due to the fact that
the underlying components that determine the value of option may change
during that time - State True or False ?
True
False
CORRECT ANSWER
Explanation:
Time value of the option depends upon how much time is remaining for the option to expire.
If all other factors affecting an option’s price remain same, the time value portion of an
option’s premium will decrease with the passage of time. This is also known as time decay.
Q 20.
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The trades done by dealers in their own account has to be totally segregated
from the trades done in their clients account - State True or False ?
True
False
WRONG ANSWER
CORRET ANSWER:
True
Q 21.
The main proof of whether a futures transaction is for speculation or hedging is
based on whether there already exists a related commercial position which is
exposed to risk of loss due to price movement - State True or False ?
True
False
WRONG ANSWER
CORRET ANSWER:
True
Explanation:
Hedgeing basically means making a trade to reduce the risk of adverse price movements in
an asset which you already hold. Normally, a hedge consists of taking an offsetting position
in a related security, such as a futures contract
For eg. - A company will be receiving dollars after three months. So to safe guard against
any fluctuations, it sells dollars in the futures market (3 month futures) and locks in the
price.
Q 22.
How can be risks be controlled in the derivatives segment by the stock exchange
?
By implementing a effective margin system
By having a well organized control systems and audit procedures
By periodic evaluation of member positions
All of the above
WRONG ANSWER
CORRET ANSWER:
All of the above
Q 23.
In derivative exchanges, the exposure amount possible for each member broker
is linked to the amount of deposits / margins kept by the member with the
clearing house - True or False ?
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True
False
WRONG ANSWER
CORRET ANSWER:
True
Explanation:
Higher the deposits / margins kept, more will be the exposure amount available to the
member brokers.
Q 24.
Mr. A wants to sell stock options but he does not own the underlying stock. Can
he do it in India ?
Yes
No
CORRECT ANSWER
Explanation:
One can buy / sell stock options even if he does not own the underlying stock.
Q 25.
The intrinsic value of an option _____ .
Is the difference between spot price and strike price of an in-the-money option
Is zero for at the money options
Is called the time value of the option
Both 1 and 2
WRONG ANSWER
CORRET ANSWER:
Both 1 and 2
Explanation:
Option premium consists of two components - intrinsic value and time value.
Intrinsic value is the difference between the Strike Price and the Spot Price.
If the Strike Price and the Spot Price is same (At the money), the intrinsic value is zero
Time value: It is the difference between premium and intrinsic value, if any, of an option. ATM
and OTM options will have only time value because the intrinsic value of such options is
zero.
Q 26.
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Broker are allowed to and expected to fund margin requirements of their clients State True or False ?
True
False
CORRECT ANSWER
Explanation:
As per major recommendations of Dr. L.C.Gupta Committee - All clients should pay margins.
Brokers should not fund margins of clients.
Q 27.
When the price of a future contract rises, the margin account __________ .
of the buyer is credited for the gain
of the seller is debited for the loss
Both 1 and 2
None of the above
CORRECT ANSWER
Explanation:
In futures, the account of buyers and sellers are debited or credited daily as per their
notional profit or losses by the Mark to Market margin.
Q 28.
A short position in futures contract can be reversed only with the same counter
party to whom the contract was originally sold - State True or False ?
True
False
CORRECT ANSWER
Explanation:
A long or short futures contract is executed on an exchange and the buyers and sellers are
unknown to each other. These trades can be reversed by executing a suitable trade on the
exchange.
Q 29.
A trader sells a PUT option of strike Rs 100 on ABC stock for a premium of Rs 25.
On expiry day, the ABC stock closed at Rs 50. What is the trader's profit or loss
in Rs. ? ( Lot size is 1000 )
+ 25000
- 25000
+ 50000
- 50000
WRONG ANSWER
CORRET ANSWER:
- 25000
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Explanation:
When a trader sells a PUT option, he believes the stock price will rise.
Here the stock price has closed at Rs 50 which means it has fallen by Rs 50 (100 - 50). So his
Gross loss is Rs 50 x 1000 (lot size) = Rs 50000.
However, when we sell an option, we receive the premium.
Here the premium received by the trader is Rs 25 x 1000 = Rs 25000
So his net loss is Rs 50000 less Rs 25000 = Rs 25000 loss
Q 30.
We can get high returns from many investment products in the market in an
absolutely risk free manner - State True or False ?
True
False
WRONG ANSWER
CORRET ANSWER:
False
Explanation:
Returns are related to the risk taken and hence there cannot be products in the market that
gives high return in risk free manner.
Q 31.
A trader is long on ABC stock April futures at 3100. He shall make a loss if the
futures price moves to _________ .
3300
3200
3400
3000
CORRECT ANSWER
Explanation:
A long position (purchase) will result in a loss if prices go down from the purchase price.
Q 32.
Option premium depends on ___________ .
volatility of the underlying
current price and the strike price
interest rates in the economy and the time to expiry
All of the above
CORRECT ANSWER
Q 33.
The ratio of change in delta for a unit change in the price of underlying is called
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________ .
Vega
Theta
Alpha
Gamma
CORRECT ANSWER
Explanation:
Gamma measures change in delta with respect to change in price of the underlying asset.
Q 34.
Outsiders ie. Non Broker members are allowed to be appointed on the Governing
Board of the Clearing Corporation of the Derivatives segment - State True or
False ?
True
False
CORRECT ANSWER
Explanation:
As per Dr. L. C. Gupta Committee recommendations :
- A separate Governing Board should be constituted for the Clearing Corporation of the
Derivatives segment.
- No broker members should be allowed to sit on the Governing Board of the Clearing
Corporation.
Q 35.
A separate client account has to be maintained to keep the money and securities
deposited by clients - State True or False ?
True
False
WRONG ANSWER
CORRET ANSWER:
True
Explanation:
The trading members own money and securities cannot be mixed up with the clients money
and securities.
Q 36.
If an investor is exposed to a price risk in a stock, by hedging he would be able
to __________ .
make the outcome more profitable
make the outcome as per SEBI and Stock market regulations
make the outcome more certain
make the outcome more volatile
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CORRECT ANSWER
Explanation:
Hedging does not increases the profit but controls the losses. This makes the outcome more
certain.
Hedging involves having two opposite positions. Loss in one will be countered by a profit in
the other. So the outcome is more certain.
Q 37.
Ms. Rita sold a put option of strike price Rs. 90 and she received a premium of
Rs. 6 from the option buyer. Theoretically, what can be the maximum loss on this
trade ?
90
84
96
0
CORRECT ANSWER
Explanation:
Theoretically a share can fall to Rs 0. So the maximum loss can be Rs 90. But Ms. Rita has
received Rs 6 as option premium so her maximum loss will be Rs 90 - Rs 6 = Rs 84.
Q 38.
**If you are a buyer of put option, it will give you the right to sell how much of the
underlying to 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 (lot size of the option contract)
Any quantity
CORRECT ANSWER
Explanation:
Only the quantity of the lot size as determined by the stock exchange.
Q 39.
**By using Financial derivatives one can engage in _________.
Hedging
Arbitraging
Speculation
All of the above
CORRECT ANSWER
Explanation:
Modern traders and investors also use financial derivatives for Arbitrage and Speculation,
apart from hedgeing.
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Q 40.
Welcome to Pass4Sure
Can clients position be netted off against each other while calculating initial
Margin on the derivatives segment.
No
Yes
WRONG ANSWER
CORRET ANSWER:
No
Explanation:
Each clients open position is taken separately for calculating the initial margin. Positions of
two or more clients cannot be netted off against each other for calculation of initial margin.
For eg - If Mr A has bought 10 contracts of Nifty and Mr B has sold 4 contracts of Nifty, then
the broker has to pay the initial margin on 14 contracts and not 6 contracts.
Q 41.
If a trader does a calendar spread in index futures and the near leg of the
calendar spread expires, the Further leg becomes a regular open position. True
or False ?
True
False
CORRECT ANSWER
Explanation:
Calendar spread means an options or futures spread established by simultaneously entering
a long and short position on the same underlying asset but with different delivery months.
In the above question, lets assume a trader has gone long in index options in current month
and short in index options in third month. Incase he does not close his position by the end
of current month, his current month option will expire and the third month option contract
will become an open position as there is no opposite option contract in his account.
Q 42.
Who can clear trades in index options?
All AMFI and IRDA members
Members of a stock exchange
Members and sub brokers of the stock exchange
Clearing members registered in the derivatives segment.
CORRECT ANSWER
Q 43.
Mr R wants to sell 17 contracts of January series at Rs.4550 and Mr S wants to
sell 20 contracts of February series at Rs. 4500. Lot size is 50. The Initial Margin
is fixed at 9%. How much Initial Margin is required to be collected from both
these investors by the broker?
Rs 3,48,075
Rs 4,05,000
Rs 5,87,500
Rs 7,53,075
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CORRECT ANSWER
Explanation:
The Broker has to collect From Mr. R : 17 x 4550 x 50 x 9% = Rs 3,48,075
From Mr. S : 20 x 4500 x 50 x 9% = Rs 4,05,000
Therefore the total margin to be collected is 348075 + 405000 = Rs 7,53,075
Q 44.
When the price of a futures contract goes down, the margin account of the buyer
of this futures contract is debited for the loss - True or False ?
False
True
CORRECT ANSWER
Q 45.
Mr Ranjan sold a ABC stock put contract of Rs 300 strike price at Rs 28. What
will be his profit / loss if he buys it back at Rs 13. The lot size is 1000 shares.
18000
-18000
15000
-15000
WRONG ANSWER
CORRET ANSWER:
15000
Explanation:
Mr Ranjan sold at Rs 28 and bought back at Rs 13, so his net profit is Rs 15 ( 28 - 13 )
The lot size is 1000, so his total profit is Rs 15 x 1000 = Rs 15000.
Q 46.
In case of CALL OPTION, it 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
CORRECT ANSWER
Explanation:
A call option is a financial instrument that gives the buyer the right, but not an obligation, to
buy a set quantity of a security at a set strike price at some time on or before expiration.
In easy terms - what ever may be the market price, the buyer will get the security at the set
price or strike price as he has paid a premium for it.
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Q 47.
Welcome to Pass4Sure
You own a portfolio of various stock for long term but currently you are unsure
of the market. The best possible action to safe guard your investments is :
Buy more stocks
Sell the Stocks
Sell Index Futures as a hedge
None of the above
CORRECT ANSWER
Explanation:
In case the market goes down and his stocks fall, he will gain from the short index futures
position and thus this hedge will help him prevent losses.
Q 48.
The settlement in futures contract happen only in __________ .
Cash
Physical Delivery
Cash or Delivery
None of the above
WRONG ANSWER
CORRET ANSWER:
Cash or Delivery
Explanation:
SEBI has now permitted physical deliveries also.
Q 49.
A trader believes that the future price of PQR company will rise and being a
smart trader he will ________________ .
sell PQR futures now and buy them later when the price rises
buy PQR futures now and sell them later when it rises
wait till the price of PQR futures and cash market price become same
wait till the prices drop to the lowest level
CORRECT ANSWER
Q 50.
What is done if a client defaults in making payments in respect to his daily
settlement ?
The contract is transferred to a special 'Default Account'
The contract is closed out
The contract is transferred to another clients account who has sufficient funds
A weeks notice is given to that client
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WRONG ANSWER
CORRET ANSWER:
The contract is closed out
Explanation:
When a Client defaults in making payment in respect of Daily Settlement, the contract is
closed out.
Out of 50 questions 26 correct and 24 wrong.
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