Derivatives & Risk Management – Questions Bank

The intrinsic value of an out-of-the-money call option is 4

Greek letter measures a dimension to_______________ in an option position 1
A company expecting the nights in the coming months to be cold shouldI. Buy call option of CDD index
1
in summerII. Buy call option of HDD index in winterIII. Sell the HDD index in winter
Usually, open interest is maximum in the _______ contract. 4
trader writes a single naked call option. The premium is Rs.3 per share. The stocks market price and the
4
exercise price are Rs.48 and Rs.43 respectively. The margin required is
American option are frequently deduced from those of its European counterpart 1
The value of a European call option on a stock is Rs.5. The strike price is Rs.50 and time to expiration is 3
months. The current market price of the stock is Rs.44. Then the value of a put option with the same 2
maturity and strike price is (Risk free rate is 8%)
Which of the following is/are not correct for Put Option? 4
Suppose a stock option contract trades for 1, 2 and 3 months expiry with strike prices of 85, 90, 95, 100,
4
105, 110, 115. How many different options contracts will be tradable?
The open position for the proprietary trades will be on a _______ 1
In the Black-Scholes Option Pricing Model, as S becomes very large, both N(d1) and N(d2) are both close
1
to 1.0.
The Black-Scholes option pricing model was developed in _____. 2
Theta is also referred to as the _________ of the portfolio 1
In the Black-Scholes Option Pricing Model, when S becomes very large a call option is almost certain to
1
be exercised
Oil refining companies resort to

EQUITY DERIVATIVES: PART A

Q:1 An investor is long 2 contracts of Nifty futures purchased at Rs. 5035 each. The next morning a scam is disclosed
of a large company because of which markets sell off and Nifty futures goes down to Rs. 4855. What is the mark to
market for the investor? (1 Nifty contract is 50 shares). [ 3 Marks ]
(a) Rs. -18000
(b) Rs. 18000
(c) Rs. -9000
(d) Rs. 9000
Correct Ans: (a )
Q:2 If SBI is trading at Rs. Rs 2200 a share in the spot market and an investor wants to buy 200 SBI shares then he has
to make a payment of ____. [ 2 Marks ]
(a) Depends on the initial margin of SBI
(b) Rs. 2200
(c) Rs. 4400
(d) Rs. 440000
Correct Ans: (d )
Q:3 An investor buys a 4 lots of TATASTEEL futures at Rs. 545 each and sells it at Rs. 447 each. If one contract is 764
shares what is the Profit/ Loss in the transaction? [ 2 Marks ]

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 Derivatives & Risk Management – Questions Bank
(a) Profit Rs. 74872
(b) Loss 74872
(c) Loss Rs. 299488
(d) Profit Rs. 299488
Correct Ans: (c )
Q:4 What are the types of settlement (s) in forward contracts? [ 3 Marks ]
(a) Physical and Cash
(b) Cash
(c) Physical
(d) There are no settlements for forward contracts
Correct Ans: (a)

Q:5 An investor sells 3 lots of Nifty futures at Rs. 5231 each. On that day Nifty closes at Rs. 5310 in the futures
market. What is the mark to market for the investor if any? One lot of Nifty is 50 shares [ 1 Mark ]
(a) Profit of Rs. 11000
(b) Loss of Rs. 11850
(c) Loss of Rs. 10000
(d) Profit of Rs. 13000
Correct Ans: (b)
Q:6 In a business daily to get information about the top gainers in the futures market, one has to look in the heading:
[ 2 Marks ]
(a) Contract details
(b) Positive trend
(c) Open Interest
(d) Negative trend
Correct Ans: (b)
Q:7 An investor bought a put option on a stock with a strike price Rs. 2000 for Rs. 200. The option will be in the
money when _______. [ 1 Mark ]
(a) The stock price is less than Rs. 2000
(b) The stock price is greater than Rs. 2200
(c) The stock price is greater than Rs. 2000
(d) The stock price is less than Rs. 1800
Correct Ans: (a)
Q:8 All Stock Options are American in nature. [ 2 Marks ]
(a) TRUE
(b) FALSE
Correct Ans: (b)

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 Derivatives & Risk Management – Questions Bank
Q:9 On 3rd August, NTPC is trading at Rs. 200 and 200 strike call option for one month is trading at Rs. 7.50. An
investor who is bearish on NTPC sells the call option. NTPC on that month's expiry closes at Rs. 207.5. What is the
investor's Profit / Loss in the trade? 1 lot of NTPC is 1625 shares. [ 2 Marks ]
(a) Rs. -12187
(b) Rs. 10000
(c) Rs. 12187
(d) No Profit no Loss
Correct Ans: (d)
Q:10 In futures trading initial margin is paid by : [ 3 Marks ]
(a) buyer only
(b) clearing member
(c) seller only
(d) buyer and seller
Correct Ans: (d)
Q:11 An investor has Unitech shares in her portfolio. RBI is increasing interest rates which is negative for the stock.
She wants to protect the downside in the stock as she feels RBI will decide on increasing interest rates in the next 3
months. What should she do? [ 1 Mark ]
(a) Buy 3 month call option of Unitech
(b) Buy 2 month put option of Unitech
(c) Buy 1 month put option of Unitech
(d) Buy 3 month put option of Unitech
Correct Ans: (d )
Q:12 In India, all Options traded on a stock are : [ 1 Mark ]
(a) Continental Options
(b) Asian Options
(c) European options
(d) American options
Correct Ans: (c)
Q:13 SBI is trading at Rs. 1800 in the cash market. What would be the price of SBI futures expiring three months from
today. Risk free rate = 8% p.a. [ 1 Mark ]
(a) 1844
(b) 1895
(c) 1814
(d) 1836
Correct Ans: (d)
Q:14 All December 2009 stock Futures contracts traded on NSE will expire on : [ 2 Marks ]
(a) Last Thursday of December 2009
(b) Exchanges decides on expiry day and will update the investors on 1st December 2009
(c) Last Friday of December 2009

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 Derivatives & Risk Management – Questions Bank
(d) 3rd Thursday of December 2009
Correct Ans: (a)
Q:15 In India, all Options traded on Nifty are : [ 1 Mark ]
(a) Asian Options
(b) American options
(c) Continental Options
(d) European options
Correct Ans: (d)
Q:16 Nifty futures is trading at Rs. 3325 and an investor buys a 3400 call for current month for Rs. 100. What should
be the closing price of Nifty only above which the investor starts to make Profits if he holds his long option position?
1 lot of Nifty = 50 shares. [ 2 Marks ]
(a) 3425
(b) 3400
(c) 3325
(d) 3500
Correct Ans: (d)
Q:17 Which of the following is an exchange traded contract? [ 3 Marks ]
(a) Futures on Nifty
(b) Forward contract on oil
(c) An interest rate swap
(d) A 10 year loan
Correct Ans: (a)
Q:18 As more and more ____ trades take place, the difference between spot and futures prices would narrow. [ 3
Marks ]
(a) hedge
(b) delta
(c) arbitrage
(d) speculative
Correct Ans: (c)
Q:19 Nifty is at 5200. A put option at 5000 strike price is trading at Rs . 150. What is the intrinsic value of the option?
[ 1 Mark ]
(a) 200
(b) 0
(c) 350
(d) 150
Correct Ans: (b)
Q:20 Nifty is currently at 5100. An investor feels Nifty will not go beyond 4500 in next three months. He sells two lots
of 5100 strike call on Nifty for Rs. 200 a lot. Because of good industrial production data, Nifty rallies to 5200 on the
option's expiry day. What is the Profit/ Loss to the investor? (1 lot = 50 shares) [ 3 Marks ]
(a) Rs. 10000

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 Derivatives & Risk Management – Questions Bank
(b) Rs. -10000
(c) Rs. 20000
(d) Rs. -20000
Correct Ans: (a)
Q:21 On 1st November, SBI is trading at Rs. 2300. An investor is bearish on the company because of the earnings of
last quarter and sells a SBI futures at Rs. 2325. He buys back SBI futures at Rs. 2300. What is the Profit / Loss for the
investor if 1 lot of SBI is 250 shares?
[ 3 Marks ]
(a) Rs. 6250
(b) Rs. 0
(c) Rs. -6250
(d) Rs. -10000
Correct Ans: (a)
Q:22 Which of the following is NOT a hedge for a long position in an underlying stock? [ 2 Marks ]
(a) Sell call option
(b) Sell futures
(c) Sell put option
(d) Buy Put option
Correct Ans: (c)
Q:23 When the strike price is lower than the spot price of the underlying, a call option will be ____. [ 1 Mark ]
(a) At the money
(b) In the money
(c) Out of the money
(d) American Type
Correct Ans: (b)
Q:24 On 1st January, SBI is trading at Rs. 2310. An investor is bullish on the company because of the earnings of last
quarter and buys a SBI futures at Rs. 2310. He sells SBI futures at Rs. 2335. What is the Profit / Loss for the investor if
1 lot of SBI is 250 shares? [ 2 Marks ]
(a) Rs. -10000
(b) Rs. -6250
(c) Rs. 6250
(d) Rs. 0
Correct Ans: (c)
Q:25 An investor buys TCS for Rs. 575 in the futures market. At the end of the day TCS futures closes at Rs. 500 in the
futures market. What is the mark to market the investor is making/ losing ? (1 lot of TCS = 1000 shares) [ 2 Marks ]
(a) Rs. 500000
(b) Rs. 575000
(c) Rs. -75000
(d) Rs. 75000

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 Derivatives & Risk Management – Questions Bank
Correct Ans: (c )
Q:26 An investor buys a 4 lots of Nifty at Rs. 5100 each. He sells 2 lots at Rs. 5050 and carries 2 lots for next day. On
that day Nifty futures closes at Rs. 5000. What is his total Loss including mark to market Loss? One lot of Nifty is 50
shares . [ 1 Mark ]
(a) Loss of Rs. 5000
(b) Profit of Rs. 5000
(c) Profit of Rs. 2000
(d) No Loss, no Profit
Correct Ans: (a)
Q:27 Infosys is trading at Rs. 1500 in the cash market. What should be the fair price of Infosys futures expiring 90
days from today. Risk free rate is 8% p.a. [ 3 Marks ]
(a) 1550
(b) 1515
(c) 1530
(d) 1540
Correct Ans: (c)
Q:28 An investor buys a 1 lot of Nifty futures at Rs. 4927 and sells it at Rs. 4567 If one contract is 50 shares what is
the Profit/ Loss in the transaction? [ 2 Marks ]
(a) Loss Rs. 22000
(b) Profit Rs. 22000
(c) Loss Rs. 18000
(d) Profit Rs. 18000
Correct Ans: (c )
Q:29 Which of the following positions has a limited downside ____ . [ 2 Marks ]
(a) Sell futures
(b) Buy Call Option
(c) Sell stock
(d) Sell Call option
Correct Ans: (b)
Q:30 Reliance is trading at Rs. 1520 in the cash market. What should be the fair price of Reliance futures expiring 90
days from today. Risk free rate is 8% p.a. [ 3 Marks ]
(a) 1529
(b) 1537
(c) 1551
(d) 1563
Correct Ans: (c)
Q:31 Like Futures contracts there is daily settlement of options contracts. [ 2 Marks ]
(a) TRUE
(b) depends on the expiry

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 Derivatives & Risk Management – Questions Bank
(c) FALSE
(d) depends if the option is call or put
Correct Ans: (c)
Q:32 TCS is trading at Rs. 420 in the spot market and Rs. 435 in the futures market. Is there an arbitrage
opportunity? The Futures contract is settling today. [ 1 Marks ]
(a) No
(b) Depends on Market Sentiment
(c) Yes
Correct Ans: (c)
Q:33 Reliance Capital is trading at Rs. 1000 in cash market. What should be the price of Reliance capital futures
expiring 60 days from today. Risk free rate is 8% p.a. [ 2 Marks ]
(a) 1087
(b) 1013
(c) 1081
(d) 1121
Correct Ans: (b)
Q:34 An investor buys 2 contracts of TCS futures for Rs. 570 each. He sells of one contract at Rs. 585. TCS futures
closes the day at Rs. 550. What is the net payment the investor has to pay/ receive from his broker? 1 TCS contract =
1000 shares [ 2 Marks ]
(a) Pay Rs. 20000 to the broker
(b) Pay Rs. 5000 to the broker
(c) Receive Rs. 5000 from the broker
(d) Receive Rs. 15000 from the broker
Correct Ans: (b)
Q:35 The value of a put option is positively related to all of the following EXCEPT: [ 2 Marks ]
(a) exercise price
(b) risk-free rate
(c) time to maturity
Correct Ans: (b)
Q:36 If a farmer expects to sell his wheat in three months time in anticipation of a harvest. He wants to hedge his
risk, he needs to: [ 3 Marks ]
(a) buy wheat futures now
(b) buy wheat now
(c) sell wheat now
(d) sell wheat futures now
Correct Ans: (d )
Q:37 DLF is trading at Rs. 380 in the spot market and Rs. 395 in the futures market. Is there an arbitrage
opportunity? The Futures contract is settling today. [ 1 Mark ]
(a) Depends on Market Sentiment
(b) Yes

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 Derivatives & Risk Management – Questions Bank
(c) No
Correct Ans: (b)
Q:38 Security descriptor for stock Futures contract is : [ 2 Marks ]
(a) FUTSTK
(b) OPTIDX
(c) OPTSTK
(d) FUTIDX
Correct Ans: (a)
Q:39 Derivatives help in ____. [ 2 Marks ]
(a) Risk Management
(b) Price Discovery of the underlying
(c) Improving Market Efficiency
(d) All of the above
Correct Ans: (d)
Q:40 Nifty is at 3900. What should be the fair price of Nifty futures expiring 180 days from today. Risk free rate is 8%
p.a. [ 3 Marks ]
(a) 4027
(b) 4083
(c) 4031
(d) 4059
Correct Ans: (d)
Q:41 The maximum expiry for individual stock options contract is : [ 2 Marks ]
(a) 2 months
(b) 6 months
(c) 1 months
(d) 3 months
Correct Ans: (d)
Q:42 The parties for the Futures contract have the flexibility of closing out the contract prior to the maturity by
squaring off the transactions in the market. State true or false. [ 3 Marks ]
(a) TRUE
(b) FALSE
Correct Ans: (a)
Q:43 Nifty is at 3375. What should be the fair price of Nifty futures expiring 30 days from today. Risk free rate is 8%
p.a. [ 2 Marks ]
(a) 3367
(b) 3377
(c) 3398
(d) 3352
Correct Ans: (c)

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Q:44 Nifty futures is trading at Rs. 4955. An investor feels the market will not go beyond 5100. He can ____. [ 2
Marks ]
(a) Sell 5000 Nifty call
(b) Sell 5100 Nifty put
(c) Sell 5000 Nifty put
(d) Sell 5100 Nifty Call
Correct Ans: (d )
Q:45 Arbitrage is a ____. [ 2 Marks ]
(a) Risk free Strategy
(b) High Risk Strategy
Correct Ans: (a )
Q:46 If an option is out of the money and the strike price of the option is lower than the spot price of the underlying,
then we are referring to ____. [ 1 Mark ]
(a) A Put Option
(b) An European Option
(c) A Call option
(d) An American option
Correct Ans: (a)
Q:47 Nifty is at 5000. An investor buys a 5000 strike price put option for Rs. 170. The option is currently____. [ 1
Mark ]
(a) Out of the money
(b) American Type
(c) At the money
(d) In the money
Correct Ans: (C)
Q:48 Nifty futures is trading at Rs. 3975 and an investor buys a 4000 call for current month for Rs. 100. What should
be the closing price of Nifty only above which the investor starts to make Profits if he holds his long option position?
1 lot of Nifty = 50 shares. [ 3 Marks ]
(a) 3975
(b) 4000
(c) 4075
(d) 4100
Correct Ans: (D)
Q:49 Price that is agreed upon at the date of the contract for the delivery of an asset at a specific futures date is
called _______. [ 2 Marks ]
(a) Spot Price
(b) Discount Price
(c) Cash market price
(d) Futures Price
Correct Ans: (D)

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Q:50 Price of an option expiring three months from today will be higher than price of an option expiring in two
months from today. [ 2 Marks ]
(a) Incomplete data
(b) Depends if it is call or put option
(c) TRUE
(d) FALSE
Correct Ans: (C)

EQUITY DERIVATIVES: PART B

Q.1 Theta is also referred to as the _________ of the portfolio [1 Mark]

(a) time decay
(b) risk delay
(c) risk decay
(d) time delay
Correct Ans: (a)
Q.2 All of the following are true regarding futures contracts except [2 Marks]
(a) they are regulated by RBI
(b) they require payment of a performance bond
(c) they are a legally enforceable promise
(d) they are market to market
Correct Ans: (a)
Q.3 Clearing Members (CMs) and Trading Members (TMs) are required to collect upfront initial margins from all their
Trading Members/Constituents. [2 Marks]
(a) FALSE
(b) TRUE
Correct Ans: (b)
Q.4 All open positions in the index futures contracts are daily settled at the [3 Marks]
(a) mark-to-market settlement price
(b) net settlement price
(c) opening price
(d) closing price
Correct Ans: (a)
Q.5. An American style call option contract on the Nifty index with a strike price of 3040 expiring on the 30th June
2008 is specified as ’30 JUN 2008 3040 CA’. [2 Marks]
(a) FALSE
(b) TRUE
Correct Ans: (b)

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 Derivatives & Risk Management – Questions Bank
Q.6 Usually, open interest is maximum in the _______ contract. [2 Marks]
(a) more liquid contracts
(b) far month
(c) middle month
(d) near month
Correct Ans: (d)
Q.7 An equity index comprises of ______. [1 Mark]
(a) basket of stocks
(b) basket of bonds and stocks
(c) basket of tradeable debentures
(d) None of the above
Correct Ans: (a)
Q.8 Position limits have been specified by _______ at trading member, client, market and FII levels respectively. [2
Marks]
(a) Sub brokers
(b) Brokers
(c) SEBI
(d) RBI
Correct Ans: (c)
Q.9 An order which is activated when a price crosses a limit is _________ in F&O segment of NSEIL. [1 Mark]
(a) stop loss order
(b) market order
(c) fill or kill order
(d) None of the above
Correct Ans: (a)
Q.10 Which of the following is not a derivative transaction? [1 Mark]
(a) An investor buying index futures in the hope that the index will go up.
(b) A copper fabricator entering into futures contracts to buy his annual requirements of copper.
(c) A farmer selling his crop at a future date
(d) An exporter selling dollars in the spot market
Correct Ans: (d)
Q.11 An investor is bearish about ABC Ltd. and sells ten one-month ABC Ltd. futures contracts at Rs.5,00,000. On the
last Thursday of the month, ABC Ltd. closes at Rs.510. He makes a _________. (assume one lot = 100) [2 Marks]
(a) Profit of Rs. 10,000
(b) loss of Rs. 10,000
(c) loss of Rs. 5,100
(d) profit of Rs. 5,100
Correct Ans: (b)

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Q.12 The interest rates are usually quoted on : [2 Marks]
(a) Per annum basis
(b) Per day basis
(c) Per week basis
(d) Per month basis
Correct Ans: (a)
Q.13 After SPAN has scanned the 16 different scenarios of underlying market price and volatility changes, it selects
the ________ loss from among these 16 observations [2 Marks]
(a) largest
(b) 8th smallest
(c) smallest
(d) average
Correct Ans: (a)
Q.14 Mr. Ram buys 100 calls on a stock with a strike of Rs.1,200. He pays a premium of Rs.50/call. A month later the
stock trades in the market at Rs.1,300. Upon exercise he will receive __________. [2 Marks]
(a) Rs.10,000
(b) Rs.1,200
(c) Rs.6,000
(d) Rs.1,150
Correct Ans: (a)
Q.15 There are no Position Limits prescribed for Foreign Institutional Investors (FIIs) in the F&O Segment. [1 Mark]
(a) TRUE
(b) FALSE
Correct Ans: (b)
Q.16 In the Black-Scholes Option Pricing Model, when S becomes very large a call option is almost certain to be
exercised [2 Marks]
(a) FALSE
(b) TRUE
Correct Ans: (b)
Q.17 Suppose Nifty options trade for 1, 2 and 3 months expiry with strike prices of 1850, 1860, 1870, 1880, 1890,
1900, 1910. How many different options contracts will be tradable? [2 Marks]
(a) 27
(b) 42
(c) 18
(d) 24
Correct Ans: (b)
Q.18 Prior to Financial Year 2005 - 06, transaction in derivatives were considered as speculative transactions for the
purpose of determination of tax liability under the Income-tax Act [1 Mark]
(a) TRUE

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 Derivatives & Risk Management – Questions Bank
(b) FALSE
Correct Ans: (a)
Q.19 ______ is allotted to the Custodial Participant (CP) by NSCCL. [3 Marks]
(a) A unique CP code
(b) An order identifier
(c) A PIN number
(d) A trade identifier
Correct Ans: (a)
Q.20 An interest rate is 15% per annum when expressed with annual compounding. What is the equivalent rate with
continuous compounding? [2 Marks]
(a) 14%
(b) 14.50%
(c) 13.98%
(d) 14.75%
Correct Ans: (c)
Q.21 The favorable difference received by buyer/holder on the exercise/expiry date, between the final settlement
price as and the strike price, will be recognized as ___________ [2 Marks]
(a) Income
(b) Expense
(c) Cannot say
(d) None
Correct Ans: (a)
Q.22 The F&O segment of NSE provides trading facilities for the following derivative instruments, except [2 Marks]
(a) Individual warrant options
(b) Index based futures
(c) Index based options
(d) Individual stock options
Correct Ans: (a)
Q.23 Derivative is defined under SC(R)A to include : A contract which derives its value from the prices, or index of
prices, of underlying securities. [1 Mark]
(a) TRUE
(b) FALSE
Correct Ans: (a)
Q.24 The risk management activities and confirmation of trades through the trading system of NSE is carried out by
_______. [2 Marks]
(a) users
(b) trading members
(c) clearing members
(d) participants

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 Derivatives & Risk Management – Questions Bank
Correct Ans: (c)
Q.25 A dealer sold one January Nifty futures contract for Rs.250,000 on 15th January. Each Nifty futures contract is
for delivery of 50 Nifties. On 25th January, the index closed at 5100. How much profit/loss did he make ? [2 Marks]
(a) Profit of Rs. 9000
(b) Loss of Rs. 8000
(c) Loss of Rs. 9500
(d) Loss of Rs. 5000
Correct Ans: (d)
Q.26 Manoj owns five hundred shares of ABC Ltd. Around budget time, he gets uncomfortable with the price
movements. Which of the following will give him the hedge he desires (assuming that one futures contract = 100
shares) ? [1 Mark]
(a) Buy 5 ABC Ltd. futures contracts
(b) Sell 5 ABC Ltd. futures contracts
(c) Sell 10 ABC Ltd. futures contracts
(d) Buy 10 ABC Ltd. futures contracts
Correct Ans: (b)
Q.27 An investor is bearish about Tata Motors and sells ten one-month ABC Ltd. Futures contracts at Rs.6,06,000. On
the last Thursday of the month, Tata Motors closes at Rs.600. He makes a _________. (assume one lot = 100) [2
Marks]
(a) Profit of Rs. 6,000
(b) Loss of Rs. 6,000
(c) Profit of Rs. 8,000
(d) Loss of Rs. 8,000
Correct Ans: (a)
Q.28 The beta of Jet Airways is 1.3. A person has a long Jet Airways position of Rs. 200,000 coupled with a short Nifty
position of Rs.100,000. Which of the following is TRUE? [2 Marks]
(a) He is bullish on Nifty and bearish on Jet Airways
(b) He has a partial hedge against fluctuations of Nifty
(c) He is bearish on Nifty as well as on Jet Airways
(d) He has a complete hedge against fluctuations of Nifty
Correct Ans: (b)
Q.29 Suppose a stock option contract trades for 1, 2 and 3 months expiry with strike prices of 85, 90, 95, 100, 105,
110, 115. How many different options contracts will be tradable? [2 Marks]
(a) 18
(b) 32
(c) 21
(d) 42
Correct Ans: (d)
Q.30 The bull spread can be created by only buying and selling [2 Marks]
(a) basket option

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 Derivatives & Risk Management – Questions Bank
(b) futures
(c) warrant
(d) options
Correct Ans: (d)
Q.31 A stock broker means a member of_______. [1 Mark]
(a) SEBI
(b) any exchange
(c) a recognized stock exchange
(d) any stock exchange
Correct Ans: (c)
Q.32 Ashish is bullish about HLL which trades in the spot market at Rs.210. He buys 10 three-month call option
contracts on HLL with a strike of 230 at a premium of Rs.1.05 per call. Three months later, HLL closes at Rs. 250.
Assuming 1 contract = 100 shares, his profit on the position is ____. [1 Mark]
(a) Rs.18,950
(b) Rs.19,500
(c) Rs.10,000
(d) Rs.20,000
Correct Ans: (a)
Q.33 A January month Nifty Futures contract will expire on the last _____ of January [2 Marks]
(a) Monday
(b) Thursday
(c) Tuesday
(d) Wednesday
Correct Ans: (b)
Q.34 Which of the following are the most liquid stocks? [2 Marks]
(a) All Infotech stocks
(b) Stocks listed/permitted to trade at the NSE
(c) Stocks in the Nifty Index
(d) Stocks in the CNX Nifty Junior Index
Correct Ans: (c)
Q.35 In the books of the buyer/holder of the option, the premium paid would be ___________ to ‘Equity Index
Option Premium Account’ or ‘Equity Stock Option Premium Account’, as the case may be. [2 Marks]
(a) Debited
(b) Credited
(c) Depends
(d) None
Correct Ans: (a)
Q.36 Greek letter measures a dimension to_______________ in an option position. [1 Mark]
(a) the risk

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 Derivatives & Risk Management – Questions Bank
(b) the premium
(c) the relationship
(d) None
Correct Ans: (a)
Q.37 An option which gives the holder the right to sell a stock at a specified price at some time in the future is called
a ___________. [1 Mark]
(a) Naked option
(b) Call option
(c) Out-of-the-money option
(d) Put option
Correct Ans: (d)
Q.38 Trading member Shantilal took proprietary purchase in a March 2000 contract. He bought 1500 units @Rs.1200
and sold 1400 units @ Rs. 1220. The end of day settlement price was Rs. 1221. What is the outstanding position on
which initial margin will be calculated? [1 Mark]
(a) 300 units
(b) 200 units
(c) 100 units
(d) 500 units
Correct Ans: (c)
Q.39 In which year, foreign currency futures based on new floating exchange rate system were introduced at the
Chicago Mercantile Exchange [1 Mark]
(a) 1970
(b) 1975
(c) 1972
(d) 1974
Correct Ans: (c)
Q.40 The units of price quotation and minimum price change are not standardised item in a Futures Contract. [1
Mark]
(a) TRUE
(b) FALSE
Correct Ans: (b)
Q.41 With the introduction of derivatives the underlying cash market witnesses _______ [1 Mark]
(a) lower volumes
(b) sometimes higher, sometimes lower
(c) higher volumes
(d) volumes same as before
Correct Ans: (c)
Q.42 Clearing members need not collect initial margins from the trading members [1 Mark]
(a) FALSE

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 Derivatives & Risk Management – Questions Bank
(b) TRUE
Correct Ans: (a)
Q.43 Which risk estimation methodology is used for measuring initial margins for futures/ options market? [2 Marks]
(a) Value At Risk
(b) Law of probability
(c) Standard Deviation
(d) None of the above
Correct Ans: (a)
Q.44 The value of a call option ___________ with a decrease in the spot price. [2 Marks]
(a) increases
(b) does not change
(c) decreases
(d) increases or decreases
Correct Ans: (c)
Q.45 Any person or persons acting in concert who together own ______% or more of the open interest in index
derivatives are required to disclose the same to the clearing corporation. [1 Mark]
(a) 35
(b) 15
(c) 5
(d) 1
Correct Ans: (b)
Q.46 NSE trades Nifty, CNX IT, BANK Nifty, Nifty Midcap 50 and Mini Nifty futures contracts having all the expiry
cycles, except. [2 Marks]
(a) Two-month expiry cycles
(b) Four month expiry cycles
(c) Three-month expiry cycles
(d) One-month expiry cycles
Correct Ans: (b)
Q.47 An investor owns one thousand shares of Reliance. Around budget time, he gets uncomfortable with the price
movements. One contract on Reliance is equivalent to 100 shares. Which of the following will give him the hedge he
desires? [2 Marks]
(a) Buy 5 Reliance futures contracts
(b) Sell 10 Reliance futures contracts
(c) Sell 5 Reliance futures contracts
(d) Buy 10 Reliance futures contracts
Correct Ans: (b)
Q.48 Spot Price = Rs. 100. Call Option Strike Price = Rs. 98. Premium = Rs. 4. An investor buys the Option contract. On
Expiry of the Option the Spot price is Rs. 108. Net profit for the Buyer of the Option is ___. [1 Mark]
(a) Rs. 6

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 Derivatives & Risk Management – Questions Bank
(b) Rs. 5
(c) Rs. 2
(d) Rs. 4
Correct Ans: (a)
Q.49 In the NEAT F&O system, the hierarchy amongst users comprises of _______. [2 Marks]
(a) branch manager, dealer, corporate manager
(b) corporate manager, branch manager, dealer
(c) dealer, corporate manager, branch manager
(d) corporate manager, dealer, branch manager
Correct Ans: (b)
Q.50 The open position for the proprietary trades will be on a _______ [3 Marks]
(a) net basis
(b) gross basis
Correct Ans: (a)
Q.51 The minimum networth for clearing members of the derivatives clearing corporation/ house shall be
__________ [2 Marks]
(a) Rs.300 Lakh
(b) Rs.250 Lakh
(c) Rs.500 Lakh
(d) None of the above
Correct Ans: (a)
Q.52 The Black-Scholes option pricing model was developed in _____. [2 Marks]
(a) 1923
(b) 1973
(c) 1887
(d) 1987
Correct Ans: (b)
Q.53 In the case of index futures contracts, the daily settlement price is the ______. [3 Marks]
(a) closing price of futures contract
(b) opening price of futures contract
(c) closing spot index value
(d) opening spot index value
Correct Ans: (a)
Q.54 Premium Margin is levied at ________ level. [1 Mark]
(a) client
(b) clearing member
(c) broker
(d) trading member

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 Derivatives & Risk Management – Questions Bank
Correct Ans: (a)
Q.55 In the Black-Scholes Option Pricing Model, as S becomes very large, both N(d1) and N(d2) are both close to 1.0.
[2 Marks]
(a) FALSE
(b) TRUE
Correct Ans: (b)
Q.56 To operate in the derivative segment of NSE, the dealer/broker and sales persons are required to pass
_________ examination. [1 Mark]
(a) Certified Financial Analyst
(b) MBA (Finance)
(c) NCFM
(d) Chartered Accountancy
(e) Not Attempted
Correct Ans: (c)
Q.57 The NEAT F&O trading system ____________. [1 Mark]
(a) allows one to enter spread trades
(b) does not allow spread trades
(c) allows only a single order placement at a time
(d) None of the above
Correct Ans: (a)
Q.58 Margins levied on a member in respect of options contracts are Initial Margin, Premium Margin and
Assignment Margin [1 Mark]
(a) TRUE
(b) FALSE
Correct Ans: (a)
Q.59 American option are frequently deduced from those of its European counterpart [1 Mark]
(a) FALSE
(b) TRUE
Correct Ans: (b)
Q.60. Which of the following is closest to the forward price of a share price if Cash Price = Rs.750, Futures Contract
Maturity = 1 year from date, Market Interest rate = 12% and dividend expected is 6%? [2 Marks]
(a) Rs. 795
(b) Rs. 705
(c) Rs. 845
(d) None of these
Correct Ans: (a)

Review Questions (1-7):

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 Derivatives & Risk Management – Questions Bank
Use the information given below to answer the questions (1 - 7)
Each contract is equal to 100 shares.

Share Current Exercise Time to maturity

price Price

Call Call Put Put

Premium 3 Premium 6 Premium 3 Premium 6
months months months months
A 52 50 3 4 0.35 1.05
B 40 45 1 1.25 5.5 6.00
C 35 30 6 6.3 0.45 0.65

Q 1 If you purchase one 3-month call contract on A, what profit or loss will you make at the maturity date if the price
of A at that time is Rs.57?
(a) Rs.200
(b) Rs.400
(c) Rs.460
(d) Rs.500
(e) Rs.560
Correct ( B )
Q 2 If B’s price is Rs.35 at the maturity of the 6-month options, determine the profit or loss of five 6-month put
contracts at their maturity date?
(a) Rs.2000
(b) Rs.5700
(c) Rs.8200
(d) Rs.4000
(e) Rs.3600
Correct ( A )

Q 3 If you had purchased five 3-month call options of C and the price of C’s share is Rs.32 at maturity. Determine
your profit or loss on the investment.
a) Rs.1000
b) Rs.1500
c) Rs.2000
d) Rs.4000
e) Rs.500
Correct ( C )
Q 4 If you had purchased five 3 month puts on C, what would your profit or loss position have been on maturity if
the share’s price was Rs.32?
a) –Rs.225

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 Derivatives & Risk Management – Questions Bank
b) –Rs.400
c) –Rs.600
d) Rs.400
e) Rs.600
Correct ( A )

Q 5 Your client wrote five 6 month call options on B’s share. What is his profit or loss on the options at maturity if
the price of B at that time is Rs.43?
(a) Rs.625
(b) (b) Rs.600
(c) Rs.400
(d) Rs.300
(e) Rs.200
Correct ( A )
Q 6 If your client had written five 6 Month put option on B, what would his profit or loss have been at the maturity
of the options if the share price was Rs.43 per share?
(a) Rs.1000
(b) Rs.2000
(c) Rs.1800
(d) Rs.1500
(e) Rs.500
Correct ( B )
Q 7 Which of the following options are in the money?
a) A’s 3-month call
b) B’s 6 month put
c) C’s 6-month put
d) (a) and (b)
e) none of the above
Correct ( d )
Q 8 Which of the following statement is not true?
a) Buying a call option allows the taker to profit from an increase in the price of underlying securities
b) Buying a call option allows the taker to profit from a decrease in the price of underlying securities.
c) Call options whose strike price exceeds the spot price are called IN THE MONEY options.
d) Call options whose spot price exceeds the exercise price are called IN THE MONEY options.
e) Both (b) and (c)
Correct ( e )
Q9 Which of the following statements are true about future contracts?
a) Forward price s are normally higher than spot prices.

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 Derivatives & Risk Management – Questions Bank
b) Usually the position are marked to market.
c) Daily settlement takes place.
d) Both (a) and (b)
e) (a),(b) and (c)
Correct ( E )
Q10 A put option gives the —————— the right to but not the obligation to ———————the underlying asset
at a specified price.
(a) seller, buy
(b) (b) seller, sell
(c) owner, buy
(d) owner, sell
Correct ( D )
Q.11. Which of the following is true with regard to straddle ?
a) A straddle involves a call and a put option with the same exercise price and different expiration date.
b) A straddle involves a call and a put option with the same exercise price and the same expiration
date.
c) A straddle involves a call and a put option with the different exercise price and the same expiration
date.
d) A straddle involves two calls with the same expiration date and different strike prices.
Correct ( B )

Value of A Equity Forward Contract:

 Value of long position in a forward contract paying dividends (Vt)
 Vt = (St - PVD) – {FP / (1+r)T-t }

Example: A person has entered into a 150-day forward contract on a stock at $80 and there is an expected
dividend on the stock of $2.5 payable in 90 days. After 30 days the stock price has moved to $86. What is
the value of this forward contract given risk free rate of 5%.

Solution: The dividend payable has 60 days left before the stock becomes ex-dividend from the current
date and the contract will mature in 120 days.

Value of the contract = (86-2.48) – {80/(1.05) 120/365 } = $ 4.79

Equity Forward Contract with Continuous Dividends

If the underlying asset on which the forward contract is entered into provides a continuously compounded
yield q, then the forward contract would be valued as:

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 Derivatives & Risk Management – Questions Bank

Where q is continuously compounded % of return on the asset, such as a equity index

Example: The current value of Nifty is 5350 providing a continuous dividend yield of 2.5%.Calculate the
price of a 100 day contract given the continuously compounded risk free rate of 6%.
Soln:

Value of forward contract (for a long position) with continuous yield is derived:

FP= 5350* e (0.06-0.025)*100/365

FP = 5401.5

 In the previous example suppose after 45 days the index moves from 5350 to 5430, calculate the
value of a forward contract assuming the same risk free rate and dividend yield.

= 5409.6 – 5353
=$56.6

Important Formulas:

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Prepared By:

Amit Gupta MS Finance, MMS Finance, CFA, CFPcm, CWM, Dip TD (ISTD), B.Tech
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