NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION

EXAM – PRACTICE TEST NO. 3

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 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 3

PRACTICE TEST NO. 3

Question 1 Mr. Sam is a equity fund manager and he is bearish on the stock market. How will he use
this view to create a hedge?

(a) He will sell all his stocks

(b) He will decrease the NAV of his fund

(c) He will sell index futures

(d) He will buy index futures

Correct Answer He will sell index futures

Answer Mr. Sam is a fund manager which means his fund already has a portfolio of stock. He thinks
Explanation that the stock market can fall so he will sell index futures to create a hedge.

In case the market falls, he will have a loss on his stocks but will earn on his index futures
position.

Question 2 The absolute amount of minimum capital adequacy requirement for derivative clearing
member is higher than that of spot market - State whether True or False?

(a) TRUE

(b) FALSE

Correct Answer TRUE

Answer The absolute amount of minimum capital adequacy requirement for derivative
Explanation brokers/dealers is much higher than for cash market as the risk involved are higher.

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.
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 3

Question 3 What will be the Delta for a Far Out-of-the-money option?

(a) Near 0

(b) Near 1

(c) Near -1

(d) Near 2

Correct Answer Near 0

Answer Delta for Out of the Money Call and Put option approaches zero as it nears expiry.
Explanation

Delta for In the Money Call option approaches 1 and delta for In the Money Put option
approaches -1 as it nears expiry.

Question 4 A penalty or suspension of registration of a stock broker from derivatives

exchange/segment under SEBI (Stock Broker and Sub-broker) Regulations, 1992 can take
place if ______ .

(a) The stock broker fails to resolve the complaints of the investors

(b) The stock broker indulges in manipulating, or price rigging or cornering of the market

(c) The stock broker does not follow the code of conduct

(d) All of the above

Correct Answer All of the above

Answer A penalty or suspension of registration of a stock - broker under the SEBI (Stock Broker)
Explanation

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 themarket
- 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
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 3

Question 5 Can a Equity oriented mutual fund hedge its equity exposure by selling stock index futures?

(a) Yes

(b) No

Correct Answer Yes

Answer Yes, a mutual fund can sell index futures for hedging purposes.
Explanation

For eg - If a fund manager of an equity mutual fund feels that the stock markets can fall in
the near future, he can hedge his position by selling Nifty / Sensex futures.

Question 6 A trader buys a January ABC stock futures contract at Rs 768 and the lot size is 1200. What
is his profit or loss , if he squares off the position at Rs 778 ?

(a) Rs. 12000

(b) Rs 1200000

(c) - Rs 12000

(d) - Rs 10000

Correct Answer Rs. 12000

Answer The trader buys at Rs 768 and sells off at Rs 778, so he makes a profit of Rs 10.
Explanation

Lot size is 1200. So the total profit is Rs 10 X 1200 = Rs 12000

 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 3

Question 7 Which of these complaints against a trading member can an Exchange take up for redressal?

(a) Claims for expenses incurred for taking up the matter with the ISC

(b) Losses for transaction which are not within the framework of exchange

(c) Claims for opportunity loss for the particular disputed trade

(d) Excess brokerage charged by a broker

Correct Answer Excess brokerage charged by a broker

Answer Complaints against trading members on account of the following can be taken by an
Explanation Exchange for redressal :

- Non-receipt of funds / securities

- Non- receipt of documents such as member client agreement, contract notes, settlement
of accounts, order trade log etc.
- Non-Receipt of Funds / Securities kept as margin
- Trades executed without adequate margins
- Delay /non – receipt of funds
- Squaring up of positions without consent
- Unauthorized transaction in the account
- Excess Brokerage charged by Trading Member
- Unauthorized transfer of funds from commodities account to other accounts etc.

Question 8 A trader takes a short position in call option, but does not take any offsetting position in the
underlying stock. What is this strategy known as ?

(a) Protective Put strategy

(b) Writing a naked call

(c) Writing a covered call

(d) Butterfly strategy

Correct Answer Writing a naked call

Answer Naked position in options market simply means a long or short position in any
Explanation option contract without having any position in the underlying asset.

When one sells (short) a call it is also known as 'writing' a call.

So the above strategy is - Writing a naked call option.
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 3

Question 9 If there are three series of one, two and three months futures open at a given point of time,
how many calendar spread possibilities arise?

(a) 4

(b) 3

(c) 2

(d) 1

Correct Answer 3

Answer The three calendar spreads can be between months 1 and 2, 2 and 3 and 1 and 3.
Explanation

Question 10 ______ is the ratio of change in option premium for a unit change in volatility.

(a) Rho

(b) Theta

(c) Delta

(d) Vega

Correct Answer Vega

Answer Vega (ν) is a measure of the sensitivity of an option price to changes in market volatility. It
Explanation is the change of an option premium for a given change in the underlying volatility.
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 3

Question 11 When the price of a future contract decreases, the margin account ______ .

(a) of the seller of futures contract will be credited for the gain

(b) of the buyer of futures contract will be debited for the loss

(c) Both 1 and 2

(d) None of the above

Correct Answer Both 1 and 2

Answer The buyer of futures will have a notional loss and so his margin account will be debited by
Explanation the notional loss amount.

The seller of futures will have a notional profit if the price falls and his margin account will
be credited by the notional gain amount.

Question 12 A forward contract is _____

(a) is a type of Option

(b) is settled and cleared through a Clearing Corporation

(c) a bilateral commitment of trade between two parties

(d) is entered through an Exchange

Correct Answer a bilateral commitment of trade between two parties

Answer Forward Contract - It is a contractual agreement between two parties to buy/sell an

Explanation underlying asset at a certain future date for a particular price that is pre-decided on the
date of contract.
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 3

Question 13 Brokers and dealers of derivative exchanges have also to be registered with SEBI in addition
to their registration with stock exchange - State whether True or False?

(a) TRUE

(b) FALSE

Correct Answer TRUE

Answer In addition to their registration as brokers of existing stock exchanges, Derivative

Explanation brokers/dealers and clearing members are required to seek registration from SEBI.

Question 14 'Bulls' are those investors who believe the market will rise - State True or False?

(a) TRUE

(b) FALSE

Correct Answer TRUE

Answer Investors who believe that the markets will rise are called Bulls and investors who believe
Explanation that markets will fall are known as Bears.
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 3

Question 15 In case of forward contracts, the rules regarding the minimum amount by which the price
would change and the price limits are specified by an authority - State True or False ?

(a) TRUE

(b) FALSE

Correct Answer FALSE

Answer In a Forward Contract, there is no such authority. Forward contract is agreement between
Explanation two parties to buy/sell an underlying asset and no other authority like a Stock Exchange or
SEBI is involved.

Question 16 All the 50 stocks of NSE Nifty index are equally weighed while calculating the index - State
True or False ?

(a) TRUE

(b) FALSE

Correct Answer FALSE

Answer The NIFTY 50 index is a well-diversified 50 companies index reflecting overall market
Explanation conditions.

NIFTY 50 Index is computed using free float market capitalization method. As per this
method, the 50 stocks of Nifty are weighed as per their free float market capitalisation. For
eg - Reliance Industry has a weightage of appx 7% where as Wipro has a weightage of appx
2% in Nifty.
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 3

Question 17 The Clearing Corporation gives exposure limits to Clearing Members based on the number
of Trading Members using the services of that Clearing Member - State True or False ?

(a) TRUE

(b) FALSE

Correct Answer TRUE

Answer As per rules - Both trading-cum-clearing member and professional clearing member are
Explanation required to

bring in additional security deposits in respect of every trading member whose trades they
undertake to clear and settle.

Question 18 Arbitrage is simultaneous purchase and sale of an asset or replicating asset in the market in
an attempt to profit from discrepancies in their prices - State True or False ?

(a) TRUE

(b) FALSE

Correct Answer TRUE

Answer An arbitrage is a deal that produces risk free profits by exploiting a mispricing in the market.
Explanation A simple arbitrage occurs when a trader purchases an asset cheaply in one location/
exchange and simultaneously arranges to sell it at another location/ exchange at a higher
price.
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 3

Question 19 The seller or writer of an option is required to pay initial margin for entering into the option
contract. Where is this shown in the balance sheet ?

(a) Under Current Assets

(b) Under Current Liabilities

(c) Under Fixed Assets

(d) Under Fixed Liabilities

Correct Answer Under Current Assets

Answer The seller/ writer of the option is required to pay initial margin for entering into the option
Explanation 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".

Question 20 Which Option gives the holder a right to buy the underlying asset on or before a particular
date for a certain price ?

(a) European call option

(b) European put option

(c) American call option

(d) American put option

Correct Answer American call option

Answer American option: The owner of such option can exercise his right at any time on or before
Explanation the expiry date/day of the contract.

A Call Option gives the holder a right to buy the underlying asset - So the answer is
American Call Option.

(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.)
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 3

Question 21 Foreign Exchange can be a part of liquid assets to be maintained by Clearing Members with
the clearing corporation - State True or False ?

(a) TRUE

(b) FALSE

Correct Answer FALSE

Answer Liquid assets can comprise of Cash, Bank Guarantees, Govt. Securities etc. but not foreign
Explanation exchange.

Question 22 The book networth criterion for Professional Clearing Members is the same as that for
Trading cum Clearing members - State True or False ?

(a) TRUE

(b) FALSE

Correct Answer FALSE

Answer The networth criterion for Professional Clearing Members is higher than that for Trading
Explanation cum Clearing members.
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 3

Question 23 Theta is the rate of change in option premium for a unit change in ______ .

(a) volatility

(b) price of the underlying asset

(c) time to expiry

(d) interest rates

Correct Answer time to expiry

Answer Theta is the change in option price given a one-day decrease in time to expiration. It is a
Explanation measure of time decay.

(Please memorize the details for Delta, Gamma, Theta, Rho etc.)

Question 24 What is Unsystematic Risk ?

(a) Unsystematic Risk is related to risk in a specific security and not pertaining to overall
market

(b) Unsystematic Risk can be reduced through diversification

(c) Both 1 and 2

(d) None of the above

Correct Answer Both 1 and 2

Answer Unsystematic risk is the component of price risk that is unique to particular events of the
Explanation company and/or industry. For example : Strike in a factory or threats from cheaper imports
to steel industry.

This risk is inseparable from investing in the securities. This risk could be reduced to a
certain extent by diversifying the portfolio.
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 3

Question 25 Future prices are usually more transparent than Forward prices - State True or False ?

(a) TRUE

(b) FALSE

Correct Answer TRUE

Answer A futures contract is similar to a forward, except that the deal is made through an organized
Explanation and regulated exchange rather than being negotiated directly between two parties.

Since the futures are traded in an organised manner and mostly done through screen based
trading, they are much more transparent than forwards.

Question 26 If the interest rate increases, the premium on CALL option will also increase - State True or
False ?

(a) TRUE

(b) FALSE

Correct Answer TRUE

Answer High interest rates will result in an increase in the value of a call option and a decrease in
Explanation the value of a put option.
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 3

Question 27 Ms. Gayatri buys a call option of strike price Rs. 300 when the spot price is Rs 337. What is
the intrinsic value of this call option?

(a) -37

(b) 37

(c) Zero

(d) 637

Correct Answer 37

Answer The option premium of any security consist of two varables ie. the intinsic value and time
Explanation value.

For example if the spot price is Rs 100 and the call option price of a Rs 95 strike price option
is Rs 12, then Rs 5 (100 - 95) is the intrinsic value and the balance Rs 7 ( 12 - 5 ) is the time
value.

In the above question, the intrinsic value is 337 - 300 = Rs 37.

Question 28 What is time value of an option ?

(a) Its the general bank interest rate

(b) Its the volatility of the underlying asset

(c) Its the difference between the intrinsic value and the premium

(d) Its the time left for the option to expiry

Correct Answer Its the difference between the intrinsic value and the premium

Answer Option premium consists of two components - intrinsic value plus the time value.
Explanation
So the time value can be known by the difference in option premium and intrinsic value.
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 3

Question 29 A portfolio of Rs 25 lacs has a beta of 1.20. A complete hedge is obtained by ______ .

(a) by selling Nifty futures of Rs 25 lacs

(b) by selling Nifty futures of Rs 28 lacs

(c) by selling Nifty futures of Rs 30 lacs

(d) by buying Nifty futures of Rs 28 lacs

Correct Answer by selling Nifty futures of Rs 30 lacs

Answer Beta measures the sensitivity of a scrip/ portfolio vis-a-vis index movement over a period of
Explanation time, on the basis of historical prices. A beta of 1 indicates that the security's price will
move with the market. A beta of less than 1 means that the security will be less volatile
than the market. A beta of greater than 1 indicates that the security's price will be more
volatile than the market. For example, if a stock's beta is 1.3, it's theoretically 30% more
volatile than the market.

So to obtain a hedge for a portfolio of shares, one has to sell Nifty futures.

The beta of a portfolio in the above case is 1.20. The portfolio value is Rs 25 lacs.

25 Lacs x 1.20 = Rs 30 [Link] to get a complete hedge for this portfolio, Nifty worth
Rs 30 lacs have to be sold.

Question 30 The beta of a stock is 0.7 and you have a buy position of Rs 3,00,000 in it. Which of the
below options will give you a complete hedge ?

(a) Sell Rs 2,10,000 Nifty

(b) Buy Rs 2,10,000 Nifty

(c) Buy Rs 3,00,00 Nifty

(d) Sell Rs 3,00,000 Nifty

Correct Answer Sell Rs 2,10,000 Nifty

Answer To get a complete hedge against your buy position , you will have to sell Nifty.
Explanation

0.7 x Rs 3,00,000 = Rs 2,10,000.

 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 3

Question 31 A derivative market would primarily have ________ .

(a) Speculators

(b) Hedgers

(c) Long term investors

(d) Both 1 and 2

Correct Answer Both 1 and 2

Answer A derivative market has both speculators and hedgers. Long term investors in vest in the
Explanation cash market and take delivery of securities.

Question 32 Mr. Sunil wishes to buy a futures contract of Tata Steel shares. He should _____.

(a) make payments for the full value of the contract

(b) make the margin payments as calculated by the exchange

(c) hedge his position in Tata Steel in the Options market

(d) None of the above

Correct Answer make the margin payments as calculated by the exchange

Answer To buy a futures contract, one does not have to make full payment but only the margin
Explanation payment as per the percentage decided by the stock exchange.
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 3

Question 33 Forward Contracts are those contracts which can be customised as per the requirements of
the concerned parties - True or False ?

(a) FALSE

(b) TRUE

Correct Answer TRUE

Answer Forward contracts are as per the choice of the transacting parties where as the future
Explanation contracts, the parameters quantity, expiry date etc. are customised by the exchanges.

Question 34 Which amongst the following comes under the purview of Securities Contracts (Regulation)
Act-1956 ?

(a) Currency

(b) Securities

(c) Gold

(d) Commodities

Correct Answer Securities

Answer As per the Securities Contracts (Regulation) Act-1956, the term ‘Securities’ include:
Explanation

- Shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities
of a like nature in or of any incorporated company or other body corporate
- Derivative
- Units or any other instrument issued by any collective investment scheme to the investors
in such schemes
- Government securities
- Such other instruments as may be declared by the Central Government to be securities
- Rights or interests in securities
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 3

Question 35 Strike price is the price per share for which the underlying security may be purchased or
sold by the option holder - State True or False ?

(a) TRUE

(b) FALSE

Correct Answer TRUE

Answer Strike price or Exercise price is the price per share for which the underlying security may be
Explanation purchased or sold by the option holder.

Question 36 A penalty or suspension of registration of a stock broker from derivatives

exchange/segment under SEBI (Stock Broker and Sub-broker) Regulations, 1992 can take
place if ________

(a) The stock broker violates the conditions of registration

(b) The stock broker fails to pay fees

(c) The stock broker is suspended by the stock exchange

(d) In any of the above situations

Correct Answer In any of the above situations

Answer A penalty or suspension of registration of a stock - broker under the SEBI (Stock
Explanation 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
- 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
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 3

Question 37 The losses for a seller of a Call options are __________ .

(a) limited

(b) Unlimited

Correct Answer unlimited

Answer The seller of a call option believes that prices will go down.
Explanation

The losses begin when the prices rise and theoretically prices can rise to unlimited levels, so
the losses can be unlimited.

Question 38 A trader sells a future contract and prices rises. The trader will ______ if he squares up the
position.

(a) make a profit

(b) make a loss

(c) Insufficient data

(d) None of the above

Correct Answer make a loss

Answer For eg - He sells at Rs 100 and prices rises to Rs 110. If he squares up, he shall make a loss of
Explanation Rs 10.
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 3

Question 39 The quality of the underlying asset is standardized by the _________ in case of futures
contract.

(a) RBI

(b) SEBI

(c) Exchange

(d) The buyer and seller

Correct Answer Exchange

Answer Exchange traded futures and options are standardised as per the rules of the Exchange in
Explanation terms of quality, time, duration, quantity etc.

Question 40 The Bye Laws of an Indian Stock Exchange are to be approved by ________ .

(a) Finance Ministry

(b) RBI

(c) Clearing Corporation

(d) SEBI

Correct Answer SEBI

 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 3

Question 41 Clearing member Ram has 6 trading members who are all in Mumbai and Clearing member
Shyam has 6 trading members who are all outside Mumbai. Both of them have deposited
same amount of liquid assets with the clearing corporation. Which amongst the following
statement is True ?

(a) Clearing Member Ram will have a higher exposure limit than Clearing Member Shyam

(b) Clearing Member Shyam will have a higher exposure limit than Clearing Member Ram

(c) Both Ram and Shyam will have the equal exposure limits

(d) None of the above

Correct Answer Both Ram and Shyam will have the equal exposure limits

Answer As per Dr. L. C. Gupta Committee recommendations: Members’ exposure should be linked
Explanation to the amount of liquid assets maintained by them with the clearing corporation.

There is no mention of any geographical limitations.

Question 42 Which one of the below mentioned option will result in a Bear Spread ?

(a) Selling a Call of a lower strike price and buying a Call of a higher strike price

(b) Selling a Put of a lower strike price and buying a Call of a higher strike price

(c) Selling one Call of a lower strike price and buying two Puts of a higher strike price

(d) None of the above

Correct Answer Selling a Call of a lower strike price and buying a Call of a higher strike price

Answer Bear Spread can be created by :

Explanation

1) Selling a low strike call and buying a high strike call OR

2) Selling a low strike Put and buying a high strike Put

Remember : Bear spread involves either 2 Calls or 2 Puts and not Call and Put.
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 3

Question 43 Are Treasury Bills included in the list of permitted liquid assets which can be offered to
Clearing Corporation by the Clearing Members ?

(a) Yes

(b) No

Correct Answer Yes

Answer Liquid Assets can be in the form of Cash, Cash Equivalents (Government Securities, Fixed
Explanation Deposits, Treasury Bills, Bank Guarantees, and Investment Grade Debt Securities) and
Equity Securities.

Question 44 The Spot Price of ABC Stock is Rs. 347. Rs. 325 strike call is quoted at Rs. 39. What is the
Intrinsic Value?

(a) 0

(b) 22

(c) 39

(d) 61

Correct Answer 22

Answer When the Strike Price is below the Spot Price, the Call Option is 'In the Money' ie.
Explanation profitable.

Intrinsic Value for a such a Call Option = Spot Price - Strike Price

= 347 – 325 = 22
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 3

Question 45 Options which are traded on a recognised exchange ie. Exchange traded options
are________

(a) usually in-the-money options

(b) usually out-of-the money options

(c) Standardized options

(d) Customized options

Correct Answer Standardized options

Answer Exchange Traded Options are standarised as per the rules and regulation of the exchanges.
Explanation Only the price is variable. The lot size quantity, time (maturity) etc. are all fixed by the
exchanges.

Question 46 You sold one SBI Ltd. futures contract at Rs.260 and the lot size is 1,000. What is your profit
or loss, if you purchase the contract back at Rs.251 ?

(a) 9000

(b) -9000

(c) 7500

(d) -7500

Correct Answer 9000

Answer When you sell a stock future contract you make a profit if the share falls. In this case SBI has
Explanation fallen by Rs9 x 1000 = Profit of Rs 9000
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 3

Question 47 Margins in futures trading are applicable to -

(a) Only Institutional players.

(b) Both the buyer and the seller

(c) Only the buyer

(d) Only the Seller

Correct Answer Both the buyer and the seller

Answer In a futures market margins are payable by both the parties.

Explanation

Question 48 An in-the-money option is a option with _______

(a) a negative intrinsic value

(b) a positive intrinsic value

(c) either negative or positive intrinsic value

(d) zero time value

Correct Answer a positive intrinsic value

Answer Intrinsic value refers to the amount by which option is in the money i.e. the amount an
Explanation option buyer will realize, before adjusting for premium paid, if he exercises the option
instantly.

For eg - Spot price of a stock is Rs 100. The Call option of strike price Rs 95 is in the money
and Rs 5 is the Intrinsic value

Therefore, only in-the-money options have intrinsic value whereas at-the-money and out-
of-the-money options have zero intrinsic value.
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 3
Question 49 All the orders entered on the Trading System of a Derivative Exchange are at Prices
exclusive of brokerage. True or False ?

(a) FALSE

(b) TRUE

Correct Answer TRUE

Answer The prices are exclusive ie. with out any brokerage. Brokerage is added later and is reflected
Explanation in the contract note.

Question 50 If a person buys a share in one market and the simultaneously sells in a different market to
benefit from differentials is known as_________.

(a) Long trading

(b) Arbitrage

(c) Speculation

(d) Jobbing

Correct Answer Arbitrage

Answer Arbitrage means the simultaneous purchase and sale of an asset in order to profit from a
Explanation difference in the price.

It is a trade that profits by exploiting price differences of identical or similar financial

instruments, on different markets.

For example- If SBI is quoted on NSE at Rs 200 and on BSE there is a buyer at Rs 203, then
the arbitrageur will buy on NSE and sell on BSE and Rs 3 (less brokerage etc.) will be is
profit.

Arbitrage exists as a result of market inefficiencies; it provides a mechanism to ensure

prices do not deviate substantially from fair value for long periods of time.

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 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 3

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NISM Series III A: Securities Intermediaries Compliance certification Exam
NISM Series X A : Investment Adviser (Level 1) Certification Exam
NISM Series X B: Investment Adviser (Level 2) Certification Exam
And many more..

NCFM

NCFM Financial Markets: A Beginners Module

NCFM Capital Market (Dealers) Module
NCFM Derivative Market (Dealers) Module

BSE

Certificate on Security Market (BCSM)

NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 3