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Aditya Birla Sun Life AMC Limited

Equity Derivatives FAQs – Questions and Answers

Understand equity derivatives through frequently asked questions covering futures, options, trading strategies, risks, payoffs, option Greeks and other key concepts.

Correct answer: B

Explanation:
A derivative derives its value from an underlying asset such as stocks, commodities, currencies, or indices.
Correct answer: C

Explanation:
Bonds are primary securities. Futures, options, and swaps are derivatives.
Correct answer: B

Explanation:
In India, equity derivatives dominate trading on National Stock Exchange of India and BSE Limited.
Correct answer: B

Explanation:
Forward contracts are customized agreements traded OTC between two parties.
Correct answer: A

Explanation:
Futures and options are standardized contracts traded on exchanges like the National Stock Exchange of India.
Correct answer: B

Explanation:
Futures contracts have standardized lot size, expiry date, and contract specifications.
Correct answer: B

Explanation:
A long position benefits when the price rises.
Correct answer: B

Explanation:
The seller expects prices to fall.
Correct answer: A

Explanation:
Daily profit or loss is adjusted through mark-to-market settlement.
Correct answer: B

Explanation:
Margins act as a security deposit to cover potential losses.
Correct answer: B

Explanation:
Call option = Right to buy.
Correct answer: B

Explanation:
Put option = Right to sell.
Correct answer: B

Explanation:
The option premium is the cost of buying the option.
Correct answer: C

Explanation:
Strike price is the predetermined price at which the option can be exercised.
Correct answer: B

Explanation:
Buyer may exercise or ignore the option.
Correct answer: C

Explanation:
Hedging reduces exposure to price movements.
Correct answer: B

Explanation:
A hedger protects against price fluctuations.
Correct answer: B

Explanation:
Arbitrage exploits price differences across markets.
Correct answer: C

Explanation:
Speculators take positions expecting favorable price changes.
Correct answer: A

Explanation:
Call intrinsic value = Max(0, Spot − Strike).
Correct answer: A

Explanation:
More time → higher time value.
Correct answer: A

Explanation:
Higher volatility increases option premium.
Correct answer: B

Explanation:
Derivatives markets are regulated by Securities and Exchange Board of India.
Correct answer: B

Explanation:
Explanation: Clearing corporations ensure counterparty risk management.
Correct answer: A

Explanation:
Each futures contract has a predefined lot size.
Correct answer: B

Explanation:
F&O contracts expire on the last Thursday of the month.
Correct answer: B
Correct answer: B
Correct answer: B
Correct answer: B
Correct answer: B
Correct answer: B
Correct answer: A
Correct answer: A
Correct answer: B
Correct answer: A

Explanation:
Underlying index: NIFTY 50
Correct answer: B
Correct answer: B
Correct answer: B
Correct answer: B
Correct answer: D
Correct answer: B
Correct answer: B
Correct answer: A
Correct answer: A
Correct answer: B
Correct answer: B
Correct answer: B
Correct answer: D
Correct answer: B
Correct answer: C

Explanation:
A market maker provides liquidity by quoting bid and ask prices.
Correct answer: B

Explanation:
Basis = Spot price – Futures price.
Basis helps analyze arbitrage opportunities.
Correct answer: B

Explanation:
Contango means futures trade at a premium to spot.
Correct answer: B
Correct answer: B
Correct answer: B

Explanation:
Call buyer can gain unlimited profit if the underlying price rises.
Correct answer: B
Correct answer: C
Correct answer: A
Correct answer: A
Correct answer: B
Correct answer: B
Correct answer: B
Correct answer: B
Correct answer: B
Correct answer: B
Correct answer: B
Correct answer: A
Correct answer: A
Correct answer: B
Correct answer: C
Correct answer: A
Correct answer: C
Correct answer: B
Correct answer: C

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Click Here to Explore Questions and Answers on Different Topics:
NISM Series V-D FAQs | Interest Rate Derivative FAQs | Mutual Fund Mock Test FAQs | SIF (Specialized Investment Fund) FAQs.

Disclaimer:
The above questions are for illustrative purposes only and are intended solely for educational purposes.

An Investor Education and Awareness Initiative of Aditya Birla Sun Life Mutual Fund.
All investors have to go through a one-time KYC (Know Your Customer) process. Investors to invest only with SEBI registered Mutual Funds. For further information on KYC, list of SEBI registered Mutual Fund, and redressal of complaints including details about SEBI SCORES portal, visit link: mutualfund.adityabirlacapital.com/investor-education/education/kyc-and-redressal for further details. Investors may lodge their complaints with SEBI through the SCORES portal (SEBI Complaints Redressal System) at https://scores.sebi.gov.in/.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

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NISM Series V-D

Equity Derivatives FAQs – Questions and Answers

b { font-weight:600 !important; } div, p { font-size:15px !important; } 1 A derivative is a financial instrument whose value is derived from: Options: A. Interest Rates Only | B. Underlying Asset | C. Government Policy | D. Inflation

b { font-weight:600 !important; } div, p { font-size:15px !important; } 2 Which of the following is NOT a derivative instrument? Options: A. Futures | B. Options | C. Bonds | D. Swaps

b { font-weight:600 !important; } div, p { font-size:15px !important; } 3 The most commonly used underlying in Indian derivatives markets is: Options: A. Bonds | B. Equity | C. Commodities | D. Currency

b { font-weight:600 !important; } div, p { font-size:15px !important; } 4 A forward contract is traded: Options: A. On stock exchanges | B. Over the counter | C. In banks only | D. In commodity markets only

b { font-weight:600 !important; } div, p { font-size:15px !important; } 5 Standardized derivative contracts are traded on: Options: A. Exchanges | B. Banks | C. Insurance Companies | D. Mutual Funds

b { font-weight:600 !important; } div, p { font-size:15px !important; } 6 Futures Market: Futures contracts are: Options: A. Customized | B. Standardized | C. Illegal | D. Non-tradable

b { font-weight:600 !important; } div, p { font-size:15px !important; } 7 The party that agrees to buy the asset in a futures contract is called: Options: A. Short Position | B. Long Position | C. Writer | D. Arbitrageur

b { font-weight:600 !important; } div, p { font-size:15px !important; } 8 The party that sells a futures contract takes: Options: A. Long Position | B. Short Position | C. Hedge Position | D. Cash Position

b { font-weight:600 !important; } div, p { font-size:15px !important; } 9 Futures contracts are settled daily through: Options: A. Mark-to-Market | B. Netting | C. Hedging | D. Clearing

b { font-weight:600 !important; } div, p { font-size:15px !important; } 10 Initial margin is collected to: Options: A. Generate Profit | B. Cover Potential Losses | C. Pay Taxes | D. Increase Liquidity

b { font-weight:600 !important; } div, p { font-size:15px !important; } 11 Options Basics: A call option gives the buyer the right to: Options: A. Sell Asset | B. Buy Asset | C. Hold Asset | D. Cancel Trade

b { font-weight:600 !important; } div, p { font-size:15px !important; } 12 A put option gives the buyer the right to: Options: A. Buy Asset | B. Sell Asset | C. Hold Asset | D. Cancel Trade

b { font-weight:600 !important; } div, p { font-size:15px !important; } 13 The price paid to buy an option is called: Options: A. Margin | B. Premium | C. Strike Price | D. Settlement Price

b { font-weight:600 !important; } div, p { font-size:15px !important; } 14 Strike price means: Options: A. Market Price | B. Contract Price | C. Exercise Price | D. Settlement Price

b { font-weight:600 !important; } div, p { font-size:15px !important; } 15 Option buyer has: Options: A. Obligation | B. Right but no obligation | C. Unlimited obligation | D. No rights

b { font-weight:600 !important; } div, p { font-size:15px !important; } 16 Hedging: Hedging means: Options: A. Increasing risk | B. Eliminating risk completely | C. Reducing price risk | D. Speculating

b { font-weight:600 !important; } div, p { font-size:15px !important; } 17 A farmer using futures to lock price is: Options: A. Speculator | B. Hedger | C. Arbitrageur | D. Investor

b { font-weight:600 !important; } div, p { font-size:15px !important; } 18 Arbitrage means: Options: A. High-risk trade | B. Risk-free profit from price difference | C. Hedging | D. Gambling

b { font-weight:600 !important; } div, p { font-size:15px !important; } 19 Speculators aim to: Options: A. Reduce risk | B. Lock prices | C. Profit from price movement | D. Stabilize market

b { font-weight:600 !important; } div, p { font-size:15px !important; } 20 Options Valuation: Intrinsic value of a call option is: Options: A. Spot – Strike | B. Strike – Spot | C. Spot + Strike | D. Premium − Strike

b { font-weight:600 !important; } div, p { font-size:15px !important; } 21 Time value of option depends on: Options: A. Time to expiry | B. Strike price only | C. Dividend | D. Tax rate

b { font-weight:600 !important; } div, p { font-size:15px !important; } 22 Volatility affects option price: Options: A. Positively | B. Negatively | C. Not at all | D. Randomly

b { font-weight:600 !important; } div, p { font-size:15px !important; } 23 Market Infrastructure: The derivatives regulator in India is: Options: A. RBI | B. SEBI | C. IRDAI | D. NABARD

b { font-weight:600 !important; } div, p { font-size:15px !important; } 24 Clearing corporation guarantees: Options: A. Profits | B. Settlement | C. Dividends | D. Interest

b { font-weight:600 !important; } div, p { font-size:15px !important; } 25 Lot size refers to: Options: A. Minimum trading quantity | B. Maximum price | C. Margin size | D. Premium amount

b { font-weight:600 !important; } div, p { font-size:15px !important; } 26 Expiry and Settlement: Most stock futures in India expire on: Options: A. First Thursday | B. Last Thursday | C. Second Friday | D. Last Monday

b { font-weight:600 !important; } div, p { font-size:15px !important; } 27 Cash settlement means: Options: A. Delivery of shares | B. Cash difference settlement | C. Commodity delivery | D. Bank transfer only

b { font-weight:600 !important; } div, p { font-size:15px !important; } 28 Physical settlement means: Options: A. Cash settlement | B. Delivery of underlying asset | C. Margin adjustment | D. Price adjustment

b { font-weight:600 !important; } div, p { font-size:15px !important; } 29 Risk Concepts: Margin call occurs when: Options: A. Profit increases | B. Margin falls below maintenance level | C. Premium rises | D. Strike price changes

b { font-weight:600 !important; } div, p { font-size:15px !important; } 30 Leverage in derivatives means: Options: A. Lower risk | B. Small capital controlling large exposure | C. Higher taxes | D. Lower liquidity

b { font-weight:600 !important; } div, p { font-size:15px !important; } 31 Option Strategies: Buying a call is profitable when: Options: A. Market falls | B. Market rises | C. Market stable | D. Volatility falls

b { font-weight:600 !important; } div, p { font-size:15px !important; } 32 Buying a put is profitable when: Options: A. Market rises | B. Market falls | C. Market stable | D. Interest rates fall

b { font-weight:600 !important; } div, p { font-size:15px !important; } 33 Covered call strategy involves: Options: A. Buying stock + selling call | B. Selling stock + buying call | C. Buying stock + buying call | D. Selling stock + selling call

b { font-weight:600 !important; } div, p { font-size:15px !important; } 34 Protective put strategy: Options: A. Buy stock + buy put | B. Sell stock + buy put | C. Buy call + sell put | D. Sell call + sell put

b { font-weight:600 !important; } div, p { font-size:15px !important; } 35 Index Derivatives: Index derivatives are based on: Options: A. Single stock | B. Basket of stocks | C. Bonds | D. Gold

b { font-weight:600 !important; } div, p { font-size:15px !important; } 36 Popular Indian index derivative: Options: A. Nifty 50 | B. Gold ETF | C. Sensex bond | D. Bank loan

b { font-weight:600 !important; } div, p { font-size:15px !important; } 37 Index futures are settled by: Options: A. Delivery of stocks | B. Cash settlement | C. Gold delivery | D. Physical delivery

b { font-weight:600 !important; } div, p { font-size:15px !important; } 38 Greeks: Delta measures: Options: A. Time decay | B. Sensitivity to underlying price | C. Volatility change | D. Interest change

b { font-weight:600 !important; } div, p { font-size:15px !important; } 39 Theta measures: Options: A. Volatility change | B. Time decay | C. Price change | D. Interest rate

b { font-weight:600 !important; } div, p { font-size:15px !important; } 40 Vega measures sensitivity to: Options: A. Interest rate | B. Volatility | C. Dividend | D. Strike price

b { font-weight:600 !important; } div, p { font-size:15px !important; } 41 Miscellaneous: Derivatives market helps in: Options: A. Price discovery | B. Risk management | C. Liquidity | D. All of the above

b { font-weight:600 !important; } div, p { font-size:15px !important; } 42 Contract note is issued by: Options: A. Clearing corporation | B. Broker | C. Exchange | D. Regulator

b { font-weight:600 !important; } div, p { font-size:15px !important; } 43 A trader expecting price fall should: Options: A. Buy futures | B. Sell futures | C. Buy call | D. Buy stock

b { font-weight:600 !important; } div, p { font-size:15px !important; } 44 Deep ITM option means: Options: A. Strike price is significantly favorable compared to spot price (deep in-the-money) | B. Strike near spot | C. Strike unfavorable | D. Zero premium

b { font-weight:600 !important; } div, p { font-size:15px !important; } 45 ATM option means: Options: A. Spot = Strike | B. Spot > Strike | C. Spot < Strike | D. No strike

b { font-weight:600 !important; } div, p { font-size:15px !important; } 46 OTM option means: Options: A. Profitable | B. Option with no intrinsic value (cannot be exercised profitably) | C. Expired | D. Exercised

b { font-weight:600 !important; } div, p { font-size:15px !important; } 47 Maximum loss for option buyer is: Options: A. Unlimited | B. Premium paid | C. Margin | D. Strike price

b { font-weight:600 !important; } div, p { font-size:15px !important; } 48 Maximum loss for option seller can be: Options: A. Limited | B. Unlimited | C. Zero | D. Premium only

b { font-weight:600 !important; } div, p { font-size:15px !important; } 49 Futures price depends on: Options: A. Spot price | B. Interest rate | C. Time to expiry | D. All of the above

b { font-weight:600 !important; } div, p { font-size:15px !important; } 50 Derivatives help in transferring: Options: A. Ownership | B. Risk | C. Interest | D. Taxes

b { font-weight:600 !important; } div, p { font-size:15px !important; } 51 Which participant provides liquidity by continuously quoting buy and sell prices? Options: A. Hedger | B. Arbitrageur | C. Market maker | D. Investor

b { font-weight:600 !important; } div, p { font-size:15px !important; } 52 Basis in futures market means: Options: A. Futures price – Spot price | B. Spot price – Futures price | C. Spot + Futures | D. Strike price – Spot

b { font-weight:600 !important; } div, p { font-size:15px !important; } 53 If futures price is higher than spot price, the market is called: Options: A. Backwardation | B. Contango | C. Discount Market | D. Arbitrage Market

b { font-weight:600 !important; } div, p { font-size:15px !important; } 54 If futures price is lower than spot price, the market is: Options: A. Contango | B. Backwardation | C. Premium Market | D. Forward Market

b { font-weight:600 !important; } div, p { font-size:15px !important; } 55 Daily mark-to-market settlement reduces: Options: A. Market volatility | B. Counterparty risk | C. Liquidity | D. Brokerage

b { font-weight:600 !important; } div, p { font-size:15px !important; } 56 Which derivatives contract has unlimited profit potential for the buyer? Options: A. Put option | B. Call option | C. Futures | D. Swap

b { font-weight:600 !important; } div, p { font-size:15px !important; } 57 Maximum profit of a call option seller is: Options: A. Unlimited | B. Premium received | C. Strike price | D. Spot price

b { font-weight:600 !important; } div, p { font-size:15px !important; } 58 An option with no intrinsic value is: Options: A. ITM Option | B. ATM Option | C. OTM Option | D. Deep ITM

b { font-weight:600 !important; } div, p { font-size:15px !important; } 59 The clearing house for derivatives on the National Stock Exchange of India is: Options: A. NSE Clearing | B. SEBI Clearing | C. RBI Clearing | D. NSDL

b { font-weight:600 !important; } div, p { font-size:15px !important; } 60 A long futures position benefits when: Options: A. Price rises | B. Price falls | C. Volatility falls | D. Interest rate falls

b { font-weight:600 !important; } div, p { font-size:15px !important; } 61 Short futures position benefits when: Options: A. Price rises | B. Price falls | C. Price stable | D. Interest rates rise

b { font-weight:600 !important; } div, p { font-size:15px !important; } 62 Option seller is also known as: Options: A. Holder | B. Writer | C. Hedger | D. Trader

b { font-weight:600 !important; } div, p { font-size:15px !important; } 63 Volatility refers to: Options: A. Interest rate change | B. Price fluctuation | C. Dividend payment | D. Liquidity

b { font-weight:600 !important; } div, p { font-size:15px !important; } 64 Higher volatility generally leads to: Options: A. Lower option premium | B. Higher option premium | C. No change | D. Lower strike price

b { font-weight:600 !important; } div, p { font-size:15px !important; } 65 The underlying of NIFTY 50 derivatives is: Options: A. Single stock | B. Basket of 50 stocks | C. Commodity | D. Bond index

b { font-weight:600 !important; } div, p { font-size:15px !important; } 66 Futures contracts require: Options: A. Premium | B. Margin | C. Strike price | D. Coupon

b { font-weight:600 !important; } div, p { font-size:15px !important; } 67 Options buyer pays: Options: A. Margin only | B. Premium | C. Interest | D. Dividend

b { font-weight:600 !important; } div, p { font-size:15px !important; } 68 Which strategy benefits from high volatility? Options: A. Long straddle | B. Covered call | C. Protective put | D. Short call

b { font-weight:600 !important; } div, p { font-size:15px !important; } 69 A long straddle involves: Options: A. Buy call + buy put | B. Sell call + sell put | C. Buy call + sell put | D. Sell call + buy put

b { font-weight:600 !important; } div, p { font-size:15px !important; } 70 A short straddle strategy benefits when: Options: A. Market moves sharply | B. Market remains stable | C. Market crashes | D. Market rallies

b { font-weight:600 !important; } div, p { font-size:15px !important; } 71 Which option Greek measures time decay? Options: A. Delta | B. Gamma | C. Theta | D. Vega

b { font-weight:600 !important; } div, p { font-size:15px !important; } 72 Which Greek measures change in delta? Options: A. Gamma | B. Theta | C. Vega | D. Rho

b { font-weight:600 !important; } div, p { font-size:15px !important; } 73 Rho measures sensitivity to: Options: A. Volatility | B. Time decay | C. Interest rate | D. Strike price

b { font-weight:600 !important; } div, p { font-size:15px !important; } 75 Which participant tries to profit from price differences across markets? Options: A. Hedger | B. Speculator | C. Arbitrageur | D. Investor

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