NISM Series 13 FAQs | Interest Rate, Currency & Equity Derivatives

Liquidity Risk

Liquidity refers to the ability of the market participants to buy or sell the desired quantity of an underlying asset. As forwards are tailor-made contracts i.e. the terms of the contract are according to the specific requirements of the parties, other market participants may not be interested in these contracts.

Counterparty Risk

Counterparty risk is the risk of economic loss arising from the failure of a counterparty.

It helps in improving price discovery based on actual valuations and expectations.

It enables the transfer of various risks from those who are exposed to risk but have a low risk appetite to participants with a high-risk appetite. For example, hedgers want to give away the risk whereas traders are willing to take risk.

It enables the shift of speculative trades from the unorganized market to the organized market. Risk management mechanism and surveillance of activities of various participants in the organized space provide stability to the financial system.

Question 1

___________________ wants to make money at all the time regardless of any fluctuations happening in the market.

1. Straddle
2. Hedger
3. Speculator
4. All of the above

Question 2

What does hedging do?

1. It maximises business profits
2. It minimises business losses
3. It produces a clearer outcome
4. Hedging can be used only in currency markets and not in equity markets

Securities Contracts (Regulation) Act, 1956 (SCRA)

Governs stock trading and aims to prevent market manipulation.

SEBI Act, 1992

Establishes the Securities and Exchange Board of India (SEBI) to regulate and protect investors.

Question 1

What does novation mean in the context of trade clearing?

1. The clearing corporation becomes the legal counterparty to both sides of every trade.
2. Modification of an order before it is executed on the exchange.
3. Cancellation of unsettled trades at the end of the day.
4. A penalty charged by the exchange for default.

Question 2

What is multilateral netting as performed by the clearing corporation?

1. Consolidating all trades of all clearing members to determine net delivery and payment obligations for each member, rather than settling trade-by-trade.
2. Offsetting buy and sell orders before trade execution on the exchange.
3. Pairing each buyer with a single specific seller for delivery (bilateral netting only).
4. Netting off a broker’s losses in one security against profits in another security for margin benefit.

SPAN Margin

SPAN (Standard Portfolio Analysis of Risk)
Think of it as a risk calculator used worldwide.
It looks at your entire portfolio and figures out: “If the market moves badly tomorrow, how much can you lose?”
Based on this, it decides how much margin (deposit) you must keep.

Exposure Margin

This adds an extra buffer-against sudden, wild swings. For stock futures and option selling, it’s approximately 3.5% of the contract value.
For index derivatives, it's around 2-3%.

Day 1: Entry

Buy Nifty futures at ₹17,800. Contract value = ₹17,800 × 75 = ₹13.35 lakh.

Margin blocked (say 12%) = ₹1.6 lakh.

Closing price = ₹18,000.

Gain = (18,000 – 17,800) × 75 = ₹15,000.

Profit added → Margin balance rises to ₹1.75 lakh.

Day 2

Reference = 18,000. Closing = ₹17,900.

Loss = (17,900 –18,000) ×75 = -₹7,500.

Loss deducted → Margin balance falls to ₹1.675 lakh.

Day 3

Reference = 17,900. Closing = ₹18,100.

Gain = (18,100 – 17,900) × 75 = ₹15,000.

Profit added → Margin balance becomes ₹1.825 lakh.

F = Futures Price

S = Spot Price

This is the basic version, used when costs/income are expressed in rupee terms or using simple interest.

Question 1

Which of the following statements best distinguishes a forward contract from a futures contract?

1. Forwards are standardized contracts traded on exchanges, while futures are private agreements traded over-the-counter.
2. Forwards settle gains/losses only at maturity, whereas futures are marked-to-market daily with margins.
3. Forwards carry minimal credit risk due to clearinghouse guarantees, whereas futures have high counterparty default risk.
4. Forwards require an initial margin deposit, while futures typically require no upfront payment.

Question 2

Suppose the spot price of a stock index is ₹10,000. The risk-free interest rate is 6% per annum. Assume no dividends on the index and no other holding costs or benefits. What is the fair futures price for a contract expiring in 6 months (0.5 year), based on the cost-of-carry model? (Use simple interest for approximation.)

1. ₹10,000
2. ₹10,300
3. ₹10,600
4. ₹10,700

Question 3

Mr. Sharma shorts 1 lot of XYZ futures at ₹200 per unit. Each lot represents 100 units. Later, he closes (squares off) his position at ₹180 per unit. What is Mr. Sharma’s profit or loss on this futures trade (ignoring transaction costs)?

1. ₹2,000 profit
2. ₹2,000 loss
3. ₹20 profit
4. ₹20 loss

Question 4

If a trader’s futures position incurs losses such that the funds in the margin account fall below the required maintenance margin level, what typically happens?

1. The trader will receive a margin call to deposit additional funds to restore the margin to the initial level.
2. The position is automatically terminated by the exchange with no further action.
3. The trader can continue to hold the position until expiry without adding funds.
4. The losses are ignored as long as the trader has paid initial margin once.

These options have a stock index as the underlying asset. For example, Options on Nifty, Sensex, etc.

These options have individual stocks as the underlying asset. For example, Option on ONGC, NTPC, etc.

The owner (buyer/holder) of an American Option can exercise his right at any time on or before the expiry date/day of the contract.

The owner (buyer/holder) of a European Option can exercise his right only on the expiry date/day of the contract. In India, all Index and Stock Options are European Style Options.

It is the price which the option buyer pays to the option seller.

It is the price at which the underlying asset is trading in the spot market. In our examples, it is the value of underlying index (Nifty 50) which was 18315.10 at that point of time.

Strike price is the price per share for which the underlying security may be purchased by the call option holder (or sold by the put option holder). In our examples, strike price for both call and put options is 18400.

In-the-money (ITM) Option

This option would give the option holder a positive cash flow, if it were exercised immediately. A call option is said to be ITM, when spot price is higher than strike price. A put option is said to be ITM when spot price is lower than strike price. In our examples, the put option is in-the-money.

At-the-money (ATM) Option

At-the-money option would lead to zero cash flow if it were exercised immediately. Therefore, for both call and put ATM options, strike price is equal to spot price. In reality, because the strike prices are at fixed intervals of say, Rs.5, Rs.10 or Rs.50, while the spot price moves in much smaller increments, the two prices may rarely be equal. Hence an ATM option can be defined as an option with a strike price which is closest to the spot price.

For example, if the index is at 18415 and three options on the index with strike prices of 18350, 18400 and 18450 are available for trading, the option with the strike price of 18400 is an ATM option.

Out-of-the-money (OTM) Option

An out-of-the-money option is one with a strike price worse than the spot price for the holder of option. In other words, this option would give the holder a negative cash flow if it were exercised immediately.

An out-of-the-money option is one with a strike price worse than the spot price for the holder of option. In other words, this option would give the holder a negative cash flow if it were exercised immediately. A call option is said to be OTM, when spot price is lower than strike price. A put option is said to be OTM when spot price is higher than strike price. In our examples, the call option is out-of-the-money.

Call Option – Right to Buy

A Call option gives the buyer the right (not obligation) to buy an asset at a fixed price (called Strike Price) before/at expiry.

The seller (writer) of the call is obligated to sell if the buyer chooses to exercise.

The buyer pays a Premium to the seller.

Premium is like a booking fee.

Payoff for Buyer of Call Option

Call Buyer (Right to Buy at ₹1,500. Premium ₹50)

• Loss is limited to premium (₹50) → flat line below zero.
• Profit starts after ₹1,550 (Strike + Premium = Breakeven Price) and grows unlimited as stock price rises.

Put Option – Right to Sell

A Put Option gives the buyer the right (not obligation) to sell an asset at strike price before/at expiry.

The seller (writer) of the put must buy if the buyer exercises.

Buyer pays premium, risk is limited, and the seller receives the premium.

Buying a Put Option Profitability depends on the Concept of Selling High at price and Buying at a Low price.

Payoff Diagram: Buyer of Put Option

Put Buyer (Right to Sell at ₹1,700, Premium ₹40)

• Loss is limited to premium (₹40) → flat line below zero.
• Profit starts after ₹1,660 (Strike Premium = Break even) and increases as stock price falls.

Question 1

If you sell a put option with strike of Rs. 245 at a premium of Rs.40, how much is the maximum gain that you may have on expiry of this position?

1. 285
2. 40
3. 0
4. 205

Question 2

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. Rs. 6
2. Rs. 5
3. Rs. 2
4. Rs. 4

Question 1

If in case of Put Buy, Spot Price < Strike Price then it means a person is in __________ situation.

1. At the money
2. In the money
3. Out the money

Question 2

In-The-Money option is ____________.

1. An option with a negative intrinsic value
2. An option which cannot be profitably exercised by the holder immediately
3. An option with a positive intrinsic value
4. An option with zero-time value

Infosys Spot Price = ₹1,600

Buy Call Option Strike Price = ₹1,500

Premium = ₹120

Intrinsic Value (IV) = 1,600 – 1,500 = ₹100

Option Premium = Intrinsic Value + Time Value

₹120 = ₹100 + Time Value

Time Value = 120 – 100 = ₹20

That ₹20 is the “extra hope” that Infosys may rise to ₹1700 or more before expiry.

Question 1

When there is an increase in time expiration, the premium of Call Option?

1. Remains constant
2. Increases
3. Decreases

Question 2

Premium of call option declines if Spot price _________________ .

1. Increases
2. Decreases
3. Data is in sufficient

Question 3

The increased Volatility of a spot price leads to ________________________________ .

1. Increase in Call Premium.
2. Increase in Put Premiums.
3. Increases in both Call and Put Premium.
4. Decrease in both call and Put premium.

Long option

Long option Buyer of an option is said to be “long the option”. As described above, he/she would have a right and no obligation with regard to buying/ selling the underlying asset in the contract. When you are long an equity option contract:

• You have the right to exercise that option.
• Your potential loss is limited to the premium amount you paid for buying the option.
• Profit would depend on the level of underlying asset price at the time of exercise/expiry of the contract.

Short option

Short option Seller of an option is said to be “short the option”. As described above, he/she would have an obligation but no right with regard to selling/buying the underlying asset in the contract. When you are short (i.e., the writer of) an equity option contract:

• Your maximum profit is the premium received.
• You can be assigned an exercised option any time during the life of option contract (in case of American options). All option writers should be aware that assignment is a distinct possibility.
• Your potential loss is theoretically unlimited as defined below.

Question 1

You buy a stock at ₹500 and sell a Call Option (₹520 strike) for ₹15. If the stock rises to ₹550, what is your total profit?

1. ₹ 15
2. ₹ 20
3. ₹ 35
4. ₹ 50

Question 2

You own a stock at ₹600 and buy a Put Option (₹580 strike, ₹12 premium). If the stock crashes to ₹550, what is your put option gain?

1. ₹ 12
2. ₹ 18
3. ₹ 32
4. ₹ 50

Profit for a Call Option buyer > Rs. 418

If the latest Spot Price is 450.

Then the overall Gain is 450 - 418 = Rs. 32

Profit for a Put Option buyer < Rs. 382

If the latest Spot Price is 350.

Then the overall Gain is 382 - 350 = Rs. 32

Delta

The most important of the ‘Greeks’ is the option’s “Delta”. This measures the sensitivity of the option value to a given small change in the price of the underlying asset.

Delta = Change in option premium / Unit change in price of the underlying asset.

Gamma (γ)

Gamma measures change in delta with respect to change in price of the underlying asset.

Gamma = Change in an option delta / Unit change in price of underlying asset.

Theta (θ)

Theta is the measure of an option’s sensitivity to time decay.

Theta = Change in an option premium / Change in time to expiry.

Vega (ν)

Vega is the measure of the sensitivity of an option price to changes in market volatility.

Vega = Change in an option premium / Change in volatility.

You expect low volatility (stock won’t move much away from spot).

Your maximum loss = the net premium you pay.

Your maximum gain = when the stock closes exactly at the middle strike price.

Call Sell positions will hedge it.

1. Base Currency

The first currency in any currency pair.

It is the currency whose value you want to measure.

In USD / INR, the base currency is USD.

Example
→ 1 USD (base) is worth ₹84.

2. Quote Currency

The second currency in the pair.

It tells you how much of this currency is needed to buy 1 unit of the base currency.

In USD / INR, the quote currency is INR.

Example
→ You must pay ₹84 for 1 USD.

3. Direct Quote

A quote where the foreign currency is the base (numerator) and the home currency is the quote (denominator).

For an Indian resident, USD / INR, EUR / INR, GBP / INR are all direct quotes.

It tells you: “How many rupees for 1 unit of foreign currency?”

Example
→ You must pay ₹84 for 1 USD. (Direct Quote in India)

Analogy:
Just like seeing product prices in rupees in an Indian store.

4. Inverse Quote

A quote where the home currency becomes the base currency.

It tells you: “How many units of foreign currency equal 1 rupee?”

For India: INR / USD, INR / GBP, INR / EUR.

Example
→ INR / USD = 1/84 = 0.0119 USD per ₹1

Analogy:
It is like asking, “How much foreign currency will I receive for ₹1?”

Question 1

A person sells GBP / INR and buys EUR / INR for an equivalent amount. What view is he expressing?

1. INR Appreciation against EUR
2. EUR Appreciation against GBP
3. EUR Depreciation against GBP
4. INR Depreciation against GBP

Question 2

Mr. Mohit buys 36 lots of USD/INR 1-month future when the price was 45.50/45.65 and squares off 20 lots when the price was 46.30/46.50. How much profit / loss has he made on the squared-off position?

1. Loss of 11,500
2. Profit of 12,300
3. Profit of 13,000
4. Profit of 11,750

Difference between LR and SR rises or widens. The curve shifts in anti-clockwise direction.

Difference between LR and SR falls or narrows. The curve shifts in clockwise direction.

All rates move in the same direction by same extent.

Question

Credit spread is the price of ____________________ .

1. Credit risk
2. Reinvestment risk
3. Price risk
4. All of the above

Question

If the long-term rate is 10% and short-term rate is 8%, the shape of term structure of rates is __________________.

1. Normal / Positive
2. Inverted / Negative
3. Flat
4. Humped

Question

The concept of "accrued interest" applies to which of the following?

1. Zero coupon bond
2. Coupon bond
3. Both (a) and (b)
4. None of the above

Question

If the coupon of the bond increases, its Modified Duration will _______________. (Other things remaining constant).

1. Increase
2. Decrease
3. May increase or decrease
4. Remain constant

Question

If you expect the interest rate will go up in future, today you should _____________.

1. Sell GOI Bond futures
2. Buy GOI bond futures
3. Buy underlying bond
4. None of the above

Limit Order

Buy or sell a share only at a specific price or better set by the investor.

IOC (Immediate or Cancel)

Order must be executed immediately (fully or partly); the remaining unexecuted portion is cancelled.

GTD (Good Till Date)

Order remains active until the specified date unless it is executed earlier.

Market Order

Buy or sell a share immediately at the current market price.

Stop-Loss Order

An order placed to limit losses by selling or buying when a trigger price is reached.

Question

A client can place order in exchange traded interest rate derivatives through _______.

1. Phone
2. Internet
3. Direct Market Access
4. All of the above

Question

A Buy or a Sell order(s) which is/are lying unmatched in the order book are known as ________________.

1. Active Orders
2. Passive Orders
3. Best Orders
4. None of the above

Question

A ___________ order is classified as price related condition.

1. Market
2. Day
3. IOC
4. None of the above

Question

Due to denial of matched orders by client/s, which type of risk arises?

1. Operational
2. Market
3. Regulatory
4. None of the above

Question

If the base rate of Overnight MIBOR futures is 5, then its operating range will be ________________.

1. 5.05 & 4.95
2. 5.10 & 4.90
3. 5.25 & 4.75
4. 5.50 & 4.50