NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION

EXAM – PRACTICE TEST NO. 2

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 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 2

PRACTICE TEST NO. 2

Question 1 Over-the-counter options are always standardised - State whether True or False ?

(a) TRUE

(b) FALSE

Correct Answer FALSE

Answer Over the Counter options are made as per the needs of the trading parties - so they are
Explanation customised.

Future options are standardised as per the rules of stock exchange.

Question 2 A seller of call option can lose unlimited amount of money - State True or False?

(a) TRUE

(b) FALSE

Correct Answer TRUE

Answer A seller of a Call Option expects the price to fall. But as the price of the underlying rises, he
Explanation begins to make losses. Theoretically the price can rise to any levels and so the call option
seller may make unlimited losses.
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 2

Question 3 The broker is compulsorily required to get a Risk Disclosure Document signed by the client,
at the time of client registration - State True or False?

(a) TRUE

(b) FALSE

Correct Answer TRUE

Answer The broker is required to get a Risk Disclosure Document signed by the client, at the time of
Explanation client registration. This document informs clients about the kind of risks that derivatives can
involve for the client. It makes the client aware and well informed.

Question 4 A long position in futures market can be reversed only with the same counterparty from
whom the contract was initially purchased - State whether True or False?

(a) TRUE

(b) FALSE

Correct Answer FALSE

Answer Futures contracts are traded on screen based derivatives market where the identity of the
Explanation buyer and seller is unknown to each other. A trade can be squared off with any buyer or
seller whose quotes are available on the screen.

The Clearing Corporation acts as a legal counterparty for every contract and guarantees the
trades.
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 2

Question 5 Intrinsic value of an option is sum of Option premium and Time value - State whether True
or False?

(a) TRUE

(b) FALSE

Correct Answer FALSE

Answer Intrinsic value is basically the difference between Spot price and Strike price.
Explanation

Option premium consists of two components - intrinsic value and time value

For eg. If the current option premium for a Rs 500 strike price Call option is Rs 70 and the
current spot price is Rs 550, than Rs 50 is the intrinsic value (550 -500) and the balance Rs 20
(70 - 50) is the time value.

Question 6 Its the duty of the Clearing Corporation to continuously analyse and modify the initial
margin requirements as the stock markets tend to be very volatile - State whether True or
False?

(a) FALSE

(b) TRUE

Correct Answer TRUE

Answer As per Prof. J.R.Verma Committee recommendations - Initial Margin levels should be
Explanation dynamic and recalculated continuously based on volatility levels. The Clearing Corporation
does this activity using modern mathematical tools.
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 2

Question 7 In exercising call option on an index, the option holder receives from the option writer cash
amount equal to excess of spot price (at the time of exercise) over the strike price of the call
option - State whether True or False ?

(a) TRUE

(b) FALSE

Correct Answer TRUE

Answer When a person buys a Call Option of an index, he is expecting the index to rise. On exercise,
Explanation if the spot price of the index is over and above the strike price at which the buyer had
bought the Call, he will receive the difference between the spot price and strike price.

Question 8 In a derivatives exchange, the networth requirement for a clearing member is higher than
that of a non-clearing member - State whether True or False?

(a) TRUE

(b) FALSE

Correct Answer TRUE

Answer In a derivative exchange, the networth requirement for a clearing member is higher than
Explanation that of a non-clearing member.
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 2

Question 9 At the time of final settlement, the seller / writer of the option will recognize the adverse
difference he paid to the buyer as ____ in his profit and loss account.

(a) Expenses

(b) Loss

(c) Debt

(d) Profit

Correct Answer Loss

Answer On exercise of the option, the seller/writer will pay the adverse difference, between the
Explanation final settlement price as on the exercise/ expiry date and the strike price. Such payment will
be recognised as a loss.

Question 10 At price level of Rs. 6900, what will be the value of one lot of ABC futures contract (contract
multiplier 50)?

(a) Rs. 289000

(b) Rs. 690000

(c) Rs. 345000

(d) Rs. 460000

Correct Answer Rs. 345000

Answer The value of the futures contract is the Price X Lot size
Explanation

= Rs 6900 X 50 = Rs 345000
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 2

Question 11 What does hedging do?

(a) It maximises business profits

(b) It minimises business losses

(c) It produces a more clearer outcome

(d) Hedging can be used only in currency markets and not in equity markets

Correct Answer It produces a more clearer outcome

Answer Hedging produces a more clearer outcome. The classic example is the farmer who sells
Explanation futures contracts to lock into a price for delivering a crop on a future date. The buyer might
be a food-processing company, which wishes to fix a price for taking delivery of the crop in
the future.

Another case is that of a company due to receive a payment in a foreign currency on a

future date. It enters into a forward transaction with a bank agreeing to sell the foreign
currency and receive a predetermined quantity of domestic currency.

Question 12 Which of these statements id True?

(a) Money and securities deposited by clients can be attached for meeting the brokers
obligation on his proprietary account

(b) Money and securities deposited by clients cannot be attached for meeting the brokers
obligation on his proprietary account

(c) Money and securities deposited by clients can be attached as per the decision of the
clearing corporation

(d) Money and securities deposited by clients can be attached as per the decision of the Stock
Exchange

Correct Answer Money and securities deposited by clients cannot be attached for meeting the brokers
obligation on his proprietary account

Answer The securities or money deposited by clients cannot be attached for meeting broker’s
Explanation obligation on his proprietary account.

The broker has to maintain separate client bank account for segregation of client money.

Also brokers should keep margins collected from clients in a separate bank account.
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 2

Question 13 Initial margin to be paid in derivatives is set up taking into account the volatility of the
underlying market. Generally ___

(a) Lower the volatility, higher the initial margin

(b) Higher the volatility, lower the initial margin

(c) Higher the volatility, higher the initial margin

(d) None of the above

Correct Answer Higher the volatility, higher the initial margin

Answer When the markets are very volatile, it could results in losses to the traders. So to safe guard
Explanation the trading member and the trader, higher initial margin are levied on when volatility is
high.

Question 14 Meghna wants to sell 34 contracts of ABC futures at Rs. 2450 (contract multiplier is 50) .
Initial margin is 7%. How much will be the initial margin to be paid ?

(a) Rs. 4165000

(b) Rs. 83300

(c) Rs. 5831

(d) Rs. 291550

Correct Answer Rs. 291550

Answer Margin to be collected from Meghna : Rs 2450 X 34 contracts X 50 (Market lot) at 7%

Explanation

= Rs 4165000 x 7% = Rs 291550
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 2

Question 15 In the derivatives market, as the strike price goes down, the premium of PUT option ______

(a) will increase

(b) will decrease

(c) there will be no change

(d) can increase or decrease

Correct Answer will decrease

Answer For eg. If the Spot Price is Rs 900, and the premium for Put Option of Strike price 900 is Rs 5.
Explanation The premium for Strike price Rs 880 can be around Rs. 1.

(For a call option, the premium decreases as the strike price moves up)

Question 16 Can the exercise price be more than or equal to or less than the cash spot price ?

(a) Yes

(b) No

Correct Answer Yes

Answer Exercise price means the Strike price for which options can be traded.
Explanation

For eg. - A scrip ABC has options trading at a strike price of Rs 100. The spot price (market
price) can easily fluctuate as per market sentiments and can be above, below or equal to Rs.
100.
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 2

Question 17 In a derivative segment, the initial margin is collected from the clearing member on a net
basis ie. after netting all buy and sell positions of all clients together - State True or False ?

(a) TRUE

(b) FALSE

Correct Answer FALSE

Answer In the derivatives segment , Clients' positions cannot be netted off against each other while
Explanation calculating initial margin. Margin for each client has to be paid separately as per his
outstanding trades / position.

Question 18 Derivatives brokers/ dealers are expected to know their clients and to exercise care to
ensure that the derivative product being sold by them to a particular client is suitable to his
understanding and financial capabilities - State True or False ?

(a) TRUE

(b) FALSE

Correct Answer TRUE

Answer Derivatives brokers/ dealers should avoid recommending opening futures/

Explanation options transaction unless they have a reasonable basis for believing that the customer has
such knowledge and financial experience that he or she is capable of evaluating,
and financially able to bear, the risks of the transaction.
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 2

Question 19 Trading is allowed in Indian Equity markets in which of the following -

(a) Index Options

(b) Individual stock options

(c) Individual futures options

(d) All of the above

Correct Answer All of the above

Question 20 Suppose you are a trading member and have bought 14 contracts of April series index
futures and sold 7 contracts of April series index futures on your own account. What will be
your exposure on these transactions ?

(a) It will grossed up to 21 contracts

(b) It will be netted to 7 contracts

(c) Higher of 14 and 7 ie. 14 contracts

(d) The Stock Exchange can decide to either to gross up or net out the exposure depending on
the past record of the trading member

Correct Answer It will be netted to 7 contracts

Answer The exposure will be netted ie. 14 -7 = 7 contracts.

Explanation
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 2

Question 21 A person has buy position in a stock, how can he cover his long position in the stock ?

(a) by Selling any security of equal quantity

(b) by Selling any index stock of equal quantity

(c) by Selling the same stock and same quantity

(d) by Selling any ‘A’ group stock of equal quantity

Correct Answer by Selling the same stock and same quantity

Answer To square up / cover a long position, the same quantity of the same stock has to be sold.
Explanation

Question 22 Mr. X does not hold any shares of ABC company so he cannot write a CALL option on it -
State True or False ?

(a) TRUE

(b) FALSE

Correct Answer FALSE

Answer Any one, whether he holds the underlying asset or not, can buy / write options.
Explanation
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 2

Question 23 Two stocks A and B stocks are quoted at Rs 500 per share. Keeping everything else constant,
if A is more volatile than B, which ‘Put’ will be priced higher ?

(a) The put of stock A

(b) The put of stock B

(c) Both the puts will be equally priced

Correct Answer The put of stock A

Answer Vega, which measure of the sensitivity of an option price to changes in market volatility is
Explanation positive for a long call and a long put.

An increase in the volatility of the underlying increases the expected payout from a buy
option, whether it is a call or a put.

Question 24 On the derivatives futures market, if there are three series of one, two and three months
open at a point of time, how many calendar spread can one have ?

(a) 1

(b) 2

(c) 3

(d) 4

Correct Answer 3

Answer The three calendar spreads can be between months 1 and 2, 2 and 3 and 1 and 3.
Explanation
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 2

Question 25 ______ can write an option in the Indian stock market .

(a) Common individuals

(b) Market makers

(c) Foreign Financial Institutions (FII)

(d) All of the above

Correct Answer All of the above

Answer All of the above can write (sell) options in Indian stock market.
Explanation

Question 26 For a derivative exchange, the networth requirement for a clearing member is always less
than that for a non clearing member - State True or False ?

(a) TRUE

(b) FALSE

Correct Answer FALSE

Answer In a derivative exchange, the networth requirement for a clearing member is higher than
Explanation that of a non-clearing member.
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 2

Question 27 When an option moves more in the money, the absolute value of Delta will _________ .

(a) Increase

(b) Decrease

(c) No effect on delta

(d) tend to become zero

Correct Answer Increase

Answer The value of delta increases as an option moves more in the money.
Explanation

For a Call option, the delta increases as price rises and for a put option, the delta increases
as price falls.

Question 28 A Professional Clearing Member can act only for Institutional clients - State True or False ?

(a) TRUE

(b) FALSE

Correct Answer FALSE

Answer Professional clearing member clears the trades of his associate Trading Member and
Explanation institutional clients.
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 2

Question 29 The price at which the market maker is ready to buy is known as BID price - State True or
False ?

(a) TRUE

(b) FALSE

Correct Answer TRUE

Answer Bid price is the price buyer / market maker is willing to pay and ask price is the price seller is
Explanation willing to sell.

For eg - If the price of Reliance Industries Ltd as seen on the trading screen is Rs 1000 - 1001,
this means Rs 1000 is the bid price and Rs 1001 is the ask price.

Question 30 If a Day Order is not executed during the day, it will __________ .

(a) get cancelled automatically once the trading time for the day is over

(b) get executed the next day if its in the price range

(c) get executed in the special auction market

(d) None of the above

Correct Answer get cancelled automatically once the trading time for the day is over

Answer A Day order is an order which is valid for a single day on which it is entered.
Explanation

If the order is not executed during the day, the trading system cancels the order
automatically at the end of the day.
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 2

Question 31 The Intrinsic value of an In the Money option is the difference between the Market Price
and the Exercise price - State True or False ?

(a) TRUE

(b) FALSE

Correct Answer TRUE

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 call option which is in-the-money, intrinsic value is the excess of spot price over the
exercise price.

For put option which is in-the-money, intrinsic value is the excess of exercise price over the
spot price.

Question 32 If the price of the underlying stock of a PUT option is very volatile, _________ .

(a) the premium will comparatively be lower

(b) the premium will comparatively be higher

(c) the premium will be zero

(d) No effect on option premium

Correct Answer the premium will comparatively be higher

Answer Vega, which measure of the sensitivity of an option price to changes in market volatility is
Explanation positive for a long call and a long put.

An increase in the volatility of the underlying increases the expected payout from a buy
option, whether it is a call or a put.
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 2

Question 33 There is only CASH settlement for Nifty futures contract - State True or False ?

(a) TRUE

(b) FALSE

Correct Answer TRUE

Answer In Nifty, there is only cash settlement.

Explanation

In some securities, SEBI has permitted physical settlement for futures contract.

Question 34 A Mutual Fund floats a new fund offer of a 100% equity scheme. Till the time it invests this
cash in equities, the fund can take equity exposure by buying stock index futures - State
True or False ?

(a) TRUE

(b) FALSE

Correct Answer TRUE

Answer FIIs & MF’s can take exposure in equity index derivatives subject to the following limits:
Explanation

Long positions in index derivatives (long futures, long calls and short puts) not exceeding (in
notional value) the FII’s / MF’s holding of cash, government securities, T-Bills and similar
instruments.

Short positions in index derivatives (short futures, short calls and long puts) not exceeding
(in notional value) the FII’s / MF’s holding of stocks.
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 2

Question 35 A writer of a naked PUT option is _______ .

(a) Bullish and pays the premium

(b) Bullish and receives the premium

(c) Bearish and pays the premium

(d) Bearish and receives the premium

Correct Answer Bullish and receives the premium

Answer A writer ie. seller of a PUT option is bullish or neutral and receives the premium
Explanation

A writer ie. seller of a CALL option is bearish or neutral and receives the premium

In options - A writer always receives the premium and the buyer always pays the premium

Question 36 The potential exposure is calculated by the clearing corporation ______ .

(a) on the last trading day of the contract month

(b) on the last trading day of the week

(c) at the end of the trading day

(d) on real time basis

Correct Answer on real time basis

Answer Clearing corporation’s on-line position monitoring system monitors a CM’s open position on
Explanation a real-time basis.

Clearing corporation monitors the CMs for Initial Margin violation, Exposure margin
violation, while TMs are monitored for Initial Margin violation and position limit violation.
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 2

Question 37 If a Trading member defaults in the derivative segment, he can still continue the trading
business in the cash segment. - True or False ?

(a) FALSE

(b) TRUE

Correct Answer FALSE

Answer A default by a member in the derivatives segment will be treated as default in all segments
Explanation of that exchange and as default on all exchanges where he is a member.

Question 38 The Spot price ie. the market price of a share is Rs 200 and the interest rate is 12% pa.
Which of the below price is closest to 3 months future maturity ?

(a) 206

(b) 200

(c) 203

(d) 224

Correct Answer 206

Answer Price of a future contract is generally the spot price plus interest for the time period.
Explanation

Yearly Interest Rate is 12%. Full year's interest = 12% of 200 ie. Rs 24 (200 x 12 / 100)

So for 3 months the cost of interest is Rs 6. ( 24/12 x 3)

Therefore the 3 month future contract will have an price of appx. Rs 206. (200 + 6)
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 2

Question 39 Mr Manoj buys a put option on PQR stock for Rs 20 of strike price Rs 130. If on the exercise
day, the spot price of PQR is Rs 175, Mr Manoj will choose _______.

(a) Not to exercise the option

(b) To exercise the option

(c) May or may not exercise the option depending on whether he is in his city or not at that
time

(d) May or may not exercise the option depending on whether he likes the company or not

Correct Answer Not to exercise the option

Answer Mr. Manoj bought a PUT option so he had a view that the stock will fall. On the exercise day
Explanation the stock has risen and so Mr Manoj is in a loss. So he will not exercise the option.

Question 40 If you have sold a ITC futures contract (contract multiplier 500) at 200 and bought it back at
228, what is your gain/loss?

(a) A gain of RS. 6,800

(b) A loss of Rs. 6,800

(c) A loss of Rs. 14,000

(d) A gain of Rs. 14,000

Correct Answer A loss of Rs. 14,000

Answer You had sold ITC believing that it will fall down, but it has risen - so there will be a loss.
Explanation

200 - 228 = -28 Loss

-28 x 500 shares = - Rs 14000

 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 2

Question 41 If the price of a stock is volatile, then the option premium would be relatively ______.

(a) Lower

(b) Higher

(c) No effect of volatility

(d) Zero

Correct Answer Higher

Answer Higher volatility means higher risk and higher risk means one has to pay a higher premium.
Explanation

Question 42 If the liquid assets maintained by clearing member Mr. Ram are higher than that clearing
member Mr. Shyam, which of the below options is/are true ?

(a) There is no need to maintain liquid assets

(b) Both Mr. Ram and Mr. Shyam have the same level of exposure

(c) Mr Ram has a higher exposure level than Mr. Shyam

(d) Mr Shyam has a higher exposure level than Mr. Ram

Correct Answer Mr Ram has a higher exposure level than Mr. Shyam

Answer As per the rules of SEBI and Stock Exchanges,the notional value of gross open positions at
Explanation any point in time in the case of all Futures and Options shall not exceed a particular
percentage of the liquid networth of a member.

So a member (Mr Ram) who keeps higher liquid assets as security and margin with the stock
exchanges will get higher exposure limits.
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 2

Question 43 As per SEBI rules , a stock broker can be suspended from the derivatives segment if
_________ .

(a) he violates the conditions of registration

(b) he is suspended by the stock exchange

(c) he fails to pay fees

(d) Any of above

Correct Answer Any of above

Answer A penalty or suspension of registration of a stock - broker under the SEBI (Stock Broker &
Explanation Sub - 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. 2

Question 44 Cost of carry model means price of futures is equal to _______ .

(a) Spot price + Cost of Carry

(b) Spot Price

(c) Cost of Carry

(d) Spot price - Cost of Carry

Correct Answer Spot price + Cost of Carry

Answer Cost of Carry is the relationship between futures prices and spot prices. For stock
Explanation derivatives, carrying cost is the interest paid to finance the purchase.

For example, assume the share of XYZ Ltd is trading at Rs. 200 in the cash market. A person
wishes to buy the share, but does not have money. In that case he would have to borrow
Rs. 200 at the rate of, say, 12% per annum. So 1% ie. Rs 2 ( 1% of Rs 200) is the per month
interest cost. and this Rs 2 is the cost of carry.

The future price (ideally) at the beginning of month will be Spot Price + Cost of Carry ie. Rs
200 + Rs 2 = Rs 202.

Question 45 **Mr Gautam has sold a put option with strike of Rs.650 at a premium of Rs.60. What is the
maximum gain per share that he may have on expiry of this positon?

(a) 650

(b) 590

(c) 60

(d) 0

Correct Answer 60

Answer The maximum a seller of an option (either CALL or PUT) can gain is the premium he
Explanation receives. In this case Mr. Gautam is receiving Rs 60 per share as premium and that can be
his maximum profit.
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 2

Question 46 The Strangle strategy is similar to straddle strategy in outlook but different in
_______________ .

(a) implementation

(b) aggression

(c) cost

(d) All of the above

Correct Answer All of the above

Answer Long Strangle As in case of straddle, the outlook here (for the long strangle position) is that
Explanation the market will move substantially in either direction, but while in straddle, both options
have same strike price, in case of a strangle, the strikes are different. Also, both the options
(call and put) in this case are out-of-the-money and hence the premium paid is low.

Question 47 Theta is ___________.

(a) is the change in option price given a one percentage point change in the risk-free interest
rate

(b) a measure of the sensitivity of an option price to changes in market volatility

(c) the change in option price given a one-day decrease in time to expiration.

(d) speed with which an option moves with respect to price of the underlying asset.

Correct Answer the change in option price given a one-day decrease in time to expiration.
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 2

Question 48 The networth of clearing members does not include -

(a) Bad Deliveries

(b) Doubtful Debts

(c) Unlisted Securities

(d) All of the Above

Correct Answer All of the Above

Answer The minimum networth for clearing members of the derivatives clearing corporation/house
Explanation shall be Rs.300 Lakhs. The networth of the member shall be computed as follows:

- Capital + Free reserves

- Less non-allowable assets which are :

o Fixed assets

o Pledged securities

o Member’s card

o Non-allowable securities (unlisted securities)

o Bad deliveries

o Doubtful debts and advances

o Prepaid expenses

o Intangible assets

o 30% marketable securities

 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 2

Question 49 Option Premium consists of two components -

(a) Intrinsic value and time value

(b) Sum of Call and Put premium

(c) Premium value and time value

(d) Intrinsic value and premium

Correct Answer Intrinsic value and time value

Answer Option premium consists of two components - intrinsic value and time value. For an option,
Explanation intrinsic value refers to the amount by which option is in the money i.e. the amount an
option buyer will realize, before adjusting for premium paid, if he exercises the option
instantly. Therefore, only in-the-money options have intrinsic value whereas at-the-money
and out-of-the-money options have zero intrinsic value. The intrinsic value of an option can
never be negative.

For eg - If the spot price is Rs 200, and the call option premium of a Rs 195 strike price is Rs
25, then Rs 5 is the intrinsic value ( 200 - 195 ) and balance Rs 20 is time value.
 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 2

Question 50 The liquid asset which are to be maintained by clearing members with clearing corporation
can include gold and silver jewellery after applying standard 20% haircut.

(a) TRUE

(b) FALSE

Correct Answer FALSE

Answer Clearing member is required to provide liquid assets which adequately cover various
Explanation margins and liquid networth requirements. He may deposit liquid assets in the form of cash,
bank guarantees, fixed deposit receipts, approved securities and any other form of
collateral as may be prescribed from time to time. The total liquid assets comprise of at
least 50% of the cash component and the rest is non cash component.

1. Cash Component:

• Cash

• Bank fixed deposits (FDRs) issued by approved banks and deposited with approved
custodians or Clearing Corporation.

• Bank Guarantees (BGs) in favour of clearing corporation from approved banks in the
specified format.

• Units of money market mutual fund and Gilt funds where applicable haircut is 10%.

• Government Securities and T-Bills

2. Non Cash Component:

• Liquid (Group I) Equity Shares as per Capital Market Segment which are in demat form, as
specified by clearing corporation from time to time deposited with approved custodians.

• Mutual fund units other than those listed under cash component decided by clearing
corporation from time to time deposited with approved custodians.

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 NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 2

Practice Question Banks also available for :

NISM

NISM Series I: Currency Derivatives Certification Exam

NISM Series V A: Mutual Fund Distributors Certification Exam
NISM Series VI: NISM Series VI - Depository Operations Certification Exam
NISM Series VII: Securities Operations and Risk Management
NISM Series VII: Equity Derivatives Certification Exam
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

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NCFM Derivative Market (Dealers) Module

BSE

Certificate on Security Market (BCSM)

NISM SERIES VIII – EQUITY DERIVATIVES CERTIFICATION
EXAM – PRACTICE TEST NO. 2