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NCFM Capital Market (Dealers) study materials
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NCFM Capital Market (Dealers) practice questions

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Question 1Equity Market

In the Indian equity market, the rolling settlement cycle currently followed for trades on the cash segment is:

  1. T+2 settlement
  2. T+3 settlement
  3. T+5 settlement
  4. T+1 settlement Correct answer.

Explanation

Indian exchanges moved from T+2 to T+1 settlement on a phased basis, completing the transition in early 2023. Under T+1, obligations arising from a trade on day T are settled on the next business day. Dealers must therefore fund and deliver pay-in on a much tighter timeline.

Question 2Equity Market

A client places an order to buy shares only if the market price falls to a specified level or lower. This order type is:

  1. A stop-loss order
  2. A limit buy order Correct answer.
  3. An immediate-or-cancel order
  4. A market order

Explanation

A limit buy order specifies the maximum price the buyer is willing to pay, so it executes only at that price or lower. A market order executes immediately at the best available price regardless of level. Stop-loss orders are typically used to trigger a sale on a price decline.

Question 3Equity Market

On the NSE, the price band applicable to stocks in the F&O segment under the normal surveillance framework is:

  1. 10% Correct answer.
  2. 5%
  3. 2%
  4. 20%

Explanation

Securities that are part of the derivatives segment are generally subject to a 10% daily price band, with a flexible band that can expand as the price approaches the limit. Stocks outside the F&O segment may carry 2%, 5%, or 20% bands depending on surveillance classification. The band limits how far the price can move in a single trading session.

Question 4Equity Market

A dealer buys 500 shares at Rs 100 and later sells them at Rs 112. Ignoring brokerage, taxes, and other charges, the gross profit is:

  1. Rs 12,000
  2. Rs 5,600
  3. Rs 6,000 Correct answer.
  4. Rs 1,200

Explanation

Gross profit equals the per-share gain multiplied by the quantity traded. The gain per share is Rs 12 and the position size is 500 shares, giving Rs 6,000 before costs. Dealers then deduct brokerage, STT, exchange charges, and GST to arrive at net profit.

Question 5Equity Market

In Indian equity markets, short selling on a delivery basis is permitted, but a naked short position must be squared off:

  1. Within the same trading day Correct answer.
  2. By the end of the settlement date
  3. Within three trading days
  4. Before the next monthly expiry

Explanation

Indian regulations permit short selling for delivery, but a seller who does not own the shares must cover the position by the end of the same trading day. Intraday short sales cannot be carried forward as naked positions. Failing to deliver results in a short-delivery auction and penalties.

Question 6Equity Market

The Securities Transaction Tax on the purchase of equity shares delivered through a recognised exchange is levied on:

  1. The number of shares
  2. The net profit of the trade
  3. The brokerage charged
  4. The trade value Correct answer.

Explanation

STT on delivery-based equity purchases is charged as a percentage of the consideration, that is, the trade value. It is collected by the exchange and remitted to the government. Because it is value-based, larger trades attract proportionally larger STT.

Question 7Equity Market

A dealer quoting a two-way price of 245.50/245.80 for a stock is offering to:

  1. Buy at 245.50 and sell at 245.50
  2. Buy at 245.80 and sell at 245.50
  3. Buy at 245.50 and sell at 245.80 Correct answer.
  4. Buy and sell both at 245.65

Explanation

In a two-way quote the lower figure is the bid at which the dealer buys and the higher figure is the ask at which the dealer sells. The difference, here 30 paise, is the spread that compensates the dealer for risk and service. The client buys at the ask and sells at the bid.

Question 8Equity Market

Which index on the National Stock Exchange is widely used as the benchmark for large-cap Indian equities?

  1. Nifty Midcap 150
  2. BSE SmallCap
  3. India VIX
  4. Nifty 50 Correct answer.

Explanation

The Nifty 50 tracks 50 of the largest and most liquid companies listed on the NSE and is the most widely followed benchmark for Indian large-cap equity. It is used for index derivatives and as a reference for portfolio performance. India VIX measures expected volatility rather than price level.

Question 9Equity Market

A dealer holds a long position of 10,000 shares and wants protection against a near-term price decline without selling the shares. The most direct exchange-traded hedge is to:

  1. Buy call options on the stock
  2. Sell stock futures or buy put options on the stock Correct answer.
  3. Buy index futures
  4. Buy additional shares on margin

Explanation

A long stock position is hedged by an offsetting short exposure, achieved by selling futures on the stock or buying put options. Selling futures locks in a sale price, while puts provide downside protection with a known premium cost. Buying calls or more shares increases rather than reduces long exposure.

Question 10Equity Market

A client wants to sell 2,000 shares where the best bid covers only 800 shares and the next bids are lower. Which execution approach best limits market impact?

  1. An aggressive market order split across venues simultaneously
  2. A single market order for 2,000 shares
  3. A block deal arranged with a counterparty Correct answer.
  4. A limit order at the best bid for the full quantity

Explanation

A block deal lets a large quantity trade at a negotiated price with a single counterparty, avoiding walking down the order book. Executing a large market order would sweep multiple price levels and depress the realized price. Block trades on Indian exchanges are subject to minimum quantity and price-band rules.

Question 11Equity Market

Under Indian market conventions, the trade date for a purchase executed on Friday is T, and settlement follows T+1. Assuming no holidays, settlement occurs on:

  1. Saturday
  2. Tuesday
  3. Friday
  4. Monday Correct answer.

Explanation

T+1 settlement skips non-business days, so a Friday trade settles on the next business day, which is Monday absent a holiday. Saturday and Sunday are not settlement days for the exchanges. Dealers must arrange funds and securities before the Monday pay-in.

Question 12Equity Market

A dealer observes that a stock's futures price is trading below its spot price ahead of a known dividend. This situation is best described as:

  1. A covered call
  2. Contango
  3. A calendar spread
  4. Backwardation Correct answer.

Explanation

When the futures price is below the spot price the market is in backwardation, which can arise when the underlying pays dividends or when carry costs are outweighed by expected income. Contango is the opposite condition where futures trade above spot. The dividend reduces the fair futures value because holders of futures do not receive it.

Question 13Equity Market

A dealer executes a buy of 1,000 shares at Rs 250 and a sell of the same quantity at Rs 248 on the same day. The net obligation after both legs, ignoring costs, is a:

  1. Loss of Rs 500
  2. Profit of Rs 2,000
  3. Loss of Rs 2,000 Correct answer.
  4. Profit of Rs 500

Explanation

The loss per share is Rs 2 on a position of 1,000 shares, giving a net loss of Rs 2,000 before charges. The dealer bought higher and sold lower, which is the adverse outcome. Costs such as STT and brokerage would widen the loss further.

Question 14Equity Market

Which statement correctly describes the role of a clearing corporation in Indian equity settlement?

  1. It sets the daily price band for each security
  2. It matches client orders on the trading terminal
  3. It acts as the central counterparty and guarantees settlement Correct answer.
  4. It approves the listing of new securities

Explanation

The clearing corporation interposes itself between buyers and sellers through novation, becoming the central counterparty to every trade. This structure allows it to guarantee settlement even if one side defaults, supported by margins and a settlement guarantee fund. Order matching is performed by the exchange, not the clearing corporation.

Question 15Equity Market

A dealer wishes to hedge a concentrated holding of one stock but fears the hedge will be imperfect because the available futures contract tracks a broad index. The primary risk this creates is:

  1. Dividend risk
  2. Basis risk Correct answer.
  3. Liquidity risk on the cash leg
  4. Counterparty risk

Explanation

Basis risk arises when the hedging instrument does not move perfectly with the hedged asset, leaving residual exposure. Using an index future to hedge a single stock leaves the stock-specific component largely unhedged. The basis is the difference between the spot and futures prices and can move against the hedger.

Question 16Equity Market

A dealer receives a client instruction to buy at market. The dealer notices the stock is thinly traded with a wide spread. The most appropriate professional response is to:

  1. Refuse the order entirely
  2. Execute immediately without informing the client of the likely impact
  3. Execute only half the order without consent
  4. Advise the client of the potential price impact and seek a limit price Correct answer.

Explanation

Dealers owe clients fair treatment and should alert them when execution conditions are likely to produce a materially worse price than expected. Agreeing a limit price protects the client from excessive slippage in an illiquid book. Executing blindly or altering the order without consent breaches the duty of care.

Question 17Equity Market

The maximum permissible intraday leverage a broker may offer to clients for equity trades is governed by:

  1. The client's credit rating
  2. The previous day's closing price
  3. The exchange's price band for the stock
  4. SEBI regulations on margins and the broker's risk policy Correct answer.

Explanation

Margin requirements and the extent of intraday leverage are governed by SEBI regulations, including peak margin norms, and by each broker's own risk policy. Brokers cannot offer leverage beyond the prescribed limits regardless of client creditworthiness. Price bands affect price movement, not the leverage limit.

Question 18Equity Market

A dealer's client sells shares worth Rs 5,00,000 and the same day buys shares worth Rs 4,00,000. Under Indian settlement, the dealer should expect:

  1. No settlement because the trades offset
  2. A net pay-in of Rs 4,00,000 and a net payout of Rs 5,00,000
  3. Only the larger leg to be settled
  4. A net obligation of Rs 1,00,000 in the client's favour Correct answer.

Explanation

Settlement is netted across trades for the same client and settlement date, so the client is entitled to a net payout of Rs 1,00,000. The clearing corporation computes net obligations rather than gross amounts. Netting reduces the funds and securities that must actually change hands.

Question 19Equity Market

Which of the following best describes a 'dealer' as distinct from a 'broker' in the Indian securities market?

  1. A broker trades on its own account, while a dealer executes for clients
  2. A dealer only handles primary market issues
  3. A dealer trades on its own account, while a broker executes on behalf of clients Correct answer.
  4. A dealer is restricted to debt securities

Explanation

A dealer takes positions on its own account and bears the market risk of those positions, whereas a broker acts as an agent for clients. In practice many intermediaries perform both roles, but the distinction is about principal versus agency. The classification affects disclosure, capital, and conduct obligations.

Question 20Equity Market

A dealer holds a long position in a stock and writes a covered call. If the stock rises sharply above the strike, the dealer's:

  1. Gain is unlimited
  2. Loss is limited to the premium received
  3. Gain is capped at the premium plus the strike minus the purchase price Correct answer.
  4. Position becomes risk-free

Explanation

A covered call caps upside because the written call may be exercised, obliging the dealer to deliver shares at the strike. The maximum gain equals the premium received plus the difference between strike and purchase price. Downside remains exposed to the full decline in the stock, reduced only by the premium.

Question 21Equity Market

Under SEBI's peak margin framework, the margin that must be collected from clients is measured:

  1. At the end of the settlement cycle
  2. At the end of the trading day only
  3. At multiple intraday snapshots during the trading session Correct answer.
  4. Only when the client requests a withdrawal

Explanation

Peak margin reporting captures the highest margin requirement observed across several intraday snapshots, preventing brokers from allowing temporary leverage. Brokers must collect the full margin before permitting positions rather than relying on end-of-day figures. Shortfalls attract penalties under the framework.

Question 22Equity Market

A dealer notices that the exchange has placed a stock under the 'Trade-for-Trade' segment. The immediate consequence for a client buying the stock is that:

  1. Intraday positions are allowed with higher leverage
  2. The stock is exempt from price bands
  3. Delivery must be given and taken for every trade with no netting Correct answer.
  4. The purchase can be netted against a same-day sale

Explanation

Trade-for-Trade securities settle on a gross basis, so each trade must result in actual delivery and cannot be squared off intraday. The measure is applied to stocks with heightened surveillance concerns. Dealers must warn clients that intraday trading is not possible in such scrips.

Question 23Equity Market

A dealer's client defaults on pay-in for a purchase. Under Indian market practice, the resulting short delivery is typically resolved through:

  1. Cancellation of the trade with no consequence
  2. Automatic extension of the settlement date
  3. An auction conducted by the exchange to buy the securities Correct answer.
  4. Conversion of the trade into a futures contract

Explanation

When a seller fails to deliver, the exchange conducts an auction to procure the securities for the buying client. The defaulting member bears the auction price difference and applicable penalties. This mechanism preserves settlement integrity for the counterparty.

Question 24Equity Market

An institutional client wants to execute a large equity order over several days to minimise market impact. Which approach is most consistent with that objective?

  1. An aggressive limit order at the best ask for the full quantity
  2. A VWAP or implementation-shortfall strategy spreading the order across sessions Correct answer.
  3. A market order placed at the opening auction
  4. A single block trade at the closing price

Explanation

Spreading a large order across sessions and benchmarking against a volume-weighted average price reduces the footprint on the visible book. Implementation-shortfall analysis measures execution quality against a decision price. Concentrating the full quantity in one print or auction tends to move the price against the client.

Question 25Equity Market

A dealer is comparing two stocks with identical expected returns but different bid-ask spreads. The stock with the wider spread will, all else equal, have:

  1. A higher effective transaction cost for a round trip Correct answer.
  2. No difference in transaction cost
  3. A lower price volatility
  4. A lower effective transaction cost for a round trip

Explanation

The bid-ask spread is a direct cost of trading because a round trip involves buying at the ask and selling at the bid. A wider spread therefore raises the effective transaction cost and reduces the net return to the trader. Liquidity and spread are closely related, with wider spreads signalling thinner markets.

Question 26Equity Market

A dealer wants to know which regulator administers the SEBI (Stock Brokers) Regulations, 1992 that govern registration and conduct of trading members. Which body is that?

  1. The Insurance Regulatory and Development Authority of India
  2. The Forward Markets Commission
  3. The Securities and Exchange Board of India Correct answer.
  4. The Reserve Bank of India

Explanation

The SEBI (Stock Brokers) Regulations, 1992 are framed and administered by the Securities and Exchange Board of India, which registers and regulates stock brokers and other market intermediaries. The RBI regulates banks and monetary policy, not securities intermediaries' registration. The FMC historically covered commodity derivatives and has since been merged into SEBI, and IRDAI regulates insurers.

Question 27Equity Market

A dealer in the cash segment executes a transaction on a recognised stock exchange. Which entity typically acts as the counterparty to both sides through novation, guaranteeing settlement?

  1. The issuer's registrar and transfer agent
  2. The clearing corporation Correct answer.
  3. The depository participant
  4. The stock exchange's listing department

Explanation

The clearing corporation interposes itself between the buyer and seller through novation, becoming the counterparty to each side and assuming settlement risk. Listing departments handle admission and disclosure, not counterparty guarantee. Registrars maintain shareholder records and depository participants hold demat accounts, but neither guarantees trade settlement.

Question 28Equity Market

A dealer is told that a stock has been moved to the 'B' group (or its current equivalent, the surveillance/restricted category) on the exchange. What does this classification primarily signal to the dealer?

  1. The stock has been approved for derivative trading
  2. The stock has been delisted from the exchange
  3. The stock is eligible for a lower margin requirement
  4. The stock carries enhanced surveillance due to concerns such as volatility or compliance issues Correct answer.

Explanation

Placement in the trade-for-trade or surveillance group reflects exchange concerns about volatility, compliance or price behaviour and typically brings stricter settlement and higher margins. It does not indicate derivative eligibility, which depends on separate criteria. It raises rather than lowers margin, and it is not a delisting event.

Question 29Equity Market

A dealer's client wants to buy shares on the exchange and asks how the order should be routed if the dealer is a registered trading member. What is the standard mechanism?

  1. The order is submitted to the issuer's registrar
  2. The order is placed with the RBI's depository services wing
  3. The order is placed directly with the clearing corporation
  4. The order is entered on the exchange's trading platform under the member's credentials Correct answer.

Explanation

Trading members access the exchange's electronic order book using their membership credentials, and client orders are entered with the correct client code. Clearing corporations handle post-trade clearing and settlement, not order entry. Registrars and the RBI do not operate equity order books.

Question 30Equity Market

A dealer is quoting a two-way price for a stock and wants the spread to compensate for the risk of holding inventory. If the dealer's cost of carrying inventory rises and volatility increases, what is the expected effect on the quoted spread?

  1. The spread widens because inventory and volatility risk increase Correct answer.
  2. The spread remains unchanged because it is fixed by the exchange
  3. The spread narrows because the dealer wants faster turnover
  4. The spread becomes negative because the dealer must attract flow

Explanation

Market makers set spreads to cover inventory risk, adverse selection and processing costs. Higher carrying costs and greater volatility raise the risk of holding a position, so the dealer demands a wider spread for compensation. Exchange rules do not fix dealer spreads, and a negative spread would guarantee loss on every round trip.

Question 31Equity Market

A dealer holds 5,000 shares bought at Rs 400. To protect the position against a fall, the dealer buys put options with a strike of Rs 390, paying a premium of Rs 8 per share. What is the maximum loss per share on the combined position if the stock falls sharply?

  1. Rs 390
  2. Rs 18 Correct answer.
  3. Rs 10
  4. Rs 8

Explanation

The put limits the loss on the shares to the fall from Rs 400 to the Rs 390 strike, which is Rs 10 per share. The premium of Rs 8 is also lost, so the maximum loss per share is Rs 10 + Rs 8 = Rs 18. The premium alone ignores the loss on the underlying, and Rs 10 ignores the cost of protection.

Question 32Equity Market

A dealer is comparing a stock trading at Rs 500 with a bid-ask spread of Rs 2 against another with the same price and a spread of Rs 0.50. If the dealer expects to buy and sell the same quantity repeatedly, which cost consideration is most relevant?

  1. Spread has no bearing on dealer cost when prices are identical
  2. The stock with the narrower spread incurs a higher round-trip cost because of lower liquidity
  3. The stock with the wider spread incurs a higher round-trip transaction cost per share Correct answer.
  4. Both stocks have identical round-trip costs because prices are equal

Explanation

The bid-ask spread is a direct transaction cost: a dealer buying at the ask and selling at the bid loses the spread each round trip. A wider spread of Rs 2 therefore costs more per share than Rs 0.50. Identical prices do not equalise costs, and narrower spreads generally indicate better liquidity rather than worse.

Question 33Equity Market

A dealer wants to know the basis on which an index like the Nifty 50 is computed. Which method is used to calculate such a market-capitalisation-weighted index?

  1. Weighting by each constituent's price-to-earnings ratio
  2. Simple arithmetic average of constituent prices
  3. Free-float market capitalisation weighting with a base value Correct answer.
  4. Equal weighting of all constituents regardless of size

Explanation

Nifty 50 and similar benchmark indices are free-float market capitalisation weighted, with the index value derived relative to a base period value. A simple average ignores company size, and equal weighting would give small and large firms identical influence. P/E weighting is not a standard index construction method.

Question 34Equity Market

A dealer's client places a limit buy order at Rs 102 when the stock is trading at Rs 100. The dealer notes that the order will execute at the best available price at or below the limit. If sufficient supply exists at Rs 100.50, at what price will the client's buy execute?

  1. Rs 100, the last traded price
  2. Rs 102, because that is the stated limit
  3. The order will not execute until the price reaches Rs 102
  4. Rs 100.50, the best available price within the limit Correct answer.

Explanation

A limit buy order sets a maximum price, but execution occurs at the best available price at or below that limit. With supply at Rs 100.50, the trade executes there rather than at the limit. The last traded price is not a guaranteed execution price, and the order can fill before the market reaches Rs 102.

Question 35Equity Market

A dealer sells 2,000 shares short in the cash segment and must deliver them at settlement. How does the dealer typically arrange delivery in the Indian market?

  1. By requesting the exchange to postpone settlement
  2. By borrowing shares through the securities lending and borrowing scheme or arranging an existing holding Correct answer.
  3. By transferring the obligation to the clearing corporation permanently
  4. By paying a cash penalty in place of delivery

Explanation

A short seller must deliver shares at settlement, so the dealer arranges them through the securities lending and borrowing scheme or from an existing holding. The exchange does not postpone settlement on request, and a cash penalty does not substitute for delivery. The clearing corporation manages shortfalls through auction or close-out, not by permanently absorbing the obligation.

Question 36Equity Market

A dealer is assessing a stock's liquidity using market depth data. The order book shows a best bid of 1,000 shares and a best ask of 200 shares. Which interpretation is most accurate?

  1. The stock is under a trading halt
  2. The stock has strong buying interest at the best bid and thin supply at the best ask Correct answer.
  3. The stock is illiquid because the bid exceeds the ask
  4. The stock has equal demand and supply at the top of the book

Explanation

Market depth shows the quantity available at each price level. A larger bid quantity than ask quantity at the top of the book suggests stronger buying interest near the best bid and thinner immediate supply. Equal quantities would indicate balanced depth, and bid size exceeding ask size is not illiquidity. A trading halt would mean no visible book at all.

Question 37Equity Market

A dealer is asked to explain how a stock's closing price is used in the settlement of mark-to-market obligations for equity derivatives. Which statement is correct?

  1. Mark-to-market obligations are waived if the position is hedged
  2. Mark-to-market is settled only at contract expiry
  3. Mark-to-market is settled monthly based on the average price
  4. Mark-to-market is settled daily using the exchange's daily settlement price, with final settlement at expiry Correct answer.

Explanation

Equity derivatives positions are marked to market daily against the exchange's daily settlement price, and profits or losses are collected or paid each day. Final settlement occurs at expiry based on the expiry settlement price. Monthly averaging and hedging-based waivers are not part of the framework.

Question 38Equity Market

A dealer observes that the exchange has revised the price band for a stock from 20% to 10% following unusual price movement. What is the immediate practical consequence for the dealer's order placement?

  1. The stock will be delisted at the end of the day
  2. The dealer can ignore the band for institutional clients
  3. Orders cannot be placed outside the revised 10% band from the previous close Correct answer.
  4. The stock becomes eligible for margin trading at lower margins

Explanation

Price bands set the maximum permissible movement from the previous close, and a revised narrower band restricts orders to that range. A band change is not a delisting event and does not lower margins; surveillance actions typically tighten conditions. Institutional clients are not exempt from exchange price bands.

Question 39Equity Market

A dealer holds a portfolio of large-cap stocks and wants to reduce systematic risk temporarily without selling the holdings. Which approach best achieves this using index derivatives?

  1. Buy index futures to increase market exposure
  2. Purchase additional large-cap stocks to diversify
  3. Sell index futures to offset the portfolio's market exposure Correct answer.
  4. Buy index puts and simultaneously sell index calls at the same strike

Explanation

Selling index futures creates a short exposure that offsets the portfolio's systematic risk while the underlying holdings remain intact. Buying futures increases rather than reduces exposure. A combined put purchase and call sale at the same strike is a synthetic short position that caps upside but is not the standard hedge, and adding stocks does not reduce market risk.

Question 40Equity Market

A dealer is evaluating a stock's free-float market capitalisation. The company has 10 crore shares outstanding, of which promoters hold 60% and foreign institutional investors hold 10%. If the price is Rs 200, what is the approximate free-float market capitalisation?

  1. Rs 600 crore
  2. Rs 2,000 crore Correct answer.
  3. Rs 200 crore
  4. Rs 800 crore

Explanation

Free float excludes promoter holdings but generally includes institutional holdings that are freely tradable. With 60% promoter holding, 40% of 10 crore shares, or 4 crore shares, are in free float. At Rs 200 per share, free-float market capitalisation is 4 crore × Rs 200 = Rs 800 crore, so the answer reflecting Rs 800 crore is correct; the option showing Rs 2,000 crore represents total market capitalisation.

Question 41Indices

In the Nifty 50 index methodology, which weighting scheme is used to compute the index level?

  1. Equal weighting of all constituents
  2. Full market capitalisation
  3. Free-float market capitalisation Correct answer.
  4. Price weighting of constituent stocks

Explanation

The Nifty 50 is a free-float market capitalisation weighted index, meaning each stock's weight depends on its market value after excluding promoter and strategic holdings. This prevents stocks with large locked-in holdings from dominating the index. Full market cap, equal and price weighting are used by other index families, not the Nifty 50.

Question 42Indices

Which of the following best describes the role of a market index in the capital market?

  1. It replaces the exchange's regulatory surveillance function
  2. It guarantees a fixed return to investors who track it
  3. It acts as a benchmark representing the performance of a defined basket of securities Correct answer.
  4. It sets the maximum price at which constituent stocks may trade

Explanation

An index aggregates the prices of a defined basket of securities into a single number so that market performance can be tracked and compared. It serves as a benchmark for portfolios and as an underlying for derivatives and funds. It does not guarantee returns, cap prices, or perform regulatory duties.

Question 43Indices

What does the 'free float' of a company represent in index construction?

  1. The shares held by the promoter group and pledged with lenders
  2. The total number of shares issued by the company
  3. The market value of the company's debt securities
  4. That portion of shares available for public trading, excluding locked-in holdings Correct answer.

Explanation

Free float refers to shares that are freely tradable in the market, after excluding promoter holdings, government stakes, strategic blocks and other locked-in shares. Index providers use this figure to weight constituents by investable size. Total issued shares and pledged promoter shares are not free float.

Question 44Indices

On the NSE, which index is widely used as the benchmark for the overall Indian equity market and underlies the Nifty futures and options contracts?

  1. Nifty Midcap 100
  2. Nifty 50 Correct answer.
  3. Nifty Next 50
  4. Nifty Bank

Explanation

The Nifty 50 represents 50 large, liquid Indian companies across sectors and is the primary benchmark for Indian equity. It is the underlying for the flagship Nifty derivatives contracts traded on NSE. The other indexes cover narrower segments such as banking, midcaps or the next tier of large caps.

Question 45Indices

A dealer reads that the Nifty 50 closed at 22,000 and the Nifty Bank at 48,000 on the same day. What does this comparison of index levels indicate?

  1. The absolute index values reflect different base values and constituent sets and cannot be compared directly Correct answer.
  2. Nifty Bank stocks are individually more expensive than Nifty 50 stocks
  3. Nifty 50 has a lower market capitalisation than Nifty Bank
  4. Nifty Bank has outperformed Nifty 50 that day

Explanation

Index levels are relative to their own base values and constituent baskets, so two indexes with different bases cannot be ranked by their absolute numbers. A higher level does not mean better performance or larger market cap. Performance comparison requires percentage change over the same period.

Question 46Indices

Which of the following is an example of a sectoral index on the NSE?

  1. Nifty 500
  2. Nifty 50
  3. Nifty IT Correct answer.
  4. Nifty Next 50

Explanation

A sectoral index tracks companies belonging to one industry, and Nifty IT covers information technology stocks. Nifty 50 and Nifty Next 50 are broad large-cap indexes, while Nifty 500 is a broad market index spanning many sectors. Sectoral indexes are used for sector-specific exposure and derivatives.

Question 47Indices

A client wants exposure to the entire Indian equity market across large, mid and small caps through a single index. Which NSE index is most appropriate?

  1. Nifty Bank
  2. Nifty 50
  3. Nifty 500 Correct answer.
  4. Nifty IT

Explanation

Nifty 500 covers 500 companies across large, mid and small capitalisations, giving broad market representation. Nifty 50 is large-cap only, while Nifty Bank and Nifty IT are narrow sectoral indexes. Broad-market exposure therefore points to Nifty 500.

Question 48Indices

In index terminology, what is a 'base date'?

  1. The date on which derivatives on the index expire
  2. The last trading day of each financial year used for rebalancing
  3. The date on which a constituent stock is removed from the index
  4. The reference date at which the index is assigned its base value for computation Correct answer.

Explanation

The base date is the reference date at which an index is set to a chosen base value, and subsequent levels are computed relative to it. It anchors the index calculation. It is not a rebalancing, expiry or deletion date.

Question 49Indices

An index provider applies a 'capping' rule to an index. What is the purpose of this rule?

  1. To restrict the number of new listings admitted to the exchange
  2. To cap the brokerage charged on index derivative trades
  3. To fix the index level at a constant value during volatile sessions
  4. To limit the weight of any single constituent or group so the index stays diversified Correct answer.

Explanation

Capping restricts the maximum weight a single stock or group can carry, preventing concentration risk in the index. This keeps the benchmark diversified and investable. Capping does not freeze index levels, control listings or affect brokerage.

Question 50Indices

Under a free-float market capitalisation methodology, a company with 100 million shares, a price of Rs 200 and a free-float factor of 0.40 contributes what free-float market value to the index?

  1. Rs 20,000 million
  2. Rs 4,000 million
  3. Rs 2,000 million
  4. Rs 8,000 million Correct answer.

Explanation

Free-float market value equals shares multiplied by price multiplied by the free-float factor: 100 million × Rs 200 × 0.40 = Rs 8,000 million. The factor scales down the full market value to the tradable portion. Using full shares or ignoring the factor gives the wrong figure.