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NCFM Derivatives Market (Dealers) study materials
NCFM Derivatives Market (Dealers) study resources

NCFM Derivatives Market (Dealers) practice questions

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Question 1Derivatives Market Basics

In the Indian derivatives market, a contract whose obligation is settled by paying the difference between the contracted price and the settlement price, rather than by delivering the underlying, is described as:

  1. Cash-settled Correct answer.
  2. Conditionally settled
  3. Optionally settled
  4. Physically settled

Explanation

Cash settlement discharges the obligation in money, using the difference between the contracted price and the final settlement price. Physical settlement instead transfers the underlying shares or securities. Most Indian index derivatives are cash-settled, while single stock derivatives may be physically settled at expiry.

Question 2Derivatives Market Basics

A futures contract differs from a forward contract primarily because a futures contract:

  1. Is standardised and traded on an exchange with daily mark-to-market Correct answer.
  2. Can be cancelled freely by either party before expiry
  3. Has no margin requirement for either counterparty
  4. Always requires delivery of the physical underlying

Explanation

Futures are exchange-traded standardised contracts cleared through a clearing corporation, with positions marked to market daily and margins collected. Forwards are privately negotiated over-the-counter contracts carrying bilateral counterparty risk. This standardisation and daily settlement is the defining structural difference.

Question 3Derivatives Market Basics

An investor buys one call option on a stock with a strike of Rs 500 and pays a premium of Rs 12. At expiry the stock trades at Rs 540. The net profit per share for the buyer is:

  1. Rs 12
  2. Rs 52
  3. Rs 28 Correct answer.
  4. Rs 40

Explanation

The call buyer's payoff at expiry is the excess of the spot price over the strike, that is Rs 540 minus Rs 500, equal to Rs 40. The premium paid of Rs 12 is then deducted, giving a net profit of Rs 28 per share. Premium is a sunk cost that must be recovered before any profit arises.

Question 4Derivatives Market Basics

In an option contract, the party that has the right but not the obligation to exercise the contract is the:

  1. Option writer
  2. Clearing member
  3. Settlement bank
  4. Option buyer Correct answer.

Explanation

The option buyer, also called the holder, pays premium and acquires a right without any obligation. The writer receives the premium and bears the obligation to perform when the buyer exercises. This asymmetry of rights and obligations is the core feature of options.

Question 5Derivatives Market Basics

The price at which the underlying must be bought or sold if an option is exercised is known as the:

  1. Basis
  2. Spot price
  3. Strike price Correct answer.
  4. Premium

Explanation

The strike price, or exercise price, is the fixed price stated in the contract at which the underlying changes hands on exercise. The premium is the price of the option itself, while spot price is the prevailing market price. Basis refers to the gap between futures and spot prices.

Question 6Derivatives Market Basics

Which of the following best describes the role of a clearing corporation in exchange-traded derivatives?

  1. It provides investment advice to retail clients on derivative strategies
  2. It lends securities to traders for physical delivery obligations
  3. It guarantees settlement and becomes the counterparty to every trade through novation Correct answer.
  4. It sets the strike prices of all option contracts listed on the exchange

Explanation

Through novation the clearing corporation interposes itself between buyer and seller, becoming the legal counterparty to each side. This, supported by margins and a settlement guarantee fund, removes bilateral counterparty risk. Strike prices are set by the exchange in the contract specification, not by the clearing corporation.

Question 7Derivatives Market Basics

A trader expects the underlying index to rise substantially and wants unlimited upside with limited downside. The most suitable position is to:

  1. Sell a put option
  2. Buy a call option Correct answer.
  3. Buy a put option
  4. Sell a call option

Explanation

A long call gives the buyer exposure to unlimited upside while the maximum loss is confined to the premium paid. Selling a call exposes the writer to unlimited loss if the market rallies. Buying a put and selling a put are bearish or neutral-to-bullish with capped gains respectively.

Question 8Derivatives Market Basics

The minimum amount that a member must deposit with the clearing corporation before taking a fresh position in futures is called:

  1. Assignment margin
  2. Delivery margin
  3. Variation margin
  4. Initial margin Correct answer.

Explanation

Initial margin, also called initial or upfront margin, is collected before a position is created and is based on value at risk and other risk parameters. Variation margin is the daily mark-to-market cash flow on open positions. Assignment margin relates to exercised option obligations.

Question 9Derivatives Market Basics

A stock futures contract trades at Rs 1,050 while the underlying stock trades at Rs 1,020. The basis in this case is:

  1. Rs 1,020
  2. Rs 2,070
  3. Zero
  4. Rs 30 Correct answer.

Explanation

Basis is conventionally measured as the futures price minus the spot price of the underlying. Here that is Rs 1,050 minus Rs 1,020, giving a basis of Rs 30. Basis converges towards zero as the contract approaches expiry.

Question 10Derivatives Market Basics

An index futures contract has a lot size of 50 and trades at 22,000. The contract value is:

  1. Rs 22,000
  2. Rs 4,40,000
  3. Rs 1,10,000
  4. Rs 11,00,000 Correct answer.

Explanation

Contract value equals the futures price multiplied by the lot size, here 22,000 times 50, which is Rs 11,00,000. Margin requirements are then applied as a percentage of this notional contract value. Confusing the index level with the contract value is a common error.

Question 11Derivatives Market Basics

A put option on a stock has a strike of Rs 200 and the stock currently trades at Rs 185. The option is:

  1. At the money
  2. Deep out of the money
  3. Out of the money
  4. In the money Correct answer.

Explanation

A put is in the money when the spot price is below the strike, because exercising it allows sale at a higher fixed price. Here Rs 185 is below the Rs 200 strike, so intrinsic value of Rs 15 exists. A put is out of the money when spot exceeds the strike.

Question 12Derivatives Market Basics

The maximum loss for a buyer of a call option is limited to:

  1. The premium paid Correct answer.
  2. The spot price at expiry
  3. Unlimited
  4. The strike price

Explanation

Because the buyer holds a right and no obligation, the worst outcome is that the option expires worthless and the premium is lost. Losses cannot exceed the premium paid, regardless of how far the underlying falls. Unlimited loss potential belongs to the option writer, not the buyer.

Question 13Derivatives Market Basics

A trader holds a short futures position in a stock at Rs 400 when the price rises to Rs 430 on the next trading day. The variation margin consequence is that the trader:

  1. Pays nothing until the contract expires
  2. Pays Rs 30 per share to the clearing system Correct answer.
  3. Receives Rs 30 per share from the clearing system
  4. Receives the full contract value

Explanation

Futures positions are marked to market daily, so a short position loses when prices rise. The loss of Rs 30 per share is debited to the trader's margin account as variation margin. Settlement occurs daily rather than being deferred to expiry.

Question 14Derivatives Market Basics

Which statement correctly describes the relationship between an option's premium and its time to expiry, all else equal?

  1. Intrinsic value falls as expiry approaches
  2. Time value generally erodes as expiry approaches Correct answer.
  3. Premium is unaffected by time to expiry
  4. Time value rises steadily as expiry approaches

Explanation

Time value reflects the chance that the option moves further into the money before expiry, and it shrinks as that remaining period shortens. At expiry only intrinsic value survives, so time value reaches zero. Intrinsic value itself depends on spot versus strike, not on time.

Question 15Derivatives Market Basics

A hedger who holds a portfolio of stocks and fears a market-wide decline would most appropriately:

  1. Sell index futures to offset potential portfolio losses Correct answer.
  2. Buy call options on the index to protect value
  3. Write put options on the index to earn premium
  4. Buy index futures to profit from the decline

Explanation

Selling index futures creates a short exposure that gains when the market falls, offsetting losses on the long cash portfolio. This is a classic short hedge. Buying calls protects a short position rather than a long portfolio, and writing puts adds downside risk.

Question 16Derivatives Market Basics

In a futures contract, the process by which gains and losses on open positions are credited or debited to the margin account at the end of each trading day is called:

  1. Rollover
  2. Mark to market Correct answer.
  3. Novation
  4. Assignment

Explanation

Daily mark to market recalculates the value of open futures positions against the day's settlement price and settles the difference in cash. This prevents the accumulation of large unsettled obligations. Novation refers to the clearing corporation becoming counterparty, and rollover means shifting a position to a later expiry.

Question 17Derivatives Market Basics

An investor sells one lot of an index call option and receives a premium of Rs 20,000. If the index rises sharply and the option is exercised, the writer's obligation is:

  1. Limited to the premium received
  2. Limited to the strike price of the option
  3. Potentially far larger than the premium received, with no upper cap Correct answer.
  4. Limited to the lot size multiplied by the premium

Explanation

A call writer faces theoretically unlimited loss because the underlying can rise without bound, while the gain is capped at the premium. The premium received is compensation for accepting this asymmetric risk. Margin collection exists precisely to cover such open-ended obligations.

Question 18Derivatives Market Basics

A trader observes that the near-month futures contract is trading at a lower price than the far-month contract on the same underlying. This market condition is described as:

  1. Contango Correct answer.
  2. Arbitrage
  3. Convergence
  4. Backwardation

Explanation

When farther-dated futures trade above nearer-dated ones, the curve is in contango, typically reflecting carry costs such as financing and storage. Backwardation is the reverse pattern, where near contracts trade above far contracts. Convergence refers to futures and spot prices meeting at expiry.

Question 19Derivatives Market Basics

A trader combines a long position in the underlying stock with a long put option on the same stock. This position is best described as:

  1. A bull call spread
  2. A covered call
  3. A protective put Correct answer.
  4. A straddle

Explanation

A protective put pairs a long stock holding with a long put, which sets a floor on the value of the combined position. The put gains value if the stock falls, offsetting the loss on the shares. A covered call instead involves writing a call against the stock holding.

Question 20Derivatives Market Basics

Which of the following is an essential eligibility condition for a stock to be considered for derivatives trading on Indian exchanges?

  1. The stock must satisfy prescribed criteria on market capitalisation, liquidity and trading volume Correct answer.
  2. The stock must have a fixed price band of two per cent
  3. The stock must pay a dividend every quarter
  4. The stock must be part of a global index

Explanation

Exchanges select derivative-eligible stocks using quantitative criteria covering market capitalisation, average daily traded value and liquidity, along with other regulatory conditions. Dividend policy and global index membership are irrelevant to eligibility. Price bands, where applicable, are not fixed at two per cent as an eligibility rule.

Question 21Derivatives Market Basics

A trader expects the underlying to remain range-bound and wishes to earn premium income while accepting obligation if the price rises modestly. The position that best matches this view is:

  1. Buying an at-the-money put
  2. Writing an in-the-money put
  3. Writing an out-of-the-money call Correct answer.
  4. Buying an out-of-the-money call

Explanation

Writing an out-of-the-money call collects premium and profits if the underlying stays below the strike until expiry. The writer accepts the obligation to deliver if the market rises above the strike. Buying a call requires a directional rally to pay off, which contradicts the range-bound view.

Question 22Derivatives Market Basics

On expiry day, an index futures contract converges to the spot index level primarily because:

  1. The exchange resets the lot size on expiry day
  2. The final settlement price is derived from the underlying index value Correct answer.
  3. The margin requirement becomes zero on expiry day
  4. The clearing corporation waives all settlement obligations

Explanation

The final settlement price of an index futures contract is based on the underlying index value, so the futures price must equal that value at expiry. This forces convergence and eliminates any residual basis. Margin and lot size changes do not drive the convergence mechanism.

Question 23Derivatives Market Basics

An arbitrageur observes that a stock futures contract trades at a price significantly above its fair value derived from spot price plus carry cost. The appropriate arbitrage action is to:

  1. Buy the futures and sell the underlying stock
  2. Buy both the futures and the underlying stock
  3. Sell the futures and buy the underlying stock Correct answer.
  4. Sell both the futures and the underlying stock

Explanation

When futures are overpriced relative to spot plus carry, the arbitrageur sells the rich futures and buys the underlying to lock in the difference. The position is held to expiry, when convergence eliminates the mispricing. This is a cash-and-carry arbitrage.

Question 24Derivatives Market Basics

A trader with a long futures position in a stock reaches expiry without closing the position, and the contract is physically settled. The trader must:

  1. Pay only the cash difference to the clearing corporation
  2. Take delivery of the shares and pay the settlement price Correct answer.
  3. Forfeit the initial margin to the exchange
  4. Roll the position automatically to the next series

Explanation

Physically settled single stock futures require the buyer to accept delivery of shares and pay the final settlement price. Failure to arrange funds or securities results in a delivery default with penal consequences. Automatic rollover does not occur unless the trader explicitly rolls the position.

Question 25Derivatives Market Basics

An investor holds a long call and a long put on the same underlying with the same strike and expiry. At expiry, the combined payoff is profitable only if:

  1. The underlying moves beyond the strike by more than the total premium paid Correct answer.
  2. The underlying remains unchanged until expiry
  3. The underlying moves in either direction by any amount
  4. The underlying finishes exactly at the strike price

Explanation

This is a long straddle, whose payoff increases with distance from the strike in either direction. The combined premium paid for both options must be recovered before the position becomes profitable. A large move in either direction, exceeding the total premium, is required.

Question 26Derivatives Market Basics

In the Indian derivatives market, which of the following best describes a 'derivative'?

  1. A financial instrument whose value is derived from the value of an underlying asset such as an index, stock, or commodity Correct answer.
  2. A physical certificate representing direct ownership of a company's equity shares
  3. A deposit receipt issued by a bank confirming a fixed-term deposit
  4. A government security that pays a fixed coupon until maturity

Explanation

A derivative is a contract whose value depends on the price of an underlying asset or variable, rather than being an asset in its own right. The underlying may be an index, an individual stock, a commodity, or a currency. Instruments representing direct ownership or fixed deposits are cash market instruments, not derivatives.

Question 27Derivatives Market Basics

Which of the following is an example of an exchange-traded derivative contract in India?

  1. A forward rate agreement negotiated privately between two banks
  2. A stock futures contract on the National Stock Exchange Correct answer.
  3. A treasury bill purchased in the primary market
  4. A corporate fixed deposit with a floating interest rate

Explanation

Stock futures are standardised contracts traded on a recognised stock exchange and cleared through a clearing corporation, which is what makes them exchange-traded derivatives. A forward rate agreement is a privately negotiated over-the-counter contract. Fixed deposits and treasury bills are cash market instruments.

Question 28Derivatives Market Basics

A trader buys one stock futures lot of 500 shares at Rs 200 and later sells it at Rs 215. Ignoring brokerage, taxes, and margins, what is the trader's profit?

  1. Rs 15,000
  2. Rs 1,075
  3. Rs 2,500
  4. Rs 7,500 Correct answer.

Explanation

Profit on a long futures position equals the change in price multiplied by lot size, i.e. (215 - 200) x 500 = Rs 7,500. The contract value at entry is not the profit; only the price difference is realised. Costs such as brokerage would reduce this amount but were excluded by the question.

Question 29Derivatives Market Basics

Which of the following market participants typically uses derivatives mainly to transfer price risk rather than to take a view on direction?

  1. A day trader who squares off all positions before market close
  2. A hedger who offsets exposure to a physical or portfolio position Correct answer.
  3. A proprietary desk that trades index futures to profit from short-term price moves
  4. A market maker quoting two-way prices to earn the bid-ask spread

Explanation

A hedger already carries an exposure, such as a share portfolio or a physical commodity, and uses derivatives to offset that risk rather than to speculate. Proprietary desks, market makers, and day traders are all seeking trading gains or spreads. Hedging is therefore the activity whose primary purpose is risk transfer.

Question 30Derivatives Market Basics

A stock futures contract trades at Rs 1,080 while the underlying stock trades at Rs 1,050. The fair futures price based on cost of carry is Rs 1,062. Which arbitrage trade is indicated?

  1. Sell the futures and buy the stock, since the futures is overpriced relative to fair value Correct answer.
  2. Take no position, because a price difference of Rs 18 is always within the no-arbitrage band
  3. Buy the futures and sell the stock, since the futures is underpriced by Rs 18
  4. Buy the stock and buy the futures, since both are expected to rise together

Explanation

When the actual futures price exceeds the fair value derived from the cost-of-carry relationship, the futures is rich. The arbitrage is to sell the futures and buy the underlying, then carry the stock to expiry or unwind when prices converge. The Rs 18 gap is the gross arbitrage spread before transaction costs.

Question 31Derivatives Market Basics

An investor writes one index call option and simultaneously holds a long position in a portfolio that closely tracks the index. What is the primary effect of this covered call position?

  1. It earns premium income but caps the portfolio's gains above the strike price Correct answer.
  2. It guarantees a profit equal to the premium received regardless of index movement
  3. It converts the portfolio into a risk-free position identical to a bank deposit
  4. It removes all downside risk on the portfolio while keeping unlimited upside

Explanation

Writing a call against an existing long position generates premium income but obliges the writer to deliver gains above the strike if the index rises. Downside risk on the portfolio remains largely intact, since the premium only provides a small cushion. The position therefore trades away upside beyond the strike in exchange for the premium.

Question 32Derivatives Market Basics

A trader expects the underlying index to stay between two levels for the next month and wants to profit if that happens, while accepting limited risk. Which strategy fits this view?

  1. A long butterfly spread with calls Correct answer.
  2. A short straddle using an at-the-money call and put option
  3. A long strangle using out-of-the-money call and put options
  4. A long call ratio spread

Explanation

A long butterfly combines option legs so that maximum profit is earned if the underlying finishes near the middle strike at expiry, which matches a range-bound view. It is a debit strategy with a defined and limited maximum loss. Long strangles and long calls profit from large moves, while a short straddle profits from range-bound markets but carries substantially higher risk.

Question 33Derivatives Market Basics

A member's open futures position shows a mark-to-market loss on a trading day that exceeds the available margin balance. What is the standard consequence under exchange risk management?

  1. The loss is automatically carried forward and adjusted only at contract expiry
  2. The member must replenish margin by the next settlement, failing which the position may be closed out Correct answer.
  3. The clearing corporation waives the loss because it is a daily accounting entry
  4. The member may continue to increase the position without any additional margin

Explanation

Futures positions are marked to market daily, and losses are debited to the member's margin account. If the balance falls below the required level, a margin call is raised and the member must restore funds; otherwise the exchange or clearing corporation can close out the position. Daily settlement means losses cannot be deferred to expiry.

Question 34Derivatives Market Basics

A trader observes that a near-month futures contract trades below the far-month contract on the same underlying. Which term describes this price pattern, and what does it usually imply about carry?

  1. Convergence; the two contracts must be priced identically at all times
  2. Contango; the far contract is priced higher, consistent with positive cost of carry Correct answer.
  3. Backwardation; the far contract is cheaper because of negative carry
  4. Inversion; the near contract is more expensive than the far contract

Explanation

When the far-month contract trades above the near-month contract, the market is in contango, which is consistent with positive carry such as interest costs and storage net of dividends. The futures price tends to rise with time to expiry under positive carry. Backwardation and inversion describe the opposite pattern, where the near contract is more expensive.

Question 35Derivatives Market Basics

A trader buys a call option with a strike of Rs 500 for a premium of Rs 12 when the underlying trades at Rs 495. At expiry the underlying is Rs 530. What is the trader's net profit per share?

  1. Rs 12
  2. Rs 18 Correct answer.
  3. Rs 30
  4. Rs 42

Explanation

The call's intrinsic value at expiry is 530 - 500 = Rs 30 per share. Net profit is intrinsic value minus the premium paid, i.e. 30 - 12 = Rs 18 per share. The premium is a sunk cost that must be deducted to arrive at the true profit.

Question 36Derivatives Market Basics

An investor holds a long put and a short call on the same underlying with identical strike and expiry. Which position does this combination most closely replicate?

  1. A short futures position at the strike price Correct answer.
  2. A covered call on the underlying
  3. A long futures position at the strike price
  4. A long call spread with the same strike

Explanation

A long put plus a short call at the same strike and expiry produces a payoff that falls one-for-one as the underlying rises above the strike and gains as it falls below, which is the payoff of a short position at the strike. This is the put-call parity relationship rearranged for a short forward. It is not a spread, because the strikes are identical.

Question 37Derivatives Market Basics

An option's premium consists of intrinsic value and time value. For a deeply out-of-the-money option close to expiry, which statement best describes its premium?

  1. It is almost entirely time value, which shrinks rapidly as expiry approaches Correct answer.
  2. It is almost entirely intrinsic value because the strike is far from the spot price
  3. It equals the strike price minus the spot price for a call option
  4. It is fixed at the exchange's minimum tick size until expiry

Explanation

An out-of-the-money option has zero intrinsic value, so its entire premium is time value. Time value decays as expiry nears and is smallest for options that are far from the money with little time left. The premium therefore tends toward zero unless the option moves into the money.

Question 38Derivatives Market Basics

Which of the following is a key difference between futures and options contracts?

  1. Futures oblige both parties to perform, whereas an option buyer has a right but no obligation Correct answer.
  2. Futures are settled only at expiry, whereas options are settled daily
  3. Options are always traded over the counter, whereas futures are always exchange-traded
  4. Futures require no margin, whereas options always require full premium payment

Explanation

A futures contract creates a binding obligation on both buyer and seller to settle at the agreed price. An option buyer pays a premium for a right and may choose not to exercise it, while the option writer carries the obligation. This asymmetry in rights and obligations is the fundamental distinction.

Question 39Derivatives Market Basics

A trader holds a long futures position in a stock and the contract is cash-settled at expiry. What happens to the position if the trader does not square it off before expiry?

  1. The position lapses without any payment because the trader did not close it
  2. The position is automatically rolled into the next month's contract at the same price
  3. The position is converted into physical shares even though the contract is cash-settled
  4. The position is settled in cash at the final settlement price, with the difference credited or debited Correct answer.

Explanation

A cash-settled futures contract is closed out at the final settlement price on expiry, and the difference between the trade price and the settlement price is credited or debited to the trader's account. No physical delivery occurs because the contract terms specify cash settlement. The position is not silently rolled forward or voided.

Question 40Derivatives Market Basics

A trader buys a call and a put on the same underlying with the same strike and expiry, paying a combined premium of Rs 40. At expiry the underlying moves far from the strike. Which statement about the position's payoff is correct?

  1. Profit is unlimited in either direction, but the premium paid reduces the net gain Correct answer.
  2. Maximum profit is capped at Rs 40 regardless of how far the underlying moves
  3. Profit equals the strike price minus the premium paid
  4. The position always loses because both options cannot be profitable together

Explanation

A long straddle profits from a large move in either direction, and the gain grows without limit as the underlying moves further from the strike. The combined premium of Rs 40 is the total cost and must be recovered before any net profit is earned. Only one leg is typically exercised at expiry, but the payoff is directional and unbounded.

Question 41Trading, Clearing and Settlement

On the NSE F&O segment, what does the daily mark-to-market settlement of futures positions primarily involve?

  1. Collecting or paying the day's price change on the position, with no transfer of the underlying Correct answer.
  2. Adjusting the contract's strike price to the closing price of the underlying
  3. Delivering the underlying shares on the day the contract is entered
  4. Transferring the entire contract value from buyer to seller each day

Explanation

Futures are marked to market daily: gains and losses from the change in daily settlement price are debited or credited to the member's account. The underlying is not exchanged during the life of the contract; only the final settlement may involve cash or delivery.

Question 42Trading, Clearing and Settlement

In the Indian derivatives market, which entity acts as the central counterparty to every trade on the exchange?

  1. The issuing company
  2. The clearing corporation Correct answer.
  3. The trading member
  4. The custodian

Explanation

The clearing corporation interposes itself between buyer and seller, becoming the counterparty to each side. This novation removes bilateral counterparty credit risk and enables uniform margining.

Question 43Trading, Clearing and Settlement

A client holds a long position in a stock futures contract. The clearing corporation's initial margin requirement for this position is designed primarily to:

  1. Guarantee delivery of the underlying shares
  2. Fund the daily settlement of the previous day's price change
  3. Cover potential losses over the expected close-out period if the client defaults Correct answer.
  4. Pay the exchange's transaction charges in advance

Explanation

Initial margin is a performance deposit sized to cover the probable loss over the close-out horizon, usually calculated using value-at-risk models. It protects the clearing system against default before the position can be liquidated.

Question 44Trading, Clearing and Settlement

Which of the following best describes the settlement guarantee fund in the Indian derivatives clearing framework?

  1. A pool used to finance clients' option premiums
  2. A fund used to pay dividends on underlying shares
  3. A corpus maintained to meet the obligations of a defaulting member Correct answer.
  4. A reserve held by the broker for its own trading profits

Explanation

The settlement guarantee fund is maintained by the clearing corporation to honour the obligations of a defaulting clearing member. It is a core layer of the default waterfall after the defaulter's own margins and collateral.

Question 45Trading, Clearing and Settlement

When does final settlement of a cash-settled index futures contract on NSE take place?

  1. Two days after expiry, based on the opening value of the index
  2. On the expiry day, based on the closing value of the underlying index Correct answer.
  3. On the last trading day of the month, based on the previous month's average
  4. On the day the position was opened, based on the entry price

Explanation

Cash-settled index futures are settled at expiry using the closing value of the underlying index on the expiry day. The final settlement price is fixed by the exchange and the difference is paid or received.

Question 46Trading, Clearing and Settlement

A trading member must pay daily mark-to-market losses of a client. If the client fails to pay, who is primarily responsible for settling the obligation with the clearing corporation?

  1. The exchange, which recovers the amount from other clients
  2. The client's bank, which must honour the debit
  3. The clearing corporation, which absorbs the loss from the settlement guarantee fund immediately
  4. The trading member, who is liable to the clearing corporation irrespective of client payment Correct answer.

Explanation

The trading member is liable to the clearing corporation for its clients' obligations; client default does not discharge that liability. The member must arrange funds and may liquidate the client's position to recover.

Question 47Trading, Clearing and Settlement

Which of the following is the correct standard settlement cycle for cash-market trades underlying derivatives hedging activity in India?

  1. T+0, with same-day delivery
  2. T+3, with settlement on the third business day
  3. T+1, with pay-in and pay-out on the next business day Correct answer.
  4. T+5, with weekly settlement

Explanation

Indian equity cash trades settle on a T+1 cycle, with pay-in and pay-out occurring on the next business day. Derivatives members must align their funding and collateral planning with this cycle.

Question 48Trading, Clearing and Settlement

In options trading on NSE, which party pays the premium, and when is it settled?

  1. The buyer pays the premium to the seller, settled on the next business day after the trade Correct answer.
  2. The clearing corporation pays the premium to the buyer on expiry
  3. Both parties pay half the premium to the exchange on the trade date
  4. The seller pays the premium to the buyer, settled at expiry

Explanation

The option buyer pays premium to the seller, and the premium is settled on the next business day after the trade. The premium is not deferred to expiry.

Question 49Trading, Clearing and Settlement

A client has a short futures position that incurs a mark-to-market loss on a day. Which account does the trading member debit to recover this amount?

  1. The client's securities demat account, which is automatically debited
  2. The settlement guarantee fund, which is debited first
  3. The client's ledger balance, after which unpaid amounts become a receivable from the client Correct answer.
  4. The clearing member's own capital account, with no recovery from the client

Explanation

MTM losses are debited to the client's ledger, and any shortfall becomes an amount recoverable from the client. The member may require funds or liquidate positions if the client does not pay.

Question 50Trading, Clearing and Settlement

A clearing member's client defaults on a large futures position and the member's own margins are insufficient to cover the shortfall. Which is the correct order in the default waterfall?

  1. Exchange reserves first, then the guarantee fund, then the defaulter's collateral
  2. Defaulter's margins, then the settlement guarantee fund, then the clearing corporation's own resources Correct answer.
  3. Settlement guarantee fund first, then the defaulter's margins, then the exchange's reserves
  4. Clearing corporation's capital first, then the defaulter's margins, then the guarantee fund

Explanation

The defaulter's own collateral and margins are used first, then the settlement guarantee fund, and finally the clearing corporation's resources as a last layer. This sequencing ensures the defaulting party absorbs losses before mutualised resources are tapped.