NISM Series I (Currency Derivatives) common mistakes
NISM Series I (Currency Derivatives) · Understand the traps and how to avoid them.
Treating the OTC forward market and the exchange-traded currency futures segment as interchangeable when answering questions about contract size, settlement, and counterparty risk, so a question about who guarantees performance gets answered with 'the bank' instead of the clearing corporation.
Candidates study forwards and futures together as 'currency derivatives' and memorise a single blended list of features, so they lose track of which features belong to which market. The exam repeatedly tests the contrast - standardised lots, daily mark-to-market, exchange clearing, versus bespoke size and date with bilateral credit risk.
What to do instead
Build a two-column comparison table (OTC forward vs exchange futures) covering contract size, maturity dates, settlement, margining, counterparty, and default handling. For every practice question, first identify which market the stem describes, then answer only from that column. Rehearse the point that on the exchange segment the clearing corporation is the counterparty to every trade.
Confusing the roles of the clearing corporation, the clearing member, and the trading member, and assuming a trading member guarantees settlement to the client or that the exchange itself takes the price risk.
The three-tier structure (client – trading member – clearing member – clearing corporation) is described in one block in most study material, and candidates memorise the names without mapping obligations to each layer. Questions that ask 'who bears counterparty risk' or 'who collects margins from whom' then get answered by guessing the biggest-sounding institution.
What to do instead
Draw the hierarchy as a flow diagram and label the cash and margin flows on each arrow: client posts margin to trading member, trading member to clearing member, clearing member to clearing corporation. Note that novation by the clearing corporation is what removes bilateral counterparty risk. Practise questions phrased as 'X fails, who is exposed' until the direction of exposure is automatic.
Miscomputing the mark-to-market and daily margin figures by applying the price change to the wrong notional, forgetting the contract lot size, or mixing up profit and loss direction for a short position.
Candidates know the MTM formula in the abstract but rush the arithmetic under time pressure, and the short-position sign convention is the most common slip. They also forget that the MTM is computed on the full contract value (price change times lot size), not on the margin deposited.
What to do instead
Adopt a fixed written template: contract value = price × lot size; daily MTM = (today's settlement − yesterday's settlement) × lot size × (+1 long / −1 short). Work three or four numeric drills with a short position and a settlement-price series, and check the sign by asking 'did the market move in my favour?'. Keep the USD/INR futures lot size and quote convention at your fingertips.
Mixing up the premium buyer and seller obligations on currency options - stating that the buyer posts margin, that the seller receives the premium and has no further obligation, or that the buyer can lose more than the premium.
Equity-option intuition and casual use of 'option' blur the asymmetry: the buyer pays premium and holds a right, the seller receives premium and carries a contingent obligation backed by margin. Candidates who have not separated right from obligation answer from memory of the word 'premium'.
What to do instead
Write one sentence per party and memorise it: buyer pays premium, has a right, maximum loss is the premium, posts no margin; seller receives premium, has an obligation, posts margin, loss is theoretically unlimited. Then test it against both a call and a put, and against both a hedger buying protection and a writer collecting premium.
Getting the direction of a currency exposure wrong - for example, treating an importer who must pay USD as being 'long USD' in the sense of benefiting from a rising USD, or hedging an exporter with the wrong side of the futures contract.
The words 'long' and 'short' are used both for the position in the futures contract and for the underlying exposure, and the two are opposite for a hedger. Candidates who memorise 'importer buys dollars, so buy futures' without tracing the cash-flow direction misapply it when the question is framed around receivables or payables.
What to do instead
For every hedging question, first write the underlying cash flow in the actual currency (importer pays USD later, exporter receives USD later), then ask what happens if USD rises, then choose the futures side that profits when USD rises (buy/long) or falls (sell/short). Drill both importer and exporter cases side by side, including a case where the exposure is in a cross currency such as EUR/INR.
Assuming the USD/INR futures price must equal the prevailing spot rate, or ignoring the interest-rate differential when explaining why futures trade at a premium or discount to spot.
Candidates without a fixed-income background treat the futures price as a forecast of spot and are surprised by the carry component. They then misanswer questions about cost of carry, the premium on USD/INR when domestic rates exceed US rates, and convergence at expiry.
What to do instead
Learn the cost-of-carry relationship as a single line: futures ≈ spot × (1 + domestic rate − foreign rate) for the period, so higher domestic rates push USD/INR futures to a premium. Work a small numerical example with a 3-month horizon, and remember that the basis must converge to zero at expiry because settlement is against the reference rate.
Confusing the exchange rate quoted by the RBI reference rate with the market rate, or misreading a two-way quote by buying at the bid and selling at the ask.
Quotation conventions (bid/ask, direct/indirect, base/quote) are covered quickly and candidates carry over the retail habit of reading a single number. The reference rate is a fixing published for settlement and valuation, not a rate at which a client can deal, and that distinction is tested.
What to do instead
Practise reading quotes aloud: in USD/INR the USD is the base, the first number is the bid at which the dealer buys USD, the second is the ask at which the dealer sells, and the client always gets the worse side. Separately note what the RBI reference rate is used for (settlement of exchange-traded contracts, valuation) and that it is not a dealing quote.
Answering eligibility and participation questions from general impression - for example, assuming any individual can trade currency futures without limit, that NRIs participate freely, or that a client may take a position beyond the permissible limit without any consequence.
The regulatory perimeter (who may trade, position limits, exposure limits, permitted underlying exposures for residents) is set out in circulars rather than in the core mechanics, so candidates skim it and answer from plausibility. The exam tests these perimeter rules precisely because they are easy to get wrong.
What to do instead
Make a one-page regulatory sheet: permitted participants, the documentary evidence required for resident hedgers, the position-limit framework, and the consequences of breach. Where you are unsure of a current numeric limit, learn the structure and the principle rather than a possibly stale number, and verify the current figure from the regulator's own circular before the exam.
Skipping the arithmetic on basis, spread, and arbitrage questions - for example, computing the profit on a calendar spread without netting the two legs, or ignoring transaction costs when judging whether an arbitrage is profitable.
Spread and arbitrage questions look conceptual but are scored on the number. Candidates describe the strategy correctly and then lose the mark on the final figure, or declare an arbitrage profitable before deducting brokerage, margins, and the cost of carry.
What to do instead
For every spread, write the two legs as signed cash flows with dates and sum them. For arbitrage, list all four components - spot leg, futures leg, carry cost, transaction costs - and only conclude if the net is positive. Do timed numerical sets so the arithmetic is fast enough to survive the paper's time pressure.
Managing the paper poorly: spending too long on one numerical question, leaving regulatory and conceptual questions unattempted, and not accounting for the negative marking or pass-mark structure before starting.
The exam mixes recall, regulation, and calculation, and candidates who grind on a single hard calculation lose the easy marks elsewhere. Many also do not check the current marking scheme and pass criteria in advance, so they cannot calibrate how many questions they need to attempt confidently.
What to do instead
Do two full timed mock papers under exam conditions and record time per question; set a rule to flag and move on after a fixed interval. Confirm the current question count, duration, marking scheme, and pass mark from the official information source before the exam, and plan a first pass that banks all conceptual questions before returning to flagged calculations.