I85PREP
⌘ K
NISM Series XII (SMF) study materials
NISM Series XII (SMF) study resources

NISM Series XII (SMF) practice questions

One question at a time. Build your NISM Series XII (SMF) understanding.

First 50 of 200 questions. Each one lists the choices, the correct answer, and an explanation. The checker at the top of this page saves progress in this browser when it is available.

Continue in the practice tool above to load more questions, 50 at a time.

Question 1Basics of Securities Markets

In the Indian securities market, which regulator is primarily responsible for regulating and developing the securities market and protecting investor interests?

  1. Ministry of Corporate Affairs
  2. Insurance Regulatory and Development Authority of India
  3. Reserve Bank of India
  4. Securities and Exchange Board of India Correct answer.

Explanation

SEBI was established under the SEBI Act, 1992, and is the statutory regulator of the Indian securities market. Its mandate covers investor protection, market development and regulation of intermediaries. RBI regulates banking and monetary policy, not securities markets.

Question 2Basics of Securities Markets

Which of the following is the primary market transaction?

  1. An investor buying shares through an initial public offer Correct answer.
  2. A broker transferring shares from one demat account to another
  3. A mutual fund redeeming units from an investor
  4. A shareholder selling listed shares on the NSE to another investor

Explanation

The primary market is where securities are issued for the first time and funds flow to the issuer. An IPO subscription is a direct purchase of newly issued securities from the company. Secondary market trades involve transfer between investors without fresh funds to the issuer.

Question 3Basics of Securities Markets

On the NSE, the settlement cycle for normal trades in the equity cash segment is:

  1. T+2
  2. T+5
  3. T+0
  4. T+1 Correct answer.

Explanation

Indian equity cash markets moved to a T+1 settlement cycle, meaning trades are settled on the trading day plus one business day. This shortened cycle reduces counterparty and settlement risk. T+2 was the earlier standard and T+0 is not the normal cycle.

Question 4Basics of Securities Markets

A stock exchange is best described as:

  1. A clearing corporation that guarantees settlement
  2. A marketplace where buyers and sellers of securities meet under regulated rules Correct answer.
  3. A bank that lends money against shares
  4. A depository that holds securities in electronic form

Explanation

An exchange provides a regulated trading platform where buy and sell orders are matched. It does not itself hold securities or guarantee settlement; those functions belong to depositories and clearing corporations respectively.

Question 5Basics of Securities Markets

Which of the following instruments is a debt security?

  1. A non-convertible debenture Correct answer.
  2. Equity shares of a listed company
  3. A stock option contract
  4. A mutual fund unit

Explanation

A non-convertible debenture is a debt instrument in which the issuer borrows money and pays interest, with no conversion into equity. Equity shares represent ownership, options are derivatives, and mutual fund units represent a pooled investment.

Question 6Basics of Securities Markets

In a dematerialised environment, securities of an investor are held:

  1. With the issuer company's registrar in paper form
  2. In electronic form with a depository participant acting as the interface Correct answer.
  3. As physical certificates in a bank locker
  4. Only with the stock exchange

Explanation

Under dematerialisation, securities are credited to the investor's demat account held with a depository participant, which is the interface to the depository. The investor does not hold physical certificates. The exchange and registrar do not hold the investor's account.

Question 7Basics of Securities Markets

A stock market index such as the Nifty 50 is designed to:

  1. Represent the aggregate price behaviour of a selected basket of stocks Correct answer.
  2. Guarantee a fixed return to investors
  3. Determine the tax rate on capital gains
  4. Set the interest rate for corporate bonds

Explanation

An index tracks the performance of a defined basket of securities using a weighting method, serving as a market benchmark. It does not guarantee returns or set interest or tax rates.

Question 8Basics of Securities Markets

Which of the following best describes the role of a clearing corporation?

  1. It issues new shares to the public
  2. It provides margin trading loans to retail investors
  3. It acts as a central counterparty and guarantees settlement of trades Correct answer.
  4. It publishes research reports on listed companies

Explanation

A clearing corporation interposes itself between buyers and sellers, becoming the central counterparty, and guarantees settlement through novation and risk management. It does not issue securities or publish research.

Question 9Basics of Securities Markets

An investor places a market order to buy 500 shares. What does this order instruct the broker to do?

  1. Wait until the closing auction to execute
  2. Buy only if the price falls below the previous close
  3. Buy immediately at the best available price in the order book Correct answer.
  4. Buy at or below a specified limit price only

Explanation

A market order has no price condition and is executed at the best prevailing prices in the order book. It prioritises execution certainty over price certainty. A limit order is the one that specifies a price ceiling or floor.

Question 10Basics of Securities Markets

A stop-loss sell order for a stock held at a purchase price of Rs. 100 is placed with a trigger of Rs. 90. This order:

  1. Guarantees a sale at exactly Rs. 90
  2. Cancels automatically if the price rises
  3. Executes immediately at Rs. 100
  4. Becomes active only when the market price reaches Rs. 90 Correct answer.

Explanation

A stop-loss order remains dormant until the trigger price is reached and then becomes a market or limit order. It cannot guarantee the exact trigger price because execution depends on available prices. It does not execute immediately on placement.

Question 11Basics of Securities Markets

A company issues rights shares to existing shareholders at a discount to the market price. This is an example of:

  1. A derivatives transaction
  2. A secondary market trade
  3. A buyback of shares
  4. A primary market issue to existing holders Correct answer.

Explanation

A rights issue is a primary market offering in which fresh shares are allotted to existing shareholders, usually at a discount. It raises new capital for the issuer. It is not a secondary market trade or a buyback.

Question 12Basics of Securities Markets

An investor wants to protect against a fall in the value of a stock portfolio while retaining upside participation. Which derivative position is most suitable?

  1. Buying a call option on the index
  2. Selling a put option on the index
  3. Buying a put option on the index Correct answer.
  4. Selling a call option on the index

Explanation

A long put gives the right to sell at a strike price and gains value when the market falls, providing downside protection. Buying a call benefits from a rise, and selling options collects premium but adds obligations rather than protection.

Question 13Basics of Securities Markets

A mutual fund's net asset value (NAV) is calculated as:

  1. Total assets minus liabilities, divided by the number of units outstanding Correct answer.
  2. The market price of the fund's largest holding
  3. Total expenses divided by the number of units
  4. Total assets divided by the number of investors

Explanation

NAV is the per-unit value of the fund's net assets, computed as total assets less liabilities divided by units outstanding. It reflects the underlying portfolio value and is not based on the number of investors or expenses alone.

Question 14Basics of Securities Markets

Which of the following is a key difference between a bond and an equity share?

  1. Bonds carry no credit risk
  2. Bondholders receive a fixed contractual return, while equity holders have a residual claim Correct answer.
  3. Bonds are always traded on the primary market only
  4. Equity holders are paid before bondholders on liquidation

Explanation

Bondholders are creditors entitled to interest and principal as per contract, while equity holders are owners with a residual claim on profits and assets. On liquidation, creditors rank ahead of equity holders. Bonds also carry credit risk.

Question 15Basics of Securities Markets

What is the primary purpose of SEBI's Insider Trading Regulations?

  1. To fix the minimum lot size for derivatives
  2. To set the maximum brokerage a broker may charge
  3. To prohibit trading on unpublished price-sensitive information by connected persons Correct answer.
  4. To determine the listing fee payable by companies

Explanation

The insider trading regulations prohibit connected persons from dealing in securities while in possession of unpublished price-sensitive information. They aim to ensure market fairness and equal access to information. Brokerage and lot sizes are governed by other rules.

Question 16Basics of Securities Markets

An investor buys 100 shares at Rs. 200 and pays brokerage of 0.5% on the trade value. What is the total cash outflow excluding other charges?

  1. Rs. 20,000
  2. Rs. 20,100 Correct answer.
  3. Rs. 19,900
  4. Rs. 21,000

Explanation

Trade value is 100 x Rs. 200 = Rs. 20,000. Brokerage at 0.5% is Rs. 100, so total outflow is Rs. 20,100. Adding brokerage to the trade value gives the correct cost.

Question 17Basics of Securities Markets

A settlement guarantee fund maintained by a clearing corporation exists to:

  1. Provide loans to listed companies
  2. Fund investor education programmes
  3. Cover losses arising from default by a clearing member Correct answer.
  4. Pay dividends to shareholders of the exchange

Explanation

The settlement guarantee fund is used to meet obligations when a clearing member defaults, thereby protecting the settlement system. It is not meant for education, dividends or corporate lending.

Question 18Basics of Securities Markets

In an auction market, the price at which the maximum quantity of buy and sell orders can be matched is known as:

  1. The margin requirement
  2. The circuit limit
  3. The equilibrium or market-clearing price Correct answer.
  4. The tick size

Explanation

The equilibrium price clears the market by matching the highest volume of willing buyers and sellers. Circuit limits cap price movement, tick size is the minimum price increment, and margin is a risk deposit.

Question 19Basics of Securities Markets

Which of the following is a feature of a preference share?

  1. It must be converted into equity within one year
  2. It is a derivative contract
  3. It carries a preferential claim on dividends and repayment over equity Correct answer.
  4. It always carries voting rights identical to equity shares

Explanation

Preference shares rank ahead of equity for dividends and repayment of capital, but typically carry limited voting rights. They are not derivatives and conversion depends on the terms of issue, not a mandatory one-year rule.

Question 20Basics of Securities Markets

An investor holds a stock that has risen sharply and wants to lock in gains while still holding the shares. Which strategy uses an options position?

  1. Buy a protective put
  2. Buy a call option
  3. Write a covered call Correct answer.
  4. Buy a futures contract on the same stock

Explanation

Writing a covered call on shares already held generates premium income and caps upside, effectively locking in part of the gain. A protective put costs premium and guards against a fall rather than locking in gains. Buying a call or futures adds to exposure.

Question 21Basics of Securities Markets

Which of the following is a key feature of the secondary market?

  1. It guarantees profits to traders
  2. It provides liquidity to investors who wish to exit their holdings Correct answer.
  3. It sets the face value of securities
  4. It raises fresh capital for issuers

Explanation

The secondary market lets investors buy and sell existing securities, providing liquidity and price discovery. Raising fresh capital is the primary market function, and the secondary market does not guarantee profits.

Question 22Basics of Securities Markets

A depository participant (DP) is best described as:

  1. A clearing member that settles trades
  2. A portfolio manager who manages investments
  3. A credit rating agency
  4. An agent of the depository that opens and maintains demat accounts for investors Correct answer.

Explanation

A DP acts as an intermediary between the investor and the depository, opening demat accounts and processing transfers. Clearing members settle trades, portfolio managers manage funds, and rating agencies assess credit quality.

Question 23Basics of Securities Markets

For a futures contract, which statement about the initial margin is correct?

  1. It is a performance deposit collected to cover potential future losses Correct answer.
  2. It is returned only after five years
  3. It is the full value of the contract
  4. It is a fee paid permanently to the exchange

Explanation

Initial margin is a performance deposit that protects the clearing system against default and is adjusted through daily mark-to-market. It is not a fee, not the full contract value, and is not locked for a fixed multi-year period.

Question 24Basics of Securities Markets

Which of the following best explains why an exchange imposes circuit filters on individual stocks?

  1. To guarantee a minimum return to investors
  2. To increase trading volumes
  3. To curb excessive price volatility in a single trading session Correct answer.
  4. To fix the fair value of the stock

Explanation

Circuit filters are price bands that halt or restrict trading when a stock moves beyond a specified percentage, limiting extreme volatility. They do not fix fair value, guarantee returns or aim to boost volume.

Question 25Basics of Securities Markets

An investor purchases a stock at Rs. 500 and sells it at Rs. 560 after holding it for 14 months. For tax purposes, this gain is generally treated as:

  1. Business income
  2. Dividend income
  3. Long-term capital gain Correct answer.
  4. Short-term capital gain

Explanation

For listed equity shares, a holding period of more than 12 months qualifies the gain as long-term capital gain. Since the holding period here is 14 months, the gain is long-term. Short-term treatment applies only when the holding period is 12 months or less.

Question 26Basics of Securities Markets

Under Indian securities market regulation, which regulator is primarily responsible for protecting investor interests and promoting the development of the securities market?

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

Explanation

SEBI was set up as the statutory regulator of the Indian securities market and its mandate includes investor protection, market development and regulation. RBI handles banking and monetary policy, IRDAI regulates insurance, and the FMC historically dealt with commodity derivatives.

Question 27Basics of Securities Markets

A company that has never listed its shares and now wishes to raise capital by offering shares to the public for the first time is undertaking:

  1. An initial public offering Correct answer.
  2. A buyback
  3. A bonus issue
  4. A rights issue

Explanation

An initial public offering is the first sale of shares by an unlisted company to the public, which also brings the company to the primary market and later to listing. Rights and bonus issues are made to existing shareholders, and a buyback reduces capital rather than raising it.

Question 28Basics of Securities Markets

In the primary market, the price at which a new issue is offered to investors is decided by the issuer and its lead managers, and the securities are then listed on an exchange. Which statement about the primary market is correct?

  1. It facilitates trading of already listed securities between investors
  2. It channels fresh capital from investors to the issuing company Correct answer.
  3. It is regulated exclusively by the RBI
  4. It always involves trading at prices discovered on the exchange

Explanation

The primary market is where new securities are issued, so the proceeds go to the issuer as fresh capital. The secondary market handles trading of already listed securities, and the securities market is regulated by SEBI.

Question 29Basics of Securities Markets

Which of the following is a money market instrument rather than a capital market instrument?

  1. Commercial paper Correct answer.
  2. Debentures
  3. Equity shares
  4. Preference shares

Explanation

Commercial paper is a short-term debt instrument used by corporates to raise working capital, so it belongs to the money market. Equity shares, debentures and preference shares are long-term securities traded in the capital market.

Question 30Basics of Securities Markets

An investor places a buy order for 100 shares at Rs. 250 with a validity of one day. If the order is not executed by the close of that trading session, what happens to it?

  1. It is automatically executed at the closing price
  2. It lapses at the end of the day Correct answer.
  3. It remains open until the investor cancels it
  4. It is converted into a market order for the next day

Explanation

A day order is valid only for the trading session on which it is placed and lapses automatically if unfilled. It does not carry forward, convert into another order type, or get executed at the closing price.

Question 31Basics of Securities Markets

Which of the following best describes a depository participant (DP)?

  1. A company that issues securities to the public
  2. An entity that guarantees settlement of trades on the exchange
  3. An intermediary that opens and maintains a demat account for an investor with a depository Correct answer.
  4. A body that clears and settles trades on behalf of the exchange

Explanation

A DP is an agent of the depository that opens and services a demat account for the investor and holds the securities in electronic form. Clearing and settlement are handled by the clearing corporation, and public issue is a primary market activity of the issuer.

Question 32Basics of Securities Markets

Which of the following is a key feature of a bond?

  1. It entitles the holder to vote at general meetings
  2. It carries an obligation to pay periodic interest and repay principal Correct answer.
  3. It always carries a share of the issuer's profit
  4. It represents ownership in the issuing company

Explanation

A bond is a debt instrument under which the issuer pays interest at stated intervals and returns the principal on maturity. Ownership, voting rights and profit sharing are features of equity shares, not bonds.

Question 33Basics of Securities Markets

Which of the following is a feature of the secondary market?

  1. It issues fresh securities directly to investors
  2. It determines the allotment of shares in an IPO
  3. It guarantees a profit to every investor who trades
  4. It provides liquidity by enabling holders to sell their securities Correct answer.

Explanation

The secondary market lets investors buy and sell securities that are already issued, thereby providing liquidity and price discovery. Fresh issuance and IPO allotment are primary market functions, and no market guarantees profits.

Question 34Basics of Securities Markets

A company issues bonus shares to its existing shareholders in the ratio 1:2. What is the immediate effect on the investor's holding and on the company's capital?

  1. The number of shares rises and the share price is expected to adjust downward proportionally Correct answer.
  2. The investor must pay cash for the additional shares
  3. The number of shares falls and cash is returned to the investor
  4. The number of shares stays the same but the face value doubles

Explanation

A bonus issue capitalises reserves by giving free shares, so the number of shares held rises while the total value of the holding is broadly unchanged, implying a proportional price adjustment. No cash is paid by the investor and the face value per share is not altered.

Question 35Basics of Securities Markets

An investor buys 200 shares at Rs. 150 each and later sells them at Rs. 165 each. Ignoring brokerage and taxes, what is the capital gain?

  1. Rs. 30,000
  2. Rs. 1,500
  3. Rs. 33,000
  4. Rs. 3,000 Correct answer.

Explanation

The gain per share is Rs. 15 (165 minus 150), so on 200 shares the total gain is Rs. 3,000. The other figures misapply the per-share gain or confuse the sale proceeds with the profit.

Question 36Basics of Securities Markets

A stock is quoted at Rs. 400. An investor places a stop-loss sell order with a trigger of Rs. 380 and a limit of Rs. 375. What is the purpose of placing the limit below the trigger?

  1. To ensure the order is executed only at a price no lower than Rs. 375 once the trigger is reached Correct answer.
  2. To convert the order into a market order at the trigger
  3. To prevent the trigger from ever being activated
  4. To guarantee execution at exactly Rs. 380

Explanation

A stop-loss limit order becomes active once the trigger price is reached and then behaves as a limit order, so the limit of Rs. 375 caps the lowest acceptable execution price. It does not guarantee execution, since the market may fall straight through the limit.

Question 37Basics of Securities Markets

Which of the following best describes the function of a stock exchange in the securities market?

  1. It lends money to companies against their shares
  2. It insures investors against losses on their investments
  3. It decides the dividend policy of listed companies
  4. It provides a regulated platform for price discovery and trading of listed securities Correct answer.

Explanation

An exchange provides a regulated, transparent marketplace where buyers and sellers meet, enabling price discovery and transfer of securities. It does not lend, insure investments, or set dividend policy, which is a board decision.

Question 38Basics of Securities Markets

Under the book-building process for an IPO, the price at which the issue is finally made to the public is known as:

  1. The face value
  2. The floor price
  3. The cut-off price
  4. The issue price Correct answer.

Explanation

After the bidding process, the issuer and lead managers determine the issue price at which shares are allotted to successful bidders. The cut-off price is a bidding option, the floor price is the minimum of the price band, and face value is the nominal value of the share.

Question 39Basics of Securities Markets

Which of the following is an example of a derivative contract?

  1. A fixed deposit with a bank
  2. A commercial paper issued by a company
  3. A government security held to maturity
  4. A futures contract on a stock index Correct answer.

Explanation

A derivative is a contract whose value is derived from an underlying asset such as an index, stock or commodity, and a futures contract is a standard example. Fixed deposits, government securities and commercial paper are cash market instruments with their own intrinsic value.

Question 40Basics of Securities Markets

An investor wants to buy shares but has no cash balance in the trading account. Which arrangement allows the broker to fund part of the purchase while the investor contributes the margin?

  1. Bonus issue
  2. Demat transfer
  3. Initial public offering
  4. Margin trading facility Correct answer.

Explanation

Under the margin trading facility, the broker funds part of the trade value and the investor provides the prescribed margin, with the shares serving as collateral. Demat transfer, IPO and bonus issues do not involve broker funding of a secondary market purchase.

Question 41Basics of Securities Markets

Which of the following statements about the Securities Contracts (Regulation) Act, 1956 is correct?

  1. It governs the regulation of banks and their lending
  2. It governs the regulation of commodity futures only
  3. It governs the regulation of insurance companies
  4. It governs the regulation of stock exchanges and contracts in securities Correct answer.

Explanation

The SCRA provides the legal framework for recognition and regulation of stock exchanges and for regulation of contracts in securities. Banking, insurance and commodity futures are governed by other statutes and regulators.

Question 42Basics of Securities Markets

An investor buys a stock at Rs. 500 and sells it at Rs. 560 after holding it for 14 months. For Indian capital gains tax purposes, this gain is treated as:

  1. A dividend income
  2. A long-term capital gain because the holding exceeds 12 months Correct answer.
  3. A speculative business income
  4. A short-term capital gain because the holding is under 24 months

Explanation

For listed equity shares in India, a holding period of more than 12 months makes the gain long-term capital gain. Short-term treatment applies only where the holding is 12 months or less, and sale of shares is not speculative business income or dividend.

Question 43Basics of Securities Markets

Which of the following is the primary role of a stock broker in the securities market?

  1. To act as the ultimate guarantor of settlement
  2. To determine the closing price of a stock
  3. To issue shares to the public
  4. To execute buy and sell orders on behalf of clients on the exchange Correct answer.

Explanation

A broker is a registered intermediary that places and executes orders on the exchange for clients in return for brokerage. Issuing shares is the issuer's function, closing prices emerge from matching on the exchange, and settlement guarantees come from the clearing corporation.

Question 44Basics of Securities Markets

A company declares a dividend of Rs. 4 per share. An investor holding 750 shares receives what amount, before tax?

  1. Rs. 3,000 Correct answer.
  2. Rs. 4,000
  3. Rs. 750
  4. Rs. 300

Explanation

Dividend income equals the dividend per share multiplied by the number of shares held, so 750 shares at Rs. 4 gives Rs. 3,000. The other figures reflect mis-multiplication or using the share count as the dividend.

Question 45Basics of Securities Markets

Which of the following best explains why an investor diversifies a portfolio across sectors?

  1. To guarantee a return above the index
  2. To reduce the impact of any single sector's poor performance on total returns Correct answer.
  3. To avoid paying brokerage on trades
  4. To eliminate all risk from the portfolio

Explanation

Diversification reduces unsystematic risk by spreading exposure, so a decline in one sector affects only part of the portfolio. It cannot eliminate systematic market risk, guarantee outperformance, or remove transaction costs.

Question 46Basics of Securities Markets

An investor observes that the Nifty 50 index fell 2% on a day when a mid-cap index rose 1%. Which interpretation is most reasonable?

  1. Large-cap stocks broadly declined while mid-cap stocks broadly advanced Correct answer.
  2. All stocks in the market fell by 2%
  3. The fall in the Nifty 50 proves the economy is in recession
  4. The exchange suspended trading in mid-cap stocks

Explanation

Each index reflects the performance of its own constituent basket, so a fall in a large-cap index alongside a rise in a mid-cap index means the two segments moved differently. An index move does not describe every stock, does not imply suspension, and cannot by itself establish a recession.

Question 47Basics of Securities Markets

A clearing member fails to meet its obligation to the clearing corporation. Which mechanism is designed to protect the counterparty from loss?

  1. The exchange's listing fee
  2. The issuer's dividend reserve
  3. The settlement guarantee fund maintained by the clearing corporation Correct answer.
  4. The broker's client ledger balance

Explanation

The clearing corporation maintains a settlement guarantee fund, along with margins and other resources, to meet the obligations of a defaulting member and protect the counterparty. Client ledgers, dividend reserves and listing fees are not designed for this purpose.

Question 48Basics of Securities Markets

An investor holds shares worth Rs. 10 lakh and wants to limit losses if the market falls sharply, but does not want to sell the shares now. Which approach is most appropriate?

  1. Buying a put option on the stock or index as a hedge Correct answer.
  2. Buying more of the same stock to average the cost
  3. Buying a call option on the same stock
  4. Selling the shares and holding cash

Explanation

A put option gains value when the underlying falls, so it offsets losses on the held shares while the investor retains ownership and upside. Averaging down increases exposure, selling removes the holding, and a call option gains on a rise rather than protecting against a fall.

Question 49Basics of Securities Markets

An order book shows buy orders at Rs. 100 for 500 shares and sell orders at Rs. 101 for 300 shares. A market buy order for 400 shares arrives. Assuming no other orders, what is the outcome?

  1. The order is rejected because the book is unbalanced
  2. All 400 shares trade at Rs. 100
  3. All 400 shares trade at Rs. 101
  4. 300 shares trade at Rs. 101 and 100 shares remain unfilled at that moment Correct answer.

Explanation

A market buy order matches against the best available sell orders, so it lifts the 300 shares offered at Rs. 101 and the remaining 100 shares stay pending until further sell orders arrive. It cannot trade at Rs. 100 because no seller is offering at that price.

Question 50Basics of Securities Markets

A stock trades at Rs. 200 on the cash market and the one-month futures contract trades at Rs. 206. If the cost of carry for one month is Rs. 4, which statement is most accurate?

  1. The futures price equals the fair value and offers no arbitrage
  2. The futures contract is overpriced relative to cost of carry, suggesting a cash-and-carry arbitrage Correct answer.
  3. The futures price must fall to the spot price immediately
  4. The futures contract is underpriced and suggests a reverse cash-and-carry arbitrage

Explanation

The fair futures price is spot plus cost of carry, i.e., Rs. 204, so the market futures price of Rs. 206 is above fair value. An arbitrageur can buy the stock, carry it, and sell the futures to lock in the difference. The contract does not have to converge instantly; convergence happens as expiry approaches.