NISM Series VIII cheat sheet

A forward is a bilateral OTC contract to buy/sell an asset at a fixed price on a future date; payoff at maturity for the long = Spot − Forward price, and the contract carries counterparty credit risk.

A futures contract is exchange-traded and standardized; the exchange clearing corporation becomes the counterparty, daily mark-to-market (MTM) settlement occurs, and margins (initial and maintenance) are collected.

Cost-of-carry (fair futures) pricing: F = S × e^((r − q + c − y) × T) for continuous rates; in discrete form F = S × (1 + r − q)^T, where q = dividend yield, c = storage, y = convenience yield.

Index futures arbitrage band: no-arbitrage futures price = S × e^((r − d) × T), where d is the continuous dividend yield on the index; a deviation beyond transaction costs permits cash-and-carry (futures rich) or reverse cash-and-carry (futures cheap) arbitrage.

Option buyer (holder) pays premium, has a right and no obligation; option writer receives premium and bears the obligation. Long call payoff = max(S − K, 0); long put payoff = max(K − S, 0); net of premium, subtract the premium paid from the long position.

Put-call parity for European options on non-dividend-paying stock: C + K × e^(−rT) = P + S. With dividends, replace S by S × e^(−qT) or S − PV(dividends).

Moneyness: call is ITM when S > K, ATM when S = K, OTM when S < K; put is ITM when S < K, OTM when S > K. Intrinsic value of call = max(S − K, 0); of put = max(K − S, 0); time value = premium − intrinsic value.

Option premium = intrinsic value + time value. Time value is highest for ATM options and decays to zero at expiry; decay accelerates in the final weeks (theta is negative for long options).

A swap exchanges cash-flow streams; in an equity index swap one leg pays a fixed or floating rate and the other pays the total return on an equity index, with periodic net settlement.

Delta = change in option price per ₹1 change in underlying; call delta ranges 0 to +1, put delta −1 to 0. Position delta of a portfolio = Σ (delta × quantity × lot size).

Gamma = change in delta per unit change in underlying; gamma is largest for ATM near-expiry options and is positive for long options, negative for short options.

Theta = change in option value per day passing, holding all else constant; negative for long options, positive for short options. Vega = change in option value per 1% change in implied volatility; long options have positive vega.

Rho = sensitivity of option value to a 1% change in the risk-free rate; calls have positive rho, puts negative rho; impact is modest for short-dated options.

Covered call: long stock + short call; caps upside at strike plus premium, earns premium income. Protective put: long stock + long put; acts as insurance with a floor at strike minus premium paid.

Bull call spread: buy lower-strike call, sell higher-strike call, net debit, limited profit and loss. Bear put spread: buy higher-strike put, sell lower-strike put, net debit.

Straddle: buy call and put at same strike and expiry; profits from large moves either way, loses if price stays near strike; maximum loss = total premium paid. Strangle: buy OTM call and OTM put, cheaper than straddle.

Short straddle/strangle collects premium but carries unlimited (straddle) or large (strangle) risk; margin is required. Butterfly spread: buy one low-strike call, sell two ATM calls, buy one high-strike call, limited risk/reward.

Implied volatility is the volatility that equates the Black-Scholes model price to the observed market price; higher IV raises both call and put premiums. Volatility smile/skew describes IV varying with strike.

SEBI regulates the securities market; derivatives trading on Indian exchanges is governed by SEBI (Stock Exchanges and Clearing Corporations) Regulations and exchange bye-laws. NISM Series VIII is the Securities Operations and Risk Management certification, not an equity-derivatives-specific certification.

Futures and options on Indian indices and stocks are cash-settled (index) or physically settled (single-stock derivatives, since October 2019); stock derivatives are settled by delivery of shares.

Margins in Indian derivatives: initial margin (SPAN + exposure margin), and mark-to-market margin collected daily. Maintenance margin and variation margin concepts apply to futures.

Contract specifications: lot size, tick size, strike price intervals, expiry day (historically last Thursday of the month, now Thursday for NSE), and final settlement price (e.g., average of the underlying over the last 30 minutes for index futures).

Clearing corporation novates trades, becomes counterparty to both sides, nets positions, and manages default via the Settlement Guarantee Fund and clearing member margins.

Position limits: client-level, trading-member-level, and FII/FPI-level limits on open interest in index and stock derivatives, monitored by the exchange.

Arbitrage and hedging: cash-futures arbitrage, calendar spreads, and hedging a portfolio with index futures (hedge ratio = portfolio beta × portfolio value ÷ (futures price × lot size)).

Mark-to-market for futures: daily profit/loss = (settlement price today − previous settlement price) × lot size × number of contracts, credited/debited to the margin account.

Risk management: value at risk (VaR) with a confidence level and horizon; stress testing; margining based on worst-case portfolio loss over a one-day/two-day horizon.

Trade lifecycle: order capture → execution → trade confirmation → clearing → settlement; back-office functions include trade capture, confirmation, reconciliation, margin monitoring, and regulatory reporting.

Settlement cycle for Indian cash equities is T+1 (rolling settlement); derivatives are cash-settled for index and physically settled for stock derivatives, with pay-in/pay-out on the settlement day.

Corporate actions affecting derivatives positions: dividends, bonus issues, stock splits, and rights issues require adjustment of strike prices and lot sizes by the exchange; open positions are adjusted, not cancelled.

Client margin collection: SEBI mandates upfront margin collection from clients (at least the initial margin) and segregation of client funds from proprietary funds; commingling is prohibited.

KYC and client onboarding: PAN, address proof, bank details, risk profiling, and periodic re-KYC; UCC (Unique Client Code) assigned per client per exchange.

Record-keeping: exchanges/brokers must maintain trade records, order logs, and margin records; SEBI-prescribed retention (typically 5–8 years) applies.

Grievance redressal: SEBI SCORES platform, exchange investor grievance cells, and arbitration for disputes between clients and members.

Operational risk controls: maker-checker on payments, reconciliation of margin and collateral, monitoring of margin shortfalls, and exception reporting.

Regulatory reporting: daily margin reporting, large open position reporting, and client-level position reporting to exchanges/clearing corporations.