NISM Series VIII key terms

A financial contract whose value is derived from an underlying asset such as a stock, index, currency, or commodity, rather than being a claim on the asset itself.

The reference asset or variable on which a derivative's price depends, such as a stock, an index level, a currency rate, or a commodity price.

A standardized exchange-traded agreement to buy or sell a specified quantity of an underlying at a fixed price on a future date, settled through a clearing corporation.

A customized, over-the-counter agreement between two parties to trade an underlying at a set price on a future date, carrying counterparty risk because it is not exchange-cleared.

A contract giving the buyer a right, but not an obligation, to buy or sell an underlying at a stated price on or before expiry, in return for a premium paid upfront.

An option that gives its buyer the right to buy the underlying at the strike price, and profits when the underlying rises above strike plus premium paid.

An option that gives its buyer the right to sell the underlying at the strike price, and gains value when the underlying falls below strike minus premium paid.

The fixed price at which an option holder may buy or sell the underlying, agreed at contract inception and used to determine whether the option is in, at, or out of the money.

The price an option buyer pays the seller for the rights conveyed by the contract, made up of intrinsic value and time value.

The portion of an option's premium representing immediate exercise benefit, calculated as the amount by which the underlying exceeds strike for calls, or strike exceeds underlying for puts.

The part of an option premium above intrinsic value, reflecting the chance that the underlying moves favourably before expiry; it erodes as expiry approaches.

A description of an option's position relative to its strike: in the money when exercise would pay, at the money when underlying equals strike, out of the money otherwise.

An option style allowing exercise only on the expiry date, which simplifies valuation and is the standard style for index options traded on Indian exchanges.

An option style permitting exercise on any trading day up to and including expiry, giving the holder more flexibility and typically a higher premium than a European option.

The last date on which an option may be exercised or a futures contract ceases trading and is settled, after which the contract no longer exists.

The standardized minimum quantity of the underlying specified in one exchange-traded derivative contract, set by the exchange based on the underlying's price.

The exchange-defined terms of a derivative contract, covering underlying, lot size, expiry, tick size, settlement method, and margin requirements.

The minimum permissible price movement for quoting a derivative contract on the exchange, set by the exchange to standardize price increments.

The upfront collateral a clearing member or client must deposit before taking a futures position, sized to cover potential losses over a defined adverse price move.

The daily process of revaluing open futures positions at the settlement price and crediting or debiting the resulting profit or loss to the trader's margin account.

The minimum margin balance a trader must keep in the account; a shortfall triggers a margin call requiring restoration to the initial margin level.

A demand from the broker or clearing member for additional funds after the account balance falls below the maintenance margin because of adverse price movement.

The price fixed by the exchange at the end of each trading day, used to compute daily mark-to-market gains and losses on open futures positions.

The process of closing out a futures or cash-settled option contract at expiry, either by delivery of the underlying or by cash payment of the final difference.

A settlement method where no asset changes hands; instead the difference between the final settlement price and the contract price is paid in cash.

The entity that guarantees performance of exchange-traded derivative contracts, acting as counterparty to both sides and managing default risk through margins and a settlement guarantee fund.

The risk that the other party to a contract fails to honour its obligation, which is significant in over-the-counter forwards but largely removed by exchange clearing.

Using derivatives to offset or reduce exposure to adverse price movements in an existing position, such as a fund manager selling index futures against a stock portfolio.

Taking derivative positions to profit from anticipated price movements without an offsetting underlying exposure, accepting higher risk in exchange for potential gains.

Simultaneously buying and selling related instruments to lock in a riskless profit from price discrepancies, such as a mispriced futures contract versus the cash market.

The ability to control a large notional exposure with a small margin or premium outlay, which magnifies both percentage gains and percentage losses.

The net expense of holding the underlying until the futures expiry, comprising financing cost plus storage and insurance, less any dividends or income received.

The theoretical fair value of a futures contract, computed as spot price compounded at the cost of carry to expiry, adjusted for dividends or income on the underlying.

The current market price at which the underlying asset itself can be bought or sold for immediate delivery in the cash market.

The difference between the spot price of the underlying and the price of a related futures contract, which narrows towards zero as expiry approaches.

The risk that the basis changes unexpectedly, so a hedge using futures does not perfectly offset the cash position because prices do not move in lockstep.

The total number of derivative contracts outstanding and not yet closed out or settled, used as an indicator of market participation and liquidity.

The number of contracts traded during a specified period such as a trading session, measuring activity rather than the number of positions still outstanding.

The ease with which a derivative position can be entered or exited at a fair price without moving the market, reflected in tight spreads and deep order books.

The gap between the highest price a buyer will pay and the lowest price a seller will accept, representing an implicit transaction cost for traders.

Sensitivity measures of an option's price to changes in underlying price, time, volatility, and interest rates, named delta, gamma, theta, vega, and rho.

The change in an option's premium for a one-unit change in the underlying price, ranging from zero to one for calls and zero to minus one for puts.

The rate at which an option's delta changes as the underlying price moves, highest for at-the-money options near expiry and indicating convexity of the payoff.

The rate at which an option's premium declines purely with the passage of time, accelerating as expiry nears and typically negative for long option positions.

The change in an option's premium for a one percentage point change in implied volatility, showing how sensitive the price is to shifts in expected future volatility.

The volatility level that, when fed into an option pricing model, reproduces the option's observed market premium, reflecting the market's expectation of future price swings.

A measure of how much the underlying's price has actually fluctuated over a past period, computed from the standard deviation of its returns.

A no-arbitrage relationship linking European call and put prices with the same strike and expiry, stating that call minus put equals underlying price minus the discounted strike.

The profit or loss at expiry from an option position, calculated as the difference between the underlying's expiry price and the strike, adjusted for premium paid or received.

A strategy where the investor holds the underlying and sells a call against it, earning premium income while capping upside above the strike price.

A strategy of buying a put while holding the underlying, which insures the portfolio against falls below the strike at the cost of the premium paid.

An options position combining two or more contracts of the same class with different strikes or expiries, typically reducing cost and limiting both profit and loss.

A strategy of buying a call and a put with the same strike and expiry, profiting from a large move in either direction at the cost of two premiums.

The total face value a derivative contract controls, calculated as contract price or underlying level multiplied by lot size, used to size exposure and margin.

An option whose underlying is a stock market index rather than a single stock, cash-settled and typically European style on Indian exchanges.

An exchange-imposed ceiling or floor on how far a derivative's price may move during a session, halting trading briefly when breached to contain volatility.

A regulatory cap on the maximum number of open contracts a client or member may hold in a given underlying, intended to prevent concentration and manipulation.