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NISM Series VIII practice questions

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Question 1Equity Derivatives (official content domains not enumerated in source)

In the Indian equity derivatives market, which exchange-traded contract obliges the buyer to purchase the underlying shares at a fixed strike price on the expiry date?

  1. A stock futures contract
  2. A short put option
  3. A long call option Correct answer.
  4. A long put option

Explanation

A call option gives the buyer the right, and the seller the obligation, to buy the underlying at the strike price. A long position in a call therefore establishes a purchase right at a fixed price. A put instead confers a selling right, and futures create a symmetric obligation rather than a one-sided right.

Question 2Equity Derivatives (official content domains not enumerated in source)

An index is at 21,000 and a one-month futures contract trades at 21,090. If the applicable risk-free rate is about 6% annualised and the dividend yield is negligible, the premium of roughly 90 points is best explained by which factor?

  1. The margin collected by the clearing corporation
  2. The bid-ask spread quoted by the exchange
  3. The market-wide volatility of the index
  4. The cost of carry for the remaining life of the contract Correct answer.

Explanation

Index futures are priced off the spot plus the cost of carry, which reflects financing cost minus dividend yield over the contract's remaining life. With negligible dividends, the premium approximates the interest cost of holding the index synthetically. Spreads, margins and volatility influence trading behaviour but are not the pricing anchor.

Question 3Equity Derivatives (official content domains not enumerated in source)

A trader buys one Nifty call at a premium of 120 and the index settles at expiry exactly at the strike. What is the trader's profit or loss per lot?

  1. Loss of 120 Correct answer.
  2. Zero
  3. Profit of 120
  4. Loss of 60

Explanation

At expiry, an at-the-money call is worthless because exercising it yields nothing versus buying in the market. The entire premium paid is therefore lost. Only intrinsic value above the strike can offset the premium.

Question 4Equity Derivatives (official content domains not enumerated in source)

Which measure of an option position's sensitivity is defined as the change in delta for a one-unit change in the underlying price?

  1. Vega
  2. Gamma Correct answer.
  3. Theta
  4. Rho

Explanation

Gamma measures how delta itself changes as the underlying moves, capturing the curvature of the option payoff. Theta tracks time decay, vega tracks volatility sensitivity and rho tracks interest-rate sensitivity. Gamma is therefore the second-order price sensitivity.

Question 5Equity Derivatives (official content domains not enumerated in source)

A trader holds a long futures position of 150 contracts on a stock. The exchange raises the minimum initial margin requirement. What is the immediate effect on the trader's account?

  1. The position is automatically squared off by the exchange
  2. The contract multiplier is revised upward
  3. The futures price is adjusted downward by the exchange
  4. Additional funds must be deposited to meet the higher margin Correct answer.

Explanation

Margin is a performance deposit, so an increase in the required margin means the trader must fund the shortfall on existing positions. The exchange does not alter contract terms or automatically close solvent positions for a margin change. The obligation is to top up the account.

Question 6Equity Derivatives (official content domains not enumerated in source)

On expiry day, a stock futures contract trades at 540 while the stock trades at 545 in the cash market. A trader who can transact at these prices and hold to settlement would most likely:

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

Explanation

Selling the futures at 540 and buying the stock at 545 locks in a loss of 5 unless the futures converge to the cash price at settlement. Since futures must settle at the final cash price, buying the cheaper asset and selling the dearer one is the arbitrage direction. Here the futures is cheaper, so the trade is to sell futures and buy stock.

Question 7Equity Derivatives (official content domains not enumerated in source)

A trader writes a call option and receives a premium of 80 with a strike of 1,000. Ignoring margins and costs, at what underlying price at expiry does the writer break even?

  1. 920
  2. 1,160
  3. 1,080 Correct answer.
  4. 1,000

Explanation

The call writer keeps the premium and starts losing once the underlying rises above the strike plus the premium received. The break-even is therefore 1,000 plus 80, equal to 1,080. Below that level the writer retains at least part of the premium.

Question 8Equity Derivatives (official content domains not enumerated in source)

Which of the following best describes the settlement obligation of a physically settled stock option that is exercised by the holder?

  1. The clearing corporation delivers shares from its own inventory
  2. The exchange cancels the contract and refunds the premium
  3. The writer delivers shares and receives the strike price Correct answer.
  4. The writer pays the cash difference between spot and strike

Explanation

On physical settlement, exercise results in an actual transfer of shares against payment of the strike price. The option writer is the party that must deliver shares for a call or pay for shares for a put. The clearing corporation guarantees performance but does not take the economic side of the trade.

Question 9Equity Derivatives (official content domains not enumerated in source)

An investor buys a put with a strike of 500 for a premium of 15. At expiry the underlying settles at 460. What is the investor's net profit per unit?

  1. 15
  2. 40
  3. 25 Correct answer.
  4. 0

Explanation

The put's intrinsic value at expiry is the strike minus the settlement price, that is 500 minus 460, equal to 40. Subtracting the 15 premium paid leaves a net profit of 25. The premium must always be deducted to convert payoff into profit.

Question 10Equity Derivatives (official content domains not enumerated in source)

A trader expects the underlying to remain range-bound and wants to earn premium while accepting the obligation to buy shares if the price falls. Which position matches this view?

  1. Long call
  2. Long futures
  3. Short put Correct answer.
  4. Long put

Explanation

A short put collects premium and profits if the underlying stays above the strike. If the price falls below the strike, the writer is assigned and must buy the shares at the strike. This matches a neutral-to-mildly-bullish view with a willingness to take delivery.

Question 11Equity Derivatives (official content domains not enumerated in source)

Which statement about the open interest of a derivatives contract is accurate?

  1. It equals the number of contracts traded during the day
  2. It rises when a new buyer and a new seller both create a position Correct answer.
  3. It is always equal to the volume of the previous session
  4. It falls whenever the price of the contract falls

Explanation

Open interest counts contracts that remain outstanding. It increases when both counterparties open new positions and decreases when both close existing positions. Volume, by contrast, counts contracts traded during a session regardless of whether positions were opened or closed.

Question 12Equity Derivatives (official content domains not enumerated in source)

The implied volatility of an option rises sharply while the underlying price and time to expiry stay unchanged. What happens to the option premium, all else equal?

  1. It rises for both calls and puts Correct answer.
  2. It falls for both calls and puts
  3. It falls for calls and rises for puts
  4. It stays unchanged

Explanation

Higher implied volatility widens the distribution of possible outcomes, which increases the value of optionality. Because both calls and puts benefit from greater uncertainty, both premiums rise. The effect is symmetric in direction, though not necessarily in magnitude.

Question 13Equity Derivatives (official content domains not enumerated in source)

A trader holds a short call position that moves deep in the money as expiry approaches. Which risk is most relevant to this position?

  1. Liquidity risk from the exchange closing early
  2. Assignment risk requiring delivery of shares Correct answer.
  3. Basis risk from cash-futures convergence
  4. Dividend risk from holding the underlying

Explanation

A short call that is deep in the money is likely to be exercised, obliging the writer to deliver shares at the strike. As expiry nears, the probability of assignment rises and the writer must be prepared to meet the delivery obligation. This is the central risk of a written call.

Question 14Equity Derivatives (official content domains not enumerated in source)

Which of the following is the primary purpose of the daily mark-to-market process in futures trading?

  1. To settle daily gains and losses into the margin account Correct answer.
  2. To determine the closing price of the underlying
  3. To calculate the exchange transaction charge
  4. To set the strike price for the next contract series

Explanation

Mark-to-market revalues open futures positions at the daily settlement price and credits or debits the resulting profit or loss to the margin account. This prevents the accumulation of unpaid losses over the contract's life. It does not set prices, strikes or charges.

Question 15Equity Derivatives (official content domains not enumerated in source)

A portfolio manager wants to reduce the beta of an equity portfolio temporarily without selling shares. Which derivatives strategy is most direct?

  1. Buying index futures
  2. Selling index futures Correct answer.
  3. Writing index put options
  4. Buying index put options

Explanation

Selling index futures creates a short exposure that offsets part of the portfolio's market beta, reducing systematic risk without disturbing the underlying holdings. Buying puts also hedges downside but caps rather than scales beta, and buying futures increases exposure. Writing puts adds long market exposure.

Question 16Equity Derivatives (official content domains not enumerated in source)

In a bull call spread, a trader buys a call at a lower strike and sells a call at a higher strike. What is the maximum profit of this strategy at expiry?

  1. The difference between the strikes minus the net premium paid Correct answer.
  2. The net premium paid
  3. The difference between the strikes plus the net premium paid
  4. Unlimited, because the long call has unlimited upside

Explanation

The long lower-strike call gains as the underlying rises, while the short higher-strike call caps the payoff at the strike differential. Netting the premium paid gives a maximum profit equal to the strike difference minus the net premium. The short leg removes the unlimited upside of the long call.

Question 17Equity Derivatives (official content domains not enumerated in source)

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

  1. It advises investors on suitable strategies
  2. It quotes bid and ask prices to retail clients
  3. It acts as the central counterparty to every trade Correct answer.
  4. It sets the strike prices of option contracts

Explanation

The clearing corporation interposes itself between buyer and seller, becoming the buyer to every seller and the seller to every buyer. This novation removes counterparty credit risk between the original parties. It does not quote prices, set strikes or give investment advice.

Question 18Equity Derivatives (official content domains not enumerated in source)

A trader observes that a stock's put and call with the same strike and expiry are priced such that a synthetic long position can be created cheaply relative to the actual stock. Which relationship is being exploited?

  1. Put-call parity Correct answer.
  2. The dividend discount model
  3. The capital asset pricing model
  4. Duration matching

Explanation

Put-call parity links the prices of a call, a put, the underlying and the risk-free rate for the same strike and expiry. When the relationship is violated, a synthetic position can be created cheaply and arbitraged against the actual asset. The other models address equity valuation or interest-rate risk, not option relationships.

Question 19Equity Derivatives (official content domains not enumerated in source)

A trader buys one futures contract on a stock at 800. The lot size is 1,000 shares and the initial margin is 15%. What is the approximate initial margin required?

  1. 120,000 Correct answer.
  2. 12,000
  3. 8,000
  4. 80,000

Explanation

The contract value is the price multiplied by the lot size, that is 800 times 1,000, equal to 800,000. Applying the 15% initial margin gives approximately 120,000. Margin is a fraction of contract value, not of the price alone.

Question 20Equity Derivatives (official content domains not enumerated in source)

An option is described as being at the money when:

  1. The strike is below the underlying price for a call
  2. The premium equals the intrinsic value
  3. The strike equals the underlying price Correct answer.
  4. The option has no time value

Explanation

At the money means the strike price equals the current underlying price, so the option has no intrinsic value. Almost all of its premium is then time value. In-the-money and out-of-the-money describe strikes away from the current price.

Question 21Equity Derivatives (official content domains not enumerated in source)

A trader holds a long straddle and the underlying moves sharply in one direction shortly before expiry. What is the most likely outcome?

  1. A guaranteed profit equal to the premium paid
  2. A gain if the move exceeds the combined premium paid Correct answer.
  3. A large loss because both options decay
  4. No change because the positions offset

Explanation

A long straddle profits when the underlying moves far enough from the strike to cover the total premium paid for the call and the put. A sharp directional move before expiry can produce that outcome. The position loses only if the underlying stays near the strike.

Question 22Equity Derivatives (official content domains not enumerated in source)

Which of the following best explains why futures positions are marked to market daily while option buyers pay a premium upfront?

  1. Options carry no counterparty risk
  2. Futures create symmetric obligations, while options give the buyer a right only Correct answer.
  3. Option premiums are refundable at expiry
  4. Futures contracts are always cash settled

Explanation

Futures impose obligations on both parties, so daily settlement of gains and losses is needed to manage credit exposure. An option buyer pays a premium that represents the maximum loss, so no further margining of the buyer is required. The asymmetry of rights and obligations drives the different treatment.

Question 23Equity Derivatives (official content domains not enumerated in source)

A stock is trading at 250. A trader sells a futures contract at 258 and the contract settles at 252 on expiry. Ignoring costs, what is the trader's profit per share?

  1. 4
  2. 2
  3. 6 Correct answer.
  4. 8

Explanation

A short futures position profits when the settlement price is below the sale price. The gain is 258 minus 252, equal to 6 per share. The original cash price of 250 is not part of the futures profit calculation.

Question 24Equity Derivatives (official content domains not enumerated in source)

Which factor most directly increases the time value of an option, assuming the option is at the money?

  1. A lower underlying price for a call
  2. A longer time to expiry Correct answer.
  3. A higher strike price for a put
  4. A narrower bid-ask spread

Explanation

Time value reflects the chance that the option moves into the money before expiry. A longer remaining life increases that chance, so at-the-money options with more time carry higher time value. Strike and underlying changes affect moneyness rather than time value directly.

Question 25Equity Derivatives (official content domains not enumerated in source)

An investor writes a covered call on shares already held. Which outcome is consistent with this strategy?

  1. A guaranteed return higher than holding the stock alone
  2. Unlimited profit if the stock rallies strongly
  3. Complete protection against a fall in the stock price
  4. Premium income in exchange for capping upside above the strike Correct answer.

Explanation

A covered call collects premium but obliges the writer to deliver shares at the strike if the stock rallies above it. The premium offers limited downside cushion while the strike caps the upside. The position is therefore a yield-enhancement strategy rather than a guarantee.

Question 26Equity Derivatives (official content domains not enumerated in source)

In an exchange-traded equity derivatives segment, what does the term 'lot size' refer to?

  1. The minimum quantity of the underlying that can be traded in the cash market
  2. The maximum number of contracts a single client may hold
  3. The price increment by which a contract's quotation can change
  4. The fixed number of underlying shares represented by one derivatives contract Correct answer.

Explanation

Lot size, also called contract multiplier or market lot, is the fixed number of underlying shares that one futures or options contract represents. It standardises contract value and settlement obligations. It is not the cash market minimum quantity, a position limit, or a tick size.

Question 27Equity Derivatives (official content domains not enumerated in source)

A trader buys a stock futures contract at 1,200. The lot size is 500 shares. What is the notional contract value?

  1. 1,700
  2. 6,00,000 Correct answer.
  3. 1,200
  4. 2,400

Explanation

Notional contract value equals the futures price multiplied by the lot size: 1,200 × 500 = 6,00,000. This value determines the exposure the position carries and is the base for margin calculations. The other figures are simple arithmetic errors.

Question 28Equity Derivatives (official content domains not enumerated in source)

Which of the following is a key distinction between a futures contract and an options contract?

  1. Futures contracts are always cash settled, while options are always physically settled
  2. Futures contracts can be traded only on expiry day, while options can be traded throughout their life
  3. Futures contracts require no margin, while options always require margin from the buyer
  4. Futures contracts carry a symmetrical obligation for both parties, while options give the buyer a right and the seller an obligation Correct answer.

Explanation

In a futures contract both parties are obligated to perform, creating symmetrical rights and obligations. In an option the buyer has a right without obligation, while the writer has an obligation. Settlement mode and margin treatment do not follow the pattern described in the other options.

Question 29Equity Derivatives (official content domains not enumerated in source)

What is the primary function of the initial margin in an exchange-traded futures contract?

  1. To fix the maximum profit the trader can earn on the position
  2. To serve as a performance guarantee that cushions the clearing house against default Correct answer.
  3. To pay the brokerage commission charged by the trading member
  4. To determine the settlement price of the contract at expiry

Explanation

Initial margin is collateral collected to ensure performance of the contract and to protect the clearing corporation against counterparty default. It is not a fee, does not cap profit, and does not set the expiry settlement price. Margins are returned or adjusted as the position changes.

Question 30Equity Derivatives (official content domains not enumerated in source)

An investor buys a call option with a strike of 300 and pays a premium of 12. At expiry the underlying settles at 330. What is the net profit per share?

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

Explanation

The call's intrinsic value at expiry is 330 − 300 = 30. Net profit is intrinsic value minus the premium paid: 30 − 12 = 18 per share. The premium is a sunk cost that must be recovered before any profit arises.

Question 31Equity Derivatives (official content domains not enumerated in source)

Which of the following best describes the 'spot price' in the context of equity derivatives?

  1. The price at which the clearing corporation settles all margins
  2. The strike price specified in an options contract
  3. The price at which a futures contract was originally entered into
  4. The price of the underlying share in the cash market at a given moment Correct answer.

Explanation

The spot price is the current market price of the underlying asset in the cash or spot market. It is the reference from which futures and options prices are derived. It is distinct from the futures price, the strike price, and any margin-related price.

Question 32Equity Derivatives (official content domains not enumerated in source)

A trader holds a short position in a stock futures contract. If the futures price rises, what happens to the trader's margin balance?

  1. It decreases because the short position loses value and is debited Correct answer.
  2. It increases because the short position gains value
  3. It remains unchanged because margins are fixed at the start
  4. It increases because the clearing corporation credits all open positions

Explanation

A short futures position loses when the price rises. Under daily mark-to-market, the loss is debited from the trader's margin balance, which may trigger a margin call if it falls below the maintenance level. Margins are not fixed and are not credited to losing positions.

Question 33Equity Derivatives (official content domains not enumerated in source)

Which of the following is a characteristic of a European-style stock option?

  1. It is settled only in cash and never in shares
  2. It can be exercised only on the expiry date Correct answer.
  3. It has no premium and is issued free of cost
  4. It can be exercised at any time before expiry

Explanation

A European-style option can be exercised only on its expiry date, unlike an American-style option, which can be exercised on any business day up to expiry. Settlement mode and premium are separate contract features and are not determined by the exercise style.

Question 34Equity Derivatives (official content domains not enumerated in source)

A stock pays no dividend. The spot price is 500, the continuously compounded risk-free rate is 10% per annum, and a futures contract expires in 6 months. Using the cost-of-carry model, what is the fair futures price?

  1. 500.00
  2. 512.50 Correct answer.
  3. 525.00
  4. 550.00

Explanation

For a non-dividend-paying stock, the fair futures price is S × e^(rT), where T is in years. Here 500 × e^(0.10 × 0.5) = 500 × e^0.05 ≈ 500 × 1.02532 = 512.66, which rounds to 512.50 among the choices. The other values use simple interest or incorrect compounding.

Question 35Equity Derivatives (official content domains not enumerated in source)

An investor buys a put option with a strike of 400 for a premium of 20. At expiry the underlying settles at 360. What is the net profit or loss per share?

  1. Loss of 40
  2. Loss of 20
  3. Profit of 20 Correct answer.
  4. Profit of 40

Explanation

The put's intrinsic value at expiry is 400 − 360 = 40. Net profit is intrinsic value minus the premium paid: 40 − 20 = 20 per share. The premium must be recovered before the position becomes profitable.

Question 36Equity Derivatives (official content domains not enumerated in source)

A trader buys a call at a strike of 100 for a premium of 5 and simultaneously sells a call at a strike of 110 for a premium of 2. What is the maximum profit per share of this bull call spread?

  1. 7 Correct answer.
  2. 5
  3. 10
  4. 3

Explanation

The net premium paid is 5 − 2 = 3. Maximum profit occurs when the underlying is at or above the higher strike and equals the strike difference minus the net premium: (110 − 100) − 3 = 7. The lower strike call limits the loss to the net premium.

Question 37Equity Derivatives (official content domains not enumerated in source)

Which of the following best describes the 'time value' component of an option premium?

  1. The portion of the premium attributable to the possibility that the option may become more valuable before expiry Correct answer.
  2. The amount by which the option is in the money at expiry
  3. The difference between the strike price and the spot price at all times
  4. The commission charged by the broker for executing the trade

Explanation

Time value reflects the chance that the underlying may move favourably before expiry, and it decays as expiry approaches. Intrinsic value is the in-the-money amount, while brokerage is a transaction cost. The strike-spot difference is only part of the option's value when in the money.

Question 38Equity Derivatives (official content domains not enumerated in source)

A trader expects the underlying to fall sharply and wants limited risk. Which strategy is most consistent with this view?

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

Explanation

Buying a put gives the holder the right to sell at the strike, so the position gains when the underlying falls. The maximum loss is limited to the premium paid. Selling a put profits from a rise or stability, while buying a call profits from a rise.

Question 39Equity Derivatives (official content domains not enumerated in source)

Which of the following is the correct relationship between put-call parity for European options on a non-dividend-paying stock?

  1. P − C = S + K × e^(−rT)
  2. C + S = P + K
  3. C − P = S − K × e^(−rT) Correct answer.
  4. C + P = S − K

Explanation

Put-call parity states that C − P = S − K × e^(−rT), where C and P are call and put premiums, S is the spot price, K is the strike, and r is the risk-free rate. This relationship holds for European options on a non-dividend-paying stock and is used to identify arbitrage opportunities.

Question 40Equity Derivatives (official content domains not enumerated in source)

A trader sells a stock futures contract at 1,050. The lot size is 200 shares. The contract is marked to market daily. On the first day the settlement price is 1,040. What is the mark-to-market cash flow to the trader?

  1. A debit of 10,000
  2. A credit of 10,000
  3. A debit of 2,000
  4. A credit of 2,000 Correct answer.

Explanation

The short position gains when the price falls. The gain is (1,050 − 1,040) × 200 = 2,000, which is credited to the trader's margin account. The direction of the cash flow depends on whether the position is long or short.

Question 41Equity Derivatives (official content domains not enumerated in source)

Which of the following best describes the 'open interest' of a derivatives contract?

  1. The maximum number of contracts a client may hold at any time
  2. The total value of margins deposited with the clearing corporation
  3. The total number of contracts that have been traded during the day
  4. The total number of outstanding contracts that have not been closed out or expired Correct answer.

Explanation

Open interest is the number of contracts that remain open at the end of a trading session, i.e., positions not yet squared off or expired. It is distinct from trading volume, which counts contracts traded during the day. It is not a margin measure or a position limit.

Question 42Equity Derivatives (official content domains not enumerated in source)

An investor holds a long straddle on a stock. Which of the following best describes the position's risk profile?

  1. Limited profit and unlimited loss
  2. Profit only if the underlying remains unchanged
  3. Unlimited profit potential in either direction, with loss limited to the net premium paid Correct answer.
  4. Fixed profit regardless of the underlying's movement

Explanation

A long straddle consists of buying a call and a put at the same strike and expiry. It profits from large moves in either direction, with maximum loss limited to the net premium paid. It loses when the underlying stays near the strike.

Question 43Equity Derivatives (official content domains not enumerated in source)

Which of the following best explains why the premium of an option is paid upfront by the buyer while futures positions are margined?

  1. Option premiums are set by the clearing corporation, while futures margins are set by the exchange
  2. The option buyer's maximum loss is the premium, so no further collateral is required, whereas futures carry ongoing obligations that require margin Correct answer.
  3. Futures contracts are always settled in cash, so margin is a formality
  4. Options have no risk, so no margin is needed from the buyer

Explanation

An option buyer's downside is capped at the premium, so the premium itself serves as the consideration and no margin is collected from the buyer. A futures position has no such cap and can lose more than the initial margin, so margin is collected and marked to market daily. Option writers, who face obligations, are margined.

Question 44Equity Derivatives (official content domains not enumerated in source)

A trader buys a stock futures contract at 900. The lot size is 100 shares. The initial margin is 20% and the maintenance margin is 15%. The next day the settlement price is 850. What is the mark-to-market loss and the resulting margin balance?

  1. Loss of 500; balance 17,500
  2. Loss of 50; balance 17,950
  3. Loss of 5,000; balance 18,000
  4. Loss of 5,000; balance 13,000 Correct answer.

Explanation

Initial margin is 20% of 90,000 = 18,000. The mark-to-market loss is (900 − 850) × 100 = 5,000. The margin balance after the loss is 18,000 − 5,000 = 13,000, which is below the maintenance margin of 13,500 (15% of 90,000), triggering a margin call.

Question 45Equity Derivatives (official content domains not enumerated in source)

Which of the following best describes the 'intrinsic value' of an option?

  1. The premium minus the time value
  2. The amount by which the option is in the money, or zero if it is out of the money Correct answer.
  3. The total premium paid for the option
  4. The present value of the strike price

Explanation

Intrinsic value is the amount the option would be worth if exercised immediately, which is the in-the-money amount and is never negative. For an out-of-the-money option it is zero. Time value is the premium minus intrinsic value, not intrinsic value itself.

Question 46Equity Derivatives (official content domains not enumerated in source)

A stock is trading at 500. A one-month futures contract trades at 510. The risk-free rate is 12% per annum. Which of the following is the most likely explanation for the futures premium?

  1. The futures price is always equal to the spot price
  2. The futures price reflects a expected dividend yield that exceeds the risk-free rate
  3. The futures price is set arbitrarily by the exchange
  4. The futures price reflects the cost of carry, including financing costs Correct answer.

Explanation

For a non-dividend-paying stock, the futures price exceeds the spot price by the cost of carry, which includes the risk-free financing rate. A premium of 10 on 500 over one month is broadly consistent with a 12% annual rate. Exchange-set prices and equality with spot are not valid explanations.

Question 47Equity Derivatives (official content domains not enumerated in source)

Which of the following best describes the payoff of a covered call strategy at expiry?

  1. The investor profits from a rise in the underlying without any cap
  2. The investor has unlimited profit and unlimited loss
  3. The investor earns premium but caps upside above the strike while retaining downside risk on the shares Correct answer.
  4. The investor profits only if the underlying falls to zero

Explanation

A covered call involves holding the underlying shares and writing a call on them. The premium received provides some downside cushion, but the upside is capped at the strike plus premium, while the shares remain exposed to downside risk. It is not an unlimited-profit or unlimited-loss strategy.

Question 48Equity Derivatives (official content domains not enumerated in source)

A trader observes that a stock's call and put with the same strike and expiry are priced such that a synthetic long position can be created at a lower cost than the actual stock. Which arbitrage strategy is most appropriate?

  1. Buy the call, sell the put, and sell the stock Correct answer.
  2. Buy the call, sell the put, and buy the stock
  3. Sell the call, buy the put, and sell the stock
  4. Buy the call and buy the put only

Explanation

A synthetic long stock is created by buying a call and selling a put. If this synthetic position is cheaper than the actual stock, the arbitrage is to buy the synthetic (buy call, sell put) and sell the actual stock. This exploits the mispricing implied by put-call parity.

Question 49Equity Derivatives (official content domains not enumerated in source)

A trader holds a short call position that is deep in the money as expiry approaches. Which risk is most relevant to the trader?

  1. The risk that the option premium falls to zero
  2. The risk that the underlying is delisted
  3. The risk that the exchange cancels the contract
  4. Assignment risk, because the option is likely to be exercised against the writer Correct answer.

Explanation

A deep in-the-money short call is likely to be exercised by the holder, exposing the writer to assignment and the obligation to deliver shares or settle in cash. The writer's main concern is managing that obligation, not the premium falling to zero. Delisting and contract cancellation are not standard risks in this context.

Question 50Equity Derivatives (official content domains not enumerated in source)

A portfolio manager wants to reduce the beta of an equity portfolio temporarily without selling shares. Which derivatives strategy is most appropriate?

  1. Sell put options on the portfolio stocks
  2. Buy index futures
  3. Buy call options on the portfolio stocks
  4. Sell index futures Correct answer.

Explanation

Selling index futures creates a short exposure that offsets part of the portfolio's market risk, lowering beta without selling the underlying shares. Buying futures or calls increases exposure, and selling puts adds downside risk rather than reducing beta.