Equity Derivatives
What this domain covers
NISM Series VIII tests equity derivatives from contract design through margining, settlement and regulation: forwards vs futures, option payoffs and moneyness, order types, clearing corporation mechanics, SPAN/exposure margins, position limits and STT.
Core rules
- Futures are exchange-traded, standardized and marked to market daily; forwards are OTC and carry counterparty risk.
- All exchange-traded Indian equity options (index and single-stock) are European - exercise only at expiry.
- Index derivatives are cash-settled; single-stock futures and options are physically settled.
- Margin = initial (SPAN + exposure) collected upfront, plus daily MTM; option buyers pay premium only, sellers post margin.
- Clearing corporations novate trades, becoming counterparty to both sides; the Settlement Guarantee Fund backs default.
- Order types include limit, market and stop-loss; F&O stocks carry price bands and dynamic bands.
- Open interest is outstanding contracts, not volume.
- Contract cycle: near, next and far month; lot size set by the exchange.
Worked example
Nifty futures at 24,000; lot 25; initial margin 12% → 24,000 × 25 × 0.12 = Rs 72,000 blocked. Trader buys one futures lot at 24,000 and squares off at 24,150. Gross profit = (150) × 25 = Rs 3,750. Separately, the trader buys a 24,000 call at premium 120 → outlay 120 × 25 = Rs 3,000. At expiry the index is 24,300: intrinsic value 300, payoff 300 × 25 = Rs 7,500, net profit Rs 4,500. Breakeven = 24,000 + 120 = 24,120. If expiry were 23,900 the call expires worthless and the loss is capped at the Rs 3,000 premium.
Traps
- Treating premium as margin or assuming the buyer can lose more than premium.
- Forgetting MTM is daily cash flow on top of initial margin.
- Applying physical settlement to index products or cash settlement to stock derivatives.
- Using American-style exercise for Indian equity options.
- Reading open interest as a direction signal - it is outstanding, not traded, quantity.