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Series I · Practice Set 1

NISM Series I: Currency Derivatives Certification — Practice Set 1 Practice Questions

Original practice set for NISM Series I: Currency Derivatives Certification. Every question below shows the correct answer and a full explanation, so you can read through this set as a study page or attempt it as a timed mock test.

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Practice questions

All 30 questions in Practice Set 1

Read each question, think through your answer, then expand it to check the correct option and explanation.

Forex Markets

Q1. The USD/INR exchange rate in India is expressed as a:

  1. A. Cross rate
  2. B. Direct quote
  3. C. Indirect quote
  4. D. Forward rate
Show correct answer & explanation

Correct answer: B. Direct quote

In India, the USD/INR rate (how many rupees per 1 US dollar) is a Direct Quote because it expresses the price of a foreign currency unit in terms of the domestic currency (Indian Rupee).
Forex Markets

Q2. The largest foreign exchange market in the world by daily trading volume is:

  1. A. New York
  2. B. Tokyo
  3. C. London
  4. D. Singapore
Show correct answer & explanation

Correct answer: C. London

London is the largest foreign exchange trading centre in the world, accounting for approximately 38-40% of global daily FX turnover. It is followed by New York and Singapore.
Forex Markets

Q3. The forex market is primarily a:

  1. A. Exchange-traded market like NSE
  2. B. Over-the-counter (OTC) market
  3. C. Government-regulated fixed market
  4. D. Auction-based market
Show correct answer & explanation

Correct answer: B. Over-the-counter (OTC) market

The global foreign exchange (forex) market is primarily an Over-the-Counter (OTC) market where currencies are traded directly between participants (banks, institutions, brokers) without a centralised exchange.
Forex Markets

Q4. Purchasing Power Parity (PPP) theory states that exchange rates should reflect:

  1. A. Interest rate differentials between countries
  2. B. Price level differences between countries
  3. C. GDP growth rate differences
  4. D. Trade balance differences
Show correct answer & explanation

Correct answer: B. Price level differences between countries

Purchasing Power Parity (PPP) theory states that exchange rates between two countries should equal the ratio of their respective price levels, so that an identical basket of goods costs the same in both countries.
Forex Markets

Q5. Interest Rate Parity (IRP) links exchange rates to:

  1. A. Inflation rates
  2. B. Interest rate differentials between countries
  3. C. GDP growth rates
  4. D. Trade balances
Show correct answer & explanation

Correct answer: B. Interest rate differentials between countries

Interest Rate Parity (IRP) theory states that the forward exchange rate should reflect the interest rate differential between two countries. Higher interest rate currencies trade at a forward discount.
Forex Markets

Q6. FEMA — the primary law governing foreign exchange in India — stands for:

  1. A. Foreign Exchange Management Act
  2. B. Federal Exchange Market Authority
  3. C. Foreign Equity Market Act
  4. D. Financial Exchange Management Authority
Show correct answer & explanation

Correct answer: A. Foreign Exchange Management Act

FEMA stands for Foreign Exchange Management Act, 1999. It replaced the older FERA (Foreign Exchange Regulation Act, 1973) and governs all foreign exchange transactions in India.
Forex Markets

Q7. The RBI's reference rate for USD/INR is used for:

  1. A. Setting bank lending rates
  2. B. Final settlement of currency futures contracts
  3. C. Calculating import duties
  4. D. Determining FDI limits
Show correct answer & explanation

Correct answer: B. Final settlement of currency futures contracts

The RBI's reference rate (FBIL fixing) for USD/INR is used as the final settlement price for currency futures and options contracts traded on Indian exchanges like NSE and BSE.
Currency Futures

Q8. The lot size of USD/INR currency futures contracts on Indian exchanges is:

  1. A. USD 500
  2. B. USD 1,000
  3. C. USD 5,000
  4. D. USD 10,000
Show correct answer & explanation

Correct answer: B. USD 1,000

The standard lot size for USD/INR currency futures contracts on Indian exchanges (NSE/BSE) is USD 1,000 per contract. This was set to make currency futures accessible to retail investors.
Currency Futures

Q9. Currency futures contracts in India are settled by:

  1. A. Physical delivery of the foreign currency
  2. B. Cash settlement in Indian Rupees
  3. C. Physical delivery of gold
  4. D. Settlement in US Dollars
Show correct answer & explanation

Correct answer: B. Cash settlement in Indian Rupees

Currency futures in India are cash-settled in Indian Rupees (INR). The settlement is based on the RBI reference rate (FBIL rate) for the respective currency pair on the expiry date.
Currency Futures

Q10. The expiry of USD/INR currency futures contracts in India is on the:

  1. A. Last Thursday of the month
  2. B. Last business day of the expiry month
  3. C. First business day of next month
  4. D. Second Friday of the month
Show correct answer & explanation

Correct answer: B. Last business day of the expiry month

USD/INR currency futures contracts in India expire on the last business day of the contract month, which is different from equity derivatives that expire on the last Thursday.
Currency Futures

Q11. USD/INR currency futures are traded on which Indian exchanges?

  1. A. NSE only
  2. B. BSE only
  3. C. Both NSE and BSE
  4. D. MCX only
Show correct answer & explanation

Correct answer: C. Both NSE and BSE

USD/INR currency futures are traded on both the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) in India, in their dedicated currency derivatives segments.
Trading and Hedging Strategies

Q12. An Indian exporter expecting to receive USD 1,00,000 in 3 months should hedge by:

  1. A. Buying USD/INR futures
  2. B. Selling USD/INR futures
  3. C. Buying USD/INR call options
  4. D. Doing nothing
Show correct answer & explanation

Correct answer: B. Selling USD/INR futures

An exporter expecting to RECEIVE USD should SELL USD futures to hedge against the risk of INR appreciation (USD depreciation). If USD weakens, the loss on USD receipts is offset by profit on the short USD futures position.
Trading and Hedging Strategies

Q13. An Indian importer who needs to pay USD 1,00,000 in 3 months should hedge by:

  1. A. Selling USD/INR futures
  2. B. Buying USD/INR futures
  3. C. Selling USD/INR put options
  4. D. Doing nothing
Show correct answer & explanation

Correct answer: B. Buying USD/INR futures

An importer who needs to PAY USD should BUY USD futures to hedge against the risk of INR depreciation (USD appreciation). If USD strengthens, the higher import cost is offset by profit on the long USD futures position.
Currency Options

Q14. USD/INR currency options traded on Indian exchanges are of which style?

  1. A. American style — can be exercised anytime
  2. B. European style — exercised only on expiry
  3. C. Bermudan style
  4. D. Asian style
Show correct answer & explanation

Correct answer: B. European style — exercised only on expiry

USD/INR currency options traded on Indian exchanges (NSE/BSE) are European-style options, meaning they can only be exercised on the expiry date and not before, unlike American-style options.
Currency Options

Q15. A USD call option gives the holder the right to:

  1. A. Sell USD at the strike price
  2. B. Buy USD at the strike price
  3. C. Both buy and sell USD
  4. D. Hold USD without any obligation
Show correct answer & explanation

Correct answer: B. Buy USD at the strike price

A USD call option gives the holder the right (but not the obligation) to BUY USD at the agreed strike price on the expiry date. An Indian importer might buy a USD call to protect against USD appreciation.
Regulations

Q16. Currency derivatives in India are jointly regulated by:

  1. A. SEBI alone
  2. B. RBI alone
  3. C. Both SEBI and RBI
  4. D. Ministry of Finance alone
Show correct answer & explanation

Correct answer: C. Both SEBI and RBI

Currency derivatives in India are jointly regulated: SEBI regulates the exchange-traded currency derivatives market (trading, intermediaries), while RBI regulates the underlying foreign exchange market and sets overall policy.
Regulations

Q17. Which persons are eligible to trade in currency futures in India?

  1. A. Only large corporations
  2. B. Only foreign investors
  3. C. Residents of India and certain non-residents (subject to RBI guidelines)
  4. D. Only banks and financial institutions
Show correct answer & explanation

Correct answer: C. Residents of India and certain non-residents (subject to RBI guidelines)

Residents of India can trade in currency futures. Certain non-residents are also permitted subject to RBI guidelines. Individual retail investors, corporates, and institutional investors all have access, subject to position limits.
Forex Markets

Q18. A spot forex transaction settles in:

  1. A. Same day (T+0)
  2. B. 1 business day (T+1)
  3. C. 2 business days (T+2)
  4. D. 1 week (T+5)
Show correct answer & explanation

Correct answer: C. 2 business days (T+2)

Standard spot forex transactions settle in 2 business days (T+2) in the international interbank market. This is the most common forex settlement convention. Some currency pairs may settle on T+1.
Forex Markets

Q19. The 'spread' in forex trading refers to:

  1. A. Total profit earned
  2. B. Difference between the bid and ask price
  3. C. Commission paid to broker
  4. D. Forward premium or discount
Show correct answer & explanation

Correct answer: B. Difference between the bid and ask price

The bid-ask spread in forex is the difference between the price at which a market maker will buy (bid) and the price at which it will sell (ask) a currency. It represents the market maker's profit and the trader's transaction cost.
Currency Futures

Q20. The EUR/INR currency futures contract lot size on Indian exchanges is:

  1. A. EUR 500
  2. B. EUR 1,000
  3. C. EUR 5,000
  4. D. EUR 10,000
Show correct answer & explanation

Correct answer: B. EUR 1,000

The EUR/INR currency futures contract has a standard lot size of EUR 1,000 on Indian exchanges (NSE/BSE), similar to the USD/INR contract size of USD 1,000.
Trading and Hedging Strategies

Q21. Cross-currency futures on Indian exchanges include which of the following pairs?

  1. A. USD/EUR only
  2. B. EUR/USD only
  3. C. EUR/INR, GBP/INR and JPY/INR
  4. D. Only USD/INR
Show correct answer & explanation

Correct answer: C. EUR/INR, GBP/INR and JPY/INR

Cross-currency futures on Indian exchanges include EUR/INR (Euro to Rupee), GBP/INR (British Pound to Rupee), and JPY/INR (Japanese Yen to Rupee), in addition to the main USD/INR contract.
Forex Markets

Q22. In the forex market, a quote of USD/INR = 83.50 means:

  1. A. 1 INR buys 83.50 USD
  2. B. 1 USD buys 83.50 INR
  3. C. 1 USD sells for 83.50 INR on forward date
  4. D. The exchange rate is fixed at 83.50
Show correct answer & explanation

Correct answer: B. 1 USD buys 83.50 INR

A USD/INR quote of 83.50 means 1 US Dollar can be exchanged for 83.50 Indian Rupees in the spot market. This is a direct quote from India's perspective — expressing domestic currency per unit of foreign currency.
Currency Futures

Q23. Forward premium on a currency means:

  1. A. The forward rate is lower than the spot rate
  2. B. The forward rate is higher than the spot rate
  3. C. The forward rate equals the spot rate
  4. D. The currency is devaluing
Show correct answer & explanation

Correct answer: B. The forward rate is higher than the spot rate

A currency trades at a forward premium when its forward exchange rate is HIGHER than the current spot rate. For USD/INR, a forward premium on USD means USD is expected to strengthen (INR to weaken).
Regulations

Q24. Currency futures were first introduced in India in:

  1. A. 2004
  2. B. 2006
  3. C. 2008
  4. D. 2010
Show correct answer & explanation

Correct answer: C. 2008

Currency futures were introduced in India in August 2008 on the National Stock Exchange (NSE), following the recommendations of the RBI-SEBI Standing Technical Committee. USD/INR was the first pair launched.
Forex Markets

Q25. SOFR replaced LIBOR as the benchmark rate for USD transactions. SOFR stands for:

  1. A. Secured Overnight Financing Rate
  2. B. Standard Overnight Fixed Rate
  3. C. State Overnight Financial Rate
  4. D. Secured Official Funding Rate
Show correct answer & explanation

Correct answer: A. Secured Overnight Financing Rate

SOFR stands for Secured Overnight Financing Rate. It replaced LIBOR (London Interbank Offered Rate) as the benchmark rate for USD-denominated financial contracts and is published by the Federal Reserve Bank of New York.
Trading and Hedging Strategies

Q26. Carry trade in forex involves:

  1. A. Hedging currency exposure fully
  2. B. Borrowing in a low interest rate currency and investing in a high interest rate currency
  3. C. Buying spot and selling forward simultaneously
  4. D. Only investing in stable currencies
Show correct answer & explanation

Correct answer: B. Borrowing in a low interest rate currency and investing in a high interest rate currency

A carry trade involves borrowing in a currency with a low interest rate and investing those funds in a currency with a higher interest rate, profiting from the interest rate differential, while bearing exchange rate risk.
Forex Markets

Q27. MIBOR — used in Indian money markets — stands for:

  1. A. Mumbai Interbank Bid-Offer Rate
  2. B. Mumbai Interbank Offered Rate
  3. C. Market Interbank Overnight Rate
  4. D. Monetary Interbank Overnight Rate
Show correct answer & explanation

Correct answer: B. Mumbai Interbank Offered Rate

MIBOR stands for Mumbai Interbank Offered Rate. It is the benchmark interest rate at which banks can borrow funds from other banks in the Indian interbank market. It is published by FBIL (Financial Benchmarks India Pvt. Ltd.).
Currency Options

Q28. An Indian exporter wanting to protect against USD depreciation while keeping upside benefit would buy a:

  1. A. USD call option
  2. B. USD put option
  3. C. USD futures contract
  4. D. EUR/INR futures
Show correct answer & explanation

Correct answer: B. USD put option

An exporter expecting USD receipts should buy a USD put option (right to SELL USD at the strike price). If USD depreciates, they exercise the put option. If USD appreciates, they let the option expire and benefit from the higher rate.
Regulations

Q29. Exchange Earners' Foreign Currency (EEFC) accounts are maintained by:

  1. A. RBI only
  2. B. Exporters to hold foreign exchange earnings
  3. C. All retail investors
  4. D. Foreign banks only
Show correct answer & explanation

Correct answer: B. Exporters to hold foreign exchange earnings

EEFC (Exchange Earners' Foreign Currency) accounts are maintained by exporters and other exchange earners to hold a portion of their foreign exchange earnings in foreign currency, avoiding conversion to INR immediately.
Trading and Hedging Strategies

Q30. A natural hedge for a company with both USD revenues and USD expenses is:

  1. A. Buying USD futures
  2. B. Selling USD futures
  3. C. Matching USD inflows with USD outflows
  4. D. Taking a loan in USD
Show correct answer & explanation

Correct answer: C. Matching USD inflows with USD outflows

A natural hedge occurs when a company's foreign currency revenues (USD inflows) are used to offset foreign currency expenses (USD outflows). By matching USD revenues with USD expenses, the net currency exposure is minimised without using financial instruments.

How to use this set

Work through the questions in order without expanding the answers first, exactly as you would in the real Series I exam. Once you have picked an option, expand the answer to confirm whether you were right and read the explanation, even for questions you answered correctly, since the reasoning behind each option is where most of the learning happens.

If you get a question wrong, note the topic tag above the question and revisit that topic in the Series I exam page before your next attempt. When you are ready for exam-condition practice, use the timed mock test above; it shuffles these questions, applies the negative marking rule, and gives you a scored review at the end.