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Series VIII · Practice Set 1

NISM Series VIII: Equity Derivatives Certification — Practice Set 1 Practice Questions

Original practice set for NISM Series VIII: Equity 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 40 questions in Practice Set 1

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

Basics of Derivatives

Q1. A derivative is a financial instrument whose value is derived from:

  1. A. Company earnings directly
  2. B. An underlying asset, index, or rate
  3. C. Government policies alone
  4. D. Interest rates only
Show correct answer & explanation

Correct answer: B. An underlying asset, index, or rate

A derivative is a financial contract whose value depends on the performance of an underlying asset, index, or rate. Common underlying assets include stocks, indices, commodities, currencies, and interest rates.
Basics of Derivatives

Q2. Which of the following is NOT a type of derivative?

  1. A. Futures
  2. B. Options
  3. C. Swaps
  4. D. Debentures
Show correct answer & explanation

Correct answer: D. Debentures

Debentures are debt instruments, not derivatives. Futures, options, and swaps are all types of derivative contracts. Forwards and warrants are also types of derivatives.
Basics of Derivatives

Q3. Open Interest (OI) in derivatives markets refers to:

  1. A. Total trading volume for the day
  2. B. Total number of outstanding open contracts
  3. C. Profit on open positions
  4. D. Interest earned on margin deposits
Show correct answer & explanation

Correct answer: B. Total number of outstanding open contracts

Open Interest (OI) is the total number of outstanding derivative contracts that have not been settled or closed. It increases when new contracts are created and decreases when contracts are squared off or expire.
Basics of Derivatives

Q4. Contango in futures market refers to a situation where:

  1. A. Futures price is less than spot price
  2. B. Futures price equals spot price
  3. C. Futures price is greater than spot price
  4. D. Spot price is unavailable
Show correct answer & explanation

Correct answer: C. Futures price is greater than spot price

Contango is a market condition where futures prices are higher than the current spot price. This is the normal situation due to the cost of carry (financing costs, storage costs). Futures price converges to spot at expiry.
Futures Contracts

Q5. In a futures contract, the obligation to buy or sell is:

  1. A. Only on the buyer
  2. B. Only on the seller
  3. C. On both buyer and seller equally
  4. D. Optional for both parties
Show correct answer & explanation

Correct answer: C. On both buyer and seller equally

In a futures contract, BOTH the buyer and seller are legally obligated to fulfill the contract on the expiry date. This distinguishes futures from options, where only the option seller (writer) has an obligation.
Futures Contracts

Q6. Mark-to-Market (MTM) in futures trading refers to:

  1. A. Setting the futures price for the day
  2. B. Daily settlement of gains and losses to trader accounts
  3. C. Monthly profit calculation
  4. D. Annual audit of futures trades
Show correct answer & explanation

Correct answer: B. Daily settlement of gains and losses to trader accounts

Mark-to-Market (MTM) is the daily settlement process in futures trading where the difference between today's settlement price and previous day's settlement price is credited or debited to the trader's margin account.
Futures Contracts

Q7. Initial Margin in futures trading is:

  1. A. Profit earned on the trade
  2. B. Upfront deposit required before entering a futures position
  3. C. Commission paid to the broker
  4. D. Tax on futures profits
Show correct answer & explanation

Correct answer: B. Upfront deposit required before entering a futures position

Initial margin is the minimum upfront deposit required by the exchange before entering into a futures contract. It serves as collateral to ensure contract performance and covers potential losses from adverse price movements.
Futures Contracts

Q8. Basis in futures trading is calculated as:

  1. A. Futures price minus spot price
  2. B. Spot price minus futures price
  3. C. Initial margin minus MTM loss
  4. D. Settlement price minus strike price
Show correct answer & explanation

Correct answer: B. Spot price minus futures price

Basis = Spot Price - Futures Price. In contango (normal) markets, futures price > spot price, so basis is negative. Basis converges to zero as the futures contract approaches its expiry date.
Futures Contracts

Q9. Nifty 50 index futures are settled by:

  1. A. Physical delivery of all 50 stocks
  2. B. Cash settlement in Indian Rupees
  3. C. Delivery of gold as underlying
  4. D. Settlement in US Dollars
Show correct answer & explanation

Correct answer: B. Cash settlement in Indian Rupees

Nifty 50 index futures are cash-settled as it is not possible to physically deliver an index. Settlement is based on the cash difference between the futures price and the final settlement price (closing value of Nifty 50).
Futures Contracts

Q10. Cost of Carry model for futures pricing: Futures price equals:

  1. A. Spot price minus dividends
  2. B. Spot price × e^(risk-free rate × time) adjusted for dividends
  3. C. Spot price only
  4. D. Expected future spot price
Show correct answer & explanation

Correct answer: B. Spot price × e^(risk-free rate × time) adjusted for dividends

According to the Cost of Carry model: F = S × e^(r-d)×t where S = spot price, r = risk-free rate, d = dividend yield, t = time to expiry. Simply: Futures Price ≈ Spot Price + Financing cost - Expected Dividends.
Options Contracts

Q11. A Call option gives the buyer the right to:

  1. A. Sell the underlying asset at the strike price
  2. B. Buy the underlying asset at the strike price
  3. C. Both buy and sell the underlying
  4. D. Neither buy nor sell — it is just information
Show correct answer & explanation

Correct answer: B. Buy the underlying asset at the strike price

A Call option gives the buyer the right, but NOT the obligation, to buy the underlying asset at the agreed strike price on or before the expiry date. The seller (writer) is obligated to sell if the buyer exercises.
Options Contracts

Q12. A Put option gives the buyer the right to:

  1. A. Buy the underlying asset at the strike price
  2. B. Sell the underlying asset at the strike price
  3. C. Swap the underlying asset
  4. D. Hold the underlying asset forever
Show correct answer & explanation

Correct answer: B. Sell the underlying asset at the strike price

A Put option gives the buyer the right, but NOT the obligation, to sell the underlying asset at the agreed strike price on or before the expiry date. It provides protection against falling prices.
Options Contracts

Q13. The price paid by the option buyer to the option seller is called:

  1. A. Strike price
  2. B. Exercise price
  3. C. Premium
  4. D. Margin deposit
Show correct answer & explanation

Correct answer: C. Premium

The premium is the price paid by the option buyer to the option seller (writer) for acquiring the rights granted by the option contract. It is the cost of the option and represents the maximum loss for the buyer.
Options Contracts

Q14. A call option is 'In-the-Money' (ITM) when:

  1. A. Strike price is above current market price
  2. B. Strike price equals current market price
  3. C. Strike price is below current market price
  4. D. The option has expired
Show correct answer & explanation

Correct answer: C. Strike price is below current market price

A call option is In-the-Money (ITM) when the strike price is BELOW the current market price of the underlying. Exercising this call option would be profitable (before accounting for premium paid).
Options Contracts

Q15. The maximum loss for a call option buyer is limited to:

  1. A. Unlimited loss
  2. B. The strike price
  3. C. The premium paid
  4. D. The initial margin
Show correct answer & explanation

Correct answer: C. The premium paid

The maximum loss for a call option buyer is limited to the premium paid for the option. If the underlying price falls below the strike price at expiry, the option expires worthless and the buyer loses only the premium.
Options Contracts

Q16. An American option can be exercised:

  1. A. Only on the expiry date
  2. B. Any time before or on the expiry date
  3. C. Only on Mondays
  4. D. Only in the last week
Show correct answer & explanation

Correct answer: B. Any time before or on the expiry date

An American-style option can be exercised at any time before or on the expiry date, giving the holder more flexibility. In India, stock options are American style while index options (Nifty/Sensex) are European style.
Options Contracts

Q17. Delta of a Call option ranges between:

  1. A. -1 to 0
  2. B. 0 to 1
  3. C. -1 to 1
  4. D. 0 to infinity
Show correct answer & explanation

Correct answer: B. 0 to 1

Delta of a call option ranges from 0 to +1. A delta of 0.5 means the call option price will increase by Rs. 0.50 for every Rs. 1 increase in the underlying price. Deep ITM calls have delta close to 1.
Options Contracts

Q18. Theta in options measures:

  1. A. Price sensitivity to the underlying
  2. B. Time decay of option premium
  3. C. Volatility sensitivity of option price
  4. D. Interest rate sensitivity
Show correct answer & explanation

Correct answer: B. Time decay of option premium

Theta measures the rate at which an option's premium decreases with the passage of time, all else remaining constant. It is called 'time decay'. Options lose value as expiry approaches, benefiting option sellers.
Options Contracts

Q19. Vega in options measures sensitivity to:

  1. A. Time decay
  2. B. Underlying price change
  3. C. Changes in implied volatility
  4. D. Interest rate change
Show correct answer & explanation

Correct answer: C. Changes in implied volatility

Vega measures the sensitivity of an option's price to changes in the implied volatility of the underlying asset. Higher Vega means the option price is more sensitive to volatility changes. Long options have positive Vega.
Options Contracts

Q20. Implied Volatility (IV) in options represents:

  1. A. Historical price volatility over past 1 year
  2. B. Market's expectation of future volatility derived from option prices
  3. C. Actual current volatility of the stock
  4. D. Volatility of the benchmark index
Show correct answer & explanation

Correct answer: B. Market's expectation of future volatility derived from option prices

Implied Volatility (IV) is derived from the option's market price using an options pricing model (like Black-Scholes). It represents the market's consensus expectation of the underlying asset's future volatility.
Trading Strategies

Q21. A Bull Call Spread involves:

  1. A. Buying a higher strike call and selling a lower strike call
  2. B. Buying a lower strike call and selling a higher strike call
  3. C. Buying two call options at the same strike
  4. D. Selling two put options at different strikes
Show correct answer & explanation

Correct answer: B. Buying a lower strike call and selling a higher strike call

A Bull Call Spread involves buying a call at a lower strike price and simultaneously selling a call at a higher strike price with the same expiry. It limits both the maximum profit and maximum loss. Used when moderate bullish outlook.
Trading Strategies

Q22. A Straddle strategy involves:

  1. A. Buying call and put at the same strike and expiry
  2. B. Buying call and put at different strike prices
  3. C. Only buying call options
  4. D. Only buying put options
Show correct answer & explanation

Correct answer: A. Buying call and put at the same strike and expiry

A Long Straddle involves buying both a call and a put option at the SAME strike price and expiry. It profits from significant price movement in either direction and is used when high volatility is expected.
Trading Strategies

Q23. A Covered Call strategy involves:

  1. A. Buying stock and buying call option
  2. B. Selling stock and selling call option
  3. C. Owning stock and selling a call option on same stock
  4. D. Buying stock and buying put option
Show correct answer & explanation

Correct answer: C. Owning stock and selling a call option on same stock

A Covered Call involves holding a long position in a stock and simultaneously selling (writing) a call option on the same stock. It generates premium income but caps the upside potential of the stock position.
Trading Strategies

Q24. Hedging using futures is primarily done to:

  1. A. Maximise profits
  2. B. Reduce or eliminate price risk on an existing position
  3. C. Speculate on price movements
  4. D. Generate arbitrage profits from price differences
Show correct answer & explanation

Correct answer: B. Reduce or eliminate price risk on an existing position

Hedging is a risk management strategy where futures contracts are used to offset potential losses in an underlying position. It reduces or eliminates exposure to adverse price movements, sacrificing some potential profit.
Trading Strategies

Q25. Arbitrage in derivatives involves:

  1. A. Taking high risk for high reward
  2. B. Exploiting price differences in same asset across different markets
  3. C. Speculating on future price movements
  4. D. Hedging existing portfolio
Show correct answer & explanation

Correct answer: B. Exploiting price differences in same asset across different markets

Arbitrage involves simultaneously buying and selling the same or equivalent assets in different markets to profit from price discrepancies, with theoretically zero risk. It helps maintain market efficiency.
Regulations

Q26. Equity derivatives in India expire on:

  1. A. Last day of every month
  2. B. Last Thursday of the expiry month
  3. C. First business day of next month
  4. D. 15th of every month
Show correct answer & explanation

Correct answer: B. Last Thursday of the expiry month

In India, equity derivatives (futures and options on Nifty, stocks, etc.) expire on the last Thursday of the expiry month. If Thursday is a trading holiday, they expire on the preceding business day.
Regulations

Q27. The minimum contract value for stock derivatives in India must be approximately:

  1. A. Rs. 1 lakh
  2. B. Rs. 5 lakhs
  3. C. Rs. 10 lakhs
  4. D. Rs. 15 lakhs
Show correct answer & explanation

Correct answer: B. Rs. 5 lakhs

As per SEBI regulations, the minimum contract value (lot size × market price) for stock derivatives in India must be approximately Rs. 5 lakhs at the time of introduction of the contract in the derivatives segment.
Clearing and Settlement

Q28. Which organisation acts as the central counterparty for NSE derivatives?

  1. A. NSE itself
  2. B. SEBI
  3. C. NSE Clearing Ltd (NCL)
  4. D. Reserve Bank of India
Show correct answer & explanation

Correct answer: C. NSE Clearing Ltd (NCL)

NSE Clearing Ltd (NCL), formerly known as National Securities Clearing Corporation Ltd (NSCCL), acts as the central counterparty for all trades on NSE, providing settlement guarantee and eliminating counterparty risk.
Clearing and Settlement

Q29. A Margin Call is issued when:

  1. A. Profits exceed the margin requirement
  2. B. Account balance falls below maintenance margin level
  3. C. A new position is opened
  4. D. Weekly settlement occurs
Show correct answer & explanation

Correct answer: B. Account balance falls below maintenance margin level

A Margin Call is issued by the broker or exchange when the trader's account balance falls below the maintenance margin level. The trader must deposit additional funds to restore the balance to the initial margin level.
Clearing and Settlement

Q30. Physical settlement of stock derivatives in India was made compulsory from:

  1. A. 2017
  2. B. 2018-2019 phase-wise
  3. C. 2021
  4. D. 2022
Show correct answer & explanation

Correct answer: B. 2018-2019 phase-wise

SEBI mandated physical settlement for stock futures and options in a phased manner starting 2018, with all stock derivatives moving to compulsory physical delivery by October 2019. Index derivatives remain cash-settled.
Options Contracts

Q31. A Protective Put strategy involves:

  1. A. Selling put options to generate income
  2. B. Buying put options on a stock you already own
  3. C. Buying call options on a stock you do not own
  4. D. Selling call options on a stock you own
Show correct answer & explanation

Correct answer: B. Buying put options on a stock you already own

A Protective Put involves buying put options on a stock you already own. It acts as insurance — protecting against downside risk while allowing you to benefit from any upside in the stock price.
Basics of Derivatives

Q32. Backwardation in futures market refers to:

  1. A. Futures price greater than spot price
  2. B. Futures price less than spot price
  3. C. Futures price equal to spot price
  4. D. No relationship between futures and spot
Show correct answer & explanation

Correct answer: B. Futures price less than spot price

Backwardation is a market condition where futures prices are LOWER than the current spot price. This can occur when there is high demand for immediate delivery or when a commodity is expected to decline in price.
Options Contracts

Q33. A put option is Out-of-the-Money (OTM) when:

  1. A. Strike price is above current market price
  2. B. Strike price is below current market price
  3. C. Strike price equals current market price
  4. D. The option has been exercised
Show correct answer & explanation

Correct answer: B. Strike price is below current market price

A put option is Out-of-the-Money (OTM) when the strike price is BELOW the current market price. Exercising this put would not be profitable as you could sell the stock at a higher price in the open market.
Trading Strategies

Q34. An Iron Condor is a strategy that involves:

  1. A. Buying only call options
  2. B. Selling a lower strike put, buying an even lower put, selling a higher strike call, buying an even higher call
  3. C. Buying both calls and puts at same strike
  4. D. Selling naked call options
Show correct answer & explanation

Correct answer: B. Selling a lower strike put, buying an even lower put, selling a higher strike call, buying an even higher call

An Iron Condor is a neutral strategy consisting of: selling a lower-strike put, buying a further lower put (put spread) + selling a higher-strike call, buying a further higher call (call spread). It profits when the underlying stays within a range.
Regulations

Q35. Position limits in equity derivatives are set to:

  1. A. Maximize trader profits
  2. B. Prevent excessive speculation and market manipulation
  3. C. Ensure physical delivery only
  4. D. Allow unlimited trading
Show correct answer & explanation

Correct answer: B. Prevent excessive speculation and market manipulation

SEBI sets position limits for various categories of market participants in equity derivatives to prevent excessive speculation, concentration of risk in a few hands, and potential market manipulation.
Options Contracts

Q36. Gamma in options measures:

  1. A. Rate of change of option price with respect to underlying
  2. B. Rate of change of delta with respect to underlying price
  3. C. Time decay of option premium
  4. D. Interest rate sensitivity
Show correct answer & explanation

Correct answer: B. Rate of change of delta with respect to underlying price

Gamma measures the rate of change of Delta with respect to changes in the underlying asset price. High Gamma means Delta changes rapidly with small price movements — ATM options have the highest Gamma.
Futures Contracts

Q37. Calendar spread in futures involves:

  1. A. Buying and selling same futures contract simultaneously
  2. B. Buying near-month futures and selling far-month futures (or vice versa) of same underlying
  3. C. Buying futures on two different stocks
  4. D. Only buying far-month futures
Show correct answer & explanation

Correct answer: B. Buying near-month futures and selling far-month futures (or vice versa) of same underlying

A Calendar Spread (or Time Spread) in futures involves simultaneously buying and selling futures contracts on the same underlying but with different expiry months. Profit depends on changes in the price difference between contracts.
Regulations

Q38. The Securities Contracts (Regulation) Act under which derivatives trading is regulated in India was enacted in:

  1. A. 1992
  2. B. 1956
  3. C. 2000
  4. D. 1988
Show correct answer & explanation

Correct answer: B. 1956

The Securities Contracts (Regulation) Act (SCRA) was enacted in 1956. Derivatives were brought under its purview by amendment in 1999, making exchange-traded derivatives legal in India after the LC Gupta Committee recommendations.
Trading Strategies

Q39. Delta hedging involves:

  1. A. Taking equal and opposite positions in futures
  2. B. Maintaining a delta-neutral portfolio by adjusting position size based on delta
  3. C. Buying options to hedge against stock losses
  4. D. Selling all options before expiry
Show correct answer & explanation

Correct answer: B. Maintaining a delta-neutral portfolio by adjusting position size based on delta

Delta hedging involves maintaining a delta-neutral portfolio — the combined delta of all positions equals zero. As the underlying price changes, the hedge ratio is adjusted dynamically. It eliminates directional price risk.
Clearing and Settlement

Q40. The daily settlement price for futures is typically the:

  1. A. Opening price of the futures contract
  2. B. Weighted average price of the last 30 minutes of trading
  3. C. Strike price of the futures
  4. D. Previous day's closing price
Show correct answer & explanation

Correct answer: B. Weighted average price of the last 30 minutes of trading

The daily settlement price for futures in India is typically the weighted average price of the futures contract during the last 30 minutes of trading for that day. This is used for daily MTM settlement.

How to use this set

Work through the questions in order without expanding the answers first, exactly as you would in the real Series VIII 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 VIII 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.