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WorksheetsQuiz on Derivatives
Total questions: 100
Worksheet time: 50mins
What is a derivative in financial terms?
A type of stock
A contract whose value is derived from an underlying asset
A form of currency
A government bond
Which of the following is NOT typically considered an underlying asset for derivatives?
Gold
Oil
Real estate
Foreign exchange
What significant event in the history of derivatives occurred in the late 17th century in Japan?
The creation of the first stock market
The development of a futures market in rice
The introduction of gold trading
The establishment of the first bank
What was the significance of the Chicago Board of Trade (CBOT) in 1848?
It introduced the first stock exchange
It facilitated trading of forward contracts on various commodities
It established the first bank in the US
It created the first currency exchange
In what year did the Chicago Mercantile Exchange introduce the International Monetary Market (IMM)?
1919
1972
1982
1998
Which exchange became the first marketplace for trading listed options in 1973?
Chicago Mercantile Exchange (CME)
Chicago Board Options Exchange (CBOE)
Kansas City Board of Trade
New York Stock Exchange (NYSE)
What was the first successful pure interest rate futures contract introduced by CBOT in 1975?
Eurodollar futures
T-bond futures
Treasury bill futures
Stock index futures
Which of the following factors is NOT mentioned as influencing the growth of the derivative market globally?
Increased fluctuations in asset prices
Integration of financial markets
Decrease in global trade
Use of latest technology in communications
Who chaired the committee set up by SEBI in 1996 to develop a regulatory framework for derivatives trading in India?
Prof. J. R. Varma
Dr. L. C. Gupta
Dr. Raghuram Rajan
Mr. Uday Kotak
What significant change occurred in the Securities Contract Regulation Act (SCRA) in 1999?
Introduction of equity trading
Inclusion of derivatives in securities
Prohibition of forward trading
Launch of Metropolitan Stock Exchange
When did the exchange-traded derivatives start in India?
March 2000
June 2000
July 2001
November 2001
What is a key difference between forward contracts and futures contracts?
Futures are traded over-the-counter
Forwards are standardized contracts
Futures are traded on an exchange
Forwards have a prearranged formula
What is the primary characteristic of an options contract?
Obligation to buy or sell
Right but not obligation to buy or sell
Exchange of cash flows
Prearranged formula for trading
What is a swap in the context of derivatives?
A contract to buy/sell an asset at a future date
A series of forward contracts
A standardized exchange-traded contract
A right to buy or sell an asset
Which of the following best describes the role of hedgers in the derivatives market?
They aim to profit from price differences in different markets.
They predict future price movements and take positions in derivatives.
They use derivatives to reduce risk associated with underlying asset prices.
They create complex derivative products for specific customer needs.
What is the primary function of arbitrageurs in the derivatives market?
To reduce risk by using derivatives.
To profit by exploiting price differences in different markets.
To predict future price movements and take positions in derivatives.
To create complex derivative products for specific customer needs.
How do speculators or traders typically use derivatives in the market?
To reduce risk associated with underlying asset prices.
To profit from price differences in different markets.
To predict future price movements and take positions in derivatives.
To create complex derivative products for specific customer needs.
What distinguishes the over-the-counter (OTC) derivatives market from exchange-traded derivatives?
OTC derivatives are traded on organized exchanges.
OTC derivatives involve a physical marketplace.
OTC derivatives are agreed directly between parties over the telephone or electronic media.
OTC derivatives are less complex than exchange-traded derivatives.
What is a key feature of OTC derivative markets compared to exchange-traded derivatives?
Contracts are standardized and traded on organized exchanges.
There are formal centralized limits on individual positions.
Transactions are private with little or no disclosure to the entire market.
Prices are determined by the interaction of buyers and sellers through an auction platform.
How do derivatives help in the financial market according to the text?
By increasing the number of market participants.
By improving price discovery based on actual valuations and expectations.
By eliminating all risks associated with trading.
By ensuring all trades are speculative.
What is one of the risks faced by participants in derivatives markets?
Guaranteed profit from all trades.
Counterparty risk, such as default by a counterparty.
Elimination of price fluctuations.
Complete transparency in all transactions.
What should a market participant consider before engaging in trading according to the text?
The potential for high returns
The suitability based on personal risk tolerance and resources
The popularity of the trading platform
The number of successful traders
Who issues the Model Risk Disclosure Document?
Individual traders
Government agencies
Members of Exchanges
Financial advisors
Why is it important for prospective participants to read the Model Risk Disclosure Document?
To understand the history of the stock market
To gain insights into successful trading strategies
To obtain important information on trading in Equities and F&O Segments
To learn about global market trends
An index option is a __________________.
Debt instrument
Derivative product
Cash market product
Money market instrument
The purchase of a share in one market and the simultaneous sale in a different market to benefit from price differentials is known as _____________.
Mortgage
Arbitrage
Hedging
Speculation
Financial derivatives provide the facility for ___________.
Trading
Hedging
Arbitraging
All of the above
Operational risks include losses due to ___________.
Inadequate disaster planning
Too much of management control
Income tax regulations
Government policies
What is the primary purpose of a stock index in financial markets?
To measure the performance of individual stocks
To provide a statistical indicator of economic changes
To determine the interest rates of bonds
To calculate the total market value of a company
How is the market capitalization of a company calculated?
By adding the total number of shares to the share price
By multiplying the total number of shares by the share price
By dividing the total number of shares by the share price
By subtracting the share price from the total number of shares
Which of the following is a function of a stock index?
To serve as a benchmark for portfolio performance
To predict future stock prices
To regulate stock market transactions
To determine tax rates for investors
What is the significance of the percentage change in an index?
It indicates the total number of stocks in the index
It reflects the change in market value over time
It shows the average price of all stocks in the index
It determines the interest rate for financial products
Based on the given data, calculate the new market capitalization of stock AZ.
Rs. 13,000 lakhs
Rs. 12,000 lakhs
Rs. 14,000 lakhs
Rs. 15,000 lakhs
What is the percentage change in the index value from January 1, 1995, to the current date?
126.06%
100%
50%
75%
How is the new value of the index calculated based on the given data?
(New Market Cap / Old Market Cap) * 100
(Old Market Cap / New Market Cap) * 100
(New Market Cap - Old Market Cap) * 100
(Old Market Cap - New Market Cap) * 100
What is a price-weighted index?
An index where each stock influences the index in proportion to its price.
An index where each stock influences the index in proportion to its market cap.
An index where each stock has equal influence regardless of its price.
An index where only the highest-priced stock influences the index.
How is the price index on January 1, 1995, calculated using the given data?
(150+300+450+100+250)/5
(150+300+450+100+250)/4
(150+300+450+100+250)/6
(150+300+450+100+250)/3
What is the current value of the index based on the given data?
510
250
104
1250
Which of the following is a popular price-weighted index?
Dow Jones Industrial Average
S&P 500
FTSE 100
NASDAQ Composite
What is an equal-weighted index?
An index where all stocks have different weights.
An index where all stocks have the same weight.
An index where only the largest stocks are weighted.
An index where weights are based on stock price.
How is the weight of each stock adjusted in an equal-weighted index when market prices change?
By increasing the number of shares for stocks that have increased in price.
By decreasing the number of shares for stocks that have decreased in price.
By selling stocks that have increased in price and buying those that have decreased.
By maintaining the same number of shares regardless of price changes.
What is the percentage change in the index value if the current value changes from 120,000 to 146,000?
18.33%
21.67%
25.00%
30.00%
Which of the following is NOT an attribute of a good market index?
It should reflect market behavior.
It should be influenced by market participants.
It should be computed by an independent third party.
It should be professionally maintained.
What is the bid-ask spread in the given order book example?
0.25
0.50
0.75
1.00
If a person buys 100 shares at the best available sell order price, what is the transaction cost due to the bid-ask spread?
Rs. 25
Rs. 50
Rs. 75
Rs. 100
How is the impact cost defined in the context of the given example?
The difference between the highest and lowest prices
The average of the best bid and offer price
The total cost of buying and selling 100 shares
The sum of all transaction costs
In the example, what is the ideal price calculated for impact cost?
Rs. 4.00
Rs. 4.25
Rs. 4.50
Rs. 4.75
What is the impact cost when buying 1500 shares if the ideal price is Rs. 9.85 and the actual buy price is Rs. 9.9333?
0.84%
0.75%
1.00%
0.50%
Who generally manages the revision process of indices like BSE and NSE?
Asia Index Pvt Ltd and NSE Indices Limited
BSE Indices Limited and NSE Indices Limited
Asia Index Pvt Ltd and BSE Indices Limited
NSE Indices Limited and Global Index Ltd
What is a key trade-off in index construction?
Diversification and liquidity
Risk and return
Cost and benefit
Growth and stability
What happens when the number of stocks in an index goes from 50 to 100?
Very little reduction in risk
Significant increase in risk
No change in risk
Significant reduction in risk
What is the primary purpose of index maintenance and revision?
To ensure the index captures the most vibrant lot of securities and reflects the market accurately.
To increase the number of stocks in the index.
To decrease the volatility of the index.
To eliminate underperforming stocks from the index.
Which of the following is NOT a major equity index in India?
S&P BSE Sensex
Nifty 50
Dow Jones Industrial Average
Nifty Next 50
How do index funds generate returns equivalent to the return on the index?
By investing in index stocks in the proportions they exist in the index.
By investing in high-risk stocks.
By frequently changing the stocks in the fund.
By investing in international markets.
What is a key characteristic of index derivatives?
They are used to hedge against market risk.
They guarantee high returns.
They are only available for the Nifty index.
They are not influenced by market fluctuations.
What is one of the main advantages of Exchange Traded Funds (ETFs) over mutual funds?
ETFs can only be bought at the end of the trading day.
ETFs have higher transaction costs.
ETFs allow for intraday trading.
ETFs cannot be traded on exchanges.
How can ETFs be used in terms of trading?
They can only be traded in large denominations.
They can be used for basket trading with smaller denominations.
They require high transaction costs.
They are not suitable for basket trading.
State whether TRUE or FALSE: Impact cost is low when the liquidity in the system is poor.
True
False
Which of the following costs is not actually paid by the market participants but arises due to lack of liquidity?
Securities Transaction Tax
Impact cost
SEBI charges
Brokerage
What is a forward contract?
An agreement made directly between two parties to buy or sell an asset on a specific date in the future
A contract traded on an exchange to buy or sell an asset immediately
A non-binding agreement to negotiate the sale of an asset in the future
A contract that allows for the exchange of assets without a set date
In the example provided, what is the term used when you agree to buy gold at a future date?
Short forward
Long forward
Spot price
Cash market
What is the essential feature of a forward contract?
It is a contract between multiple parties
Terms of the contract are flexible and can be changed anytime
All terms of the contract are fixed on the day of entering into the contract
It is traded on a public exchange
How are forward contracts typically negotiated?
Through a public exchange
Over-the-counter (OTC) between two parties
Via a government-regulated platform
Through a third-party broker
What is the primary purpose of entering into a forward contract?
To speculate on future price movements
To fix the price and avoid price risk
To increase liquidity in the market
To ensure counterparty transparency
What is a major limitation of forward contracts related to market participation?
High transaction costs
Lack of liquidity
Excessive regulation
High volatility
What is counterparty risk in the context of forward contracts?
The risk of price fluctuation
The risk of an economic loss from the failure of the counterparty to fulfill its obligation
The risk of high transaction fees
The risk of regulatory changes
How do futures contracts address the limitations of forward contracts?
By allowing for more speculation
By being traded on an organized exchange
By increasing the risk of default
By reducing the need for collateral
What is a key feature of futures contracts in terms of trading platform?
Decentralized trading platform
Centralized trading platform
Peer-to-peer trading platform
Over-the-counter trading platform
Which of the following is a limitation of futures contracts?
Unlimited maturities
Flexibility in contract design
Limited underlying set
No administrative costs
What is the expiry date for the Nifty futures contract mentioned in the document?
Oct 01, 2024
Oct 15, 2024
Oct 31, 2024
Nov 01, 2024
How does the exchange contribute to price discovery in futures contracts?
By setting the price
Through free interaction of buyers and sellers
By limiting the number of contracts
By controlling the underlying asset
What is the turnover in Rs. Lakhs for the Nifty futures as given in the document?
25,07,617.27
30,07,617.27
35,07,617.27
40,07,617.27
What is the underlying asset in the given example of a futures contract?
Nifty 50 index
Dow Jones index
S&P 500 index
FTSE 100 index
How is the contract value of a Nifty futures contract calculated?
By multiplying the lot size with the closing futures price
By adding the lot size to the closing futures price
By dividing the lot size by the closing futures price
By subtracting the lot size from the closing futures price
What is the current contract size for Nifty futures contracts?
25
50
100
10
According to the SEBI Master Circular, what is the new minimum contract value for derivatives?
Rs. 15 lakhs
Rs. 10 lakhs
Rs. 5 lakhs
Rs. 20 lakhs
What is the expiration day in the context of futures contracts?
The last trading day of the contract
The first trading day of the contract
The day before the contract starts
The day after the contract ends
When do Nifty and Bank Nifty futures contracts typically expire?
Last Monday of the month
Last Thursday and Last Wednesday of the month
First Friday of the month
Second Tuesday of the month
What is the tick size for Nifty futures?
1 paisa
2 paisa
5 paisa
10 paisa
How is the daily settlement price for futures contracts determined?
Based on the opening price of the day
Based on the last half-an-hour weighted average price
Based on the highest price of the day
Based on the lowest price of the day
What is the final settlement price for the Oct Nifty futures contract in the example provided?
25475.70
25500.00
Spot value of Nifty on Oct 31, 2024
25000.00
During which hours can equity futures contracts be traded?
8.00 am to 4.00 pm
9.15 am to 3.30 pm
10.00 am to 5.00 pm
11.00 am to 6.00 pm
What is the underlying asset for BSE Sensex futures contracts?
Nifty 50
BSE Sensex
Dow Jones
NASDAQ
What is the tick size for BSE Sensex futures contracts?
Rs.0.01
Rs.0.05
Rs.0.10
Rs.0.50
How many serial weekly and monthly contracts are there in the BSE Sensex futures contract cycle?
5 weekly and 2 monthly
6 weekly and 3 monthly
7 weekly and 3 monthly
8 weekly and 4 monthly
On which day do the weekly BSE Sensex futures contracts expire?
Monday
Wednesday
Thursday
Friday
What is the basis in futures contracts?
The difference between the futures price and the spot price
The sum of the futures price and the spot price
The average of the futures price and the spot price
The product of the futures price and the spot price
What is the fundamental principle of linking various futures and underlying cash market prices together?
The cost of carry should be zero.
The basis should always be positive.
The cost of carrying the underlying asset should equal the difference in futures prices.
The futures price should always be higher than the spot price.
What happens to the basis at the maturity of a futures contract?
It becomes positive.
It becomes negative.
It becomes zero.
It remains unchanged.
How is the cost of carry defined in the context of futures and spot prices?
The difference between futures and spot prices.
The interest paid to finance the purchase less dividend earned.
The storage cost plus the interest paid to carry the asset.
The income earned on the asset during the holding period.
In the example provided, what is the break-even futures price for the share of ABC Ltd?
Rs. 100
Rs. 104
Rs. 102
Rs. 106
What is the initial margin in the context of futures contracts?
The final payment made at the end of the contract.
The amount deposited to guarantee the settlement of trades.
The interest paid on the futures contract.
The dividend received from the underlying asset.
What is the initial margin required if a broker charges 10% of the contract value and the contract value is Rs. 556,250?
Rs. 55,625
Rs. 5,562.50
Rs. 556,250
Rs. 50,000
How is the Mark to Market (MTM) gain calculated for a futures contract?
Difference in contract price multiplied by the number of contracts
Initial margin divided by the contract price
Contract price multiplied by the initial margin percentage
Sum of all contract prices over the trading period
What does an increase in Open Interest indicate in the futures market?
Decrease in market depth
Increase in market depth
Stability in market prices
Decrease in trading volume
On March 2, if C goes long in 100 contracts and D goes short in 100 contracts, what is the Open Interest?
50
100
150
200
What is the price band for a contract if the previous day's closing price is Rs. 200 and the price band is 5%?
Rs. 190 to Rs. 210
Rs. 195 to Rs. 205
Rs. 180 to Rs. 220
Rs. 200 to Rs. 210
If Mr. A buys 10 contracts of a stock and sells 5 contracts of the same stock, what is his position called?
Long position
Short position
Open position
Closed position
How is the price band for a contract determined on the first trading day of a futures contract?
Based on the previous day's closing price of the underlying asset
Based on the opening price of the futures contract
Based on the average price of the last week
Based on the highest price of the previous month
What happens to the open interest (OI) when a short position is replaced by another short position of the same size?
OI increases
OI decreases
OI remains the same
OI doubles
