Exam Question 1 Flashcards
Q.1
The risk that cannot be controlled by diversification of portfolio is _____ .
Unsystematic Risk
Explanation
An investor can diversify his portfolio and eliminate major part of price risk i.e. the diversifiable/unsystematic risk but what is left is the non-diversifiable portion or the market risk-called Systematic risk. Systematic risk can be caused due to unfavourable reasons such as act of nature like a natural disaster, changes in government policy etc.
Q.2
Over-the-counter options are always standardised - State whether True or False ?
False
( Correct Answer)
Explanation
Over the Counter options are made as per the needs of the trading parties - so they are customised. Future options are standardised as per the rules of stock exchange.
Q.3
Mr. Sam is a equity fund manager and he is bearish on the stock market. How will he use this view to create a hedge?
He will sell index futures
Explanation
Mr. Sam is a fund manager which means his fund already has a portfolio of stock. He thinks that the stock market can fall so he will sell index futures to create a hedge. In case the market falls, he will have a loss on his stocks but will earn on his index futures position.
Q.4
‘ICICI Bank stock call and put option’ belongs to which of the following categories ?
Derivative product
( Correct Answer)
Call and Put options on any stock are derivatives products.
Q.5
In case of a member’s default, the Clearing Corporation cannot transfer clients positions to another member or close out all open positions of defaulting member, without prior approval from SEBI – State True or False ?
False
( Correct Answer)
Explanation
As per SEBI rules - The Clearing Corporation can transfer client positions from one broker member to another broker member in the event of a default by the first broker member. A report is then sent to SEBI regarding this.
Q.6
Mr. Ganesh thinks that the markets will go down, so he sell 10 lots of index futures at 3500. His predictions come true and the index falls and Mr. Ganesh buys back the futures contract at 3410. What is the profit Mr. Ganesh has made if one lot of index is of 50.
35000
45000
( Correct Answer)
55000
65000
Explanation
Mr Ganesh had sold at Rs 3500 and bought back at Rs 3410. So he made a profit of Rs 90. Total Quantity sold = 10 lots x 50 (lot size) = 500 Total Profit = Rs 90 x 500 = Rs 45,000
Q.7
Can Professional Clearing members act only on behalf of institutional clients ?
Yes
No
( Correct Answer)
Explanation
Professional clearing member clears the trades of his associate Trading Member and institutional clients.
Q.8
The Stock Exchanges and Stock Brokers decide the option premiums – True or False ?
True
( Correct Answer)
Explanation
Stock Exchanges decide the rules and provide the platform for trading and a Stock Broker act as authorized mediatory. The option prices are decided by the buyers and sellers based on the spot price, time value, volatility and many other factors.
Q.9
A client can use cross margining across Cash and Derivatives segment - True or False ?
True
( Correct Answer)
Explanation
A client can use the margin he has paid in any segment provided he has signed on the necessary declarations in the account opening forms etc.
Q.10
A client Mr P has bought March series contract and another client Mr Q has sold March series contract on Nifty futures. This has been done through the same broker. Will this qualify as a calendar spread ?
No
( Correct Answer)
Explanation
Calendar spread position is a combination of two positions in futures on the same underlying - long on one maturity contract and short on a different maturity contract. The above example is not a Calendar spread because here we have the same expiry ie. March series. Also the spread has to be done by the same client.
Q.11
How many shares should be ideally there in an index ?
Depends on the objective of the index
( Correct Answer)
Around 100 to comprehensively cover all sectors
Exactly 50
Below 50
Explanation
Stocks in the index are chosen based on certain pre-determined qualitative and quantitative parameters, laid down by the Index Construction Managers. Once a stock satisfies the eligibility criterion, it is entitled for inclusion in the index. Generally, final decision of inclusion or removal of a security from the index is taken by a specialized committee known as Index Committee.
Q.12
At price level of Rs. 6900, what will be the value of one lot of ABC futures contract (contract multiplier 50)?
Rs. 289000
Rs. 690000
Rs. 345000
( Correct Answer)
Rs. 460000
Explanation
The value of the futures contract is the Price X Lot size Rs 6900 X 50 = Rs 345000
Q.13 ______ is the ratio of change in option premium for a unit change in volatility.
Rho
Theta
Delta
Vega
( Correct Answer)
Explanation
Vega (ν) is a measure of the sensitivity of an option price to changes in market volatility. It is the change of an option premium for a given change in the underlying volatility.
Q.14
When a person enters into a forward contract, the loss that can occur on the position is _____ .
known
unknown
( Correct Answer)
Explanation
When a person enters into a forward or a futures contract, his profits or losses are uncertain as it depends on the movement of prices. (Only in the case of buying an option, the losses are fixed ie. premium paid)
Q.15
Mr. Arvind is very bullish on the market. How ever he feels some specific companies which he has in his portfolio will not perform well in future. What strategy should he adopt?
Sell Index futures and Sell specific companies shares
Buy Index futures and Sell specific companies shares
( Correct Answer)
Sell Index futures and Buy specific companies shares
Do nothing as markets are uncertain
Explanation
Mr. Arvind should sell the shares of those specific companies and buy index futures. By this he will profit when the index rises and avoid losses on those specific companies if his view proves to be correct.
