>This note has collection of 750+ Questions on [NISM-Series-I: Currency Derivatives Certification Examination](https://www.nism.ac.in/currency-derivatives/) ### Syllabus Outline and Weightage - 781 Questions | Unit No. | Unit Name | Weightage (%) | Total Questions | | ---------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------: | --------------- | | Unit 1 | [Ch. 1 - Introduction to Currency Markets](Currency%20Futures%20&%20Options.md#Ch.%201%20-%20Introduction%20to%20Currency%20Markets) | 10 | 109 | | Unit 2 | [Ch.2 - Foreign Exchange Derivatives](Currency%20Futures%20&%20Options.md#Ch.2%20-%20Foreign%20Exchange%20Derivatives) | 5 | 104 | | **Unit 3** | [Ch.3 - Exchange Traded Currency Futures](Currency%20Futures%20&%20Options.md#Ch.3%20-%20Exchange%20Traded%20Currency%20Futures) | **20** | 119 | | **Unit 4** | [Ch. 4 - Exchange Traded Currency Options](#Ch.%204%20-%20Exchange%20Traded%20Currency%20Options) | **20** | 62 | | **Unit 5** | [Ch. 5 - Strategies Using Exchange Traded Currency Derivatives](Currency%20Futures%20&%20Options.md#Ch.%205%20-%20Strategies%20Using%20Exchange%20Traded%20Currency%20Derivatives) | **10** | 65 | | **Unit 6** | [Ch.6 - Trading Mechanism in ETCD](Currency%20Futures%20&%20Options.md#Ch.6%20-%20Trading%20Mechanism%20in%20ETCD) | **10** | 118 | | **Unit 7** | [Ch. 7 - Clearing, Settlement And Risk Management In Exchange Traded Currency Derivatives](Currency%20Futures%20&%20Options.md#Ch.%207%20-%20Clearing,%20Settlement%20And%20Risk%20Management%20In%20Exchange%20Traded%20Currency%20Derivatives) | **10** | 77 | | Unit 8 | [Ch. 8 - Regulatory Framework For Exchange Traded Currency Derivatives](Currency%20Futures%20&%20Options.md#Ch.%208%20-%20Regulatory%20Framework%20For%20Exchange%20Traded%20Currency%20Derivatives) | 5 | 13 | | Unit 9 | [Ch. 9 -Accounting and Taxation of ETCD](Currency%20Futures%20&%20Options.md#Ch.%209%20-Accounting%20and%20Taxation%20of%20ETCD) | 5 | 60 | | Unit 10 | [Ch. 10 - Code Of Conduct And Investor Protection Measures](Currency%20Futures%20&%20Options.md#Ch.%2010%20-%20Code%20Of%20Conduct%20And%20Investor%20Protection%20Measures) | 5 | 64 | ### Ch. 1 - Introduction to Currency Markets 1. **The interbank forex market in India consists primarily of banks holding Authorised Dealer (AD) licences. True or False?** 1. True 2. **The retail forex market generally has:** - A. Higher transaction value per trade than interbank market - B. Lower transaction per trade than interbank market - C. Only institutional participants - D. Only exporters and importers Answer - B 3. **What are the three broad categories of market participants operating inside the currency derivatives market?** - A. Importers, Exporters, and Central Bank Administrators - B. Category-1 Authorised Dealers, Price-makers, and Clearing Houses - C. Hedgers, traders (speculators) and arbitrageurs - D. Resident individuals, Non-resident entities, and Institutional protection sellers Answer - C 4. **Interbank spot trading happens on electronic trading platforms. True or False?** 1. True. Yes, In India, interbank trading is conducted electronically on platforms like Refinitiv D2, or CCIL's FX Clear. 5. **CCIL settles Cash, Tom, Spot and Forward USDINR transactions through multilateral netting. True or False?** 1. True. So there is single net payment or receipt for each party 6. **Which of the following is an example of market making?** - A. Quoting only a buying price - B. Quoting only a selling price - C. Quoting both buying and selling prices - D. Matching buyers and sellers without quoting prices Answer - C 7. **FX-Retail was introduced primarily to:** - A. Restrict retail forex trading - B. Improve transparency and pricing - C. Eliminate banks from forex trading - D. Replace CCIL Answer - B. FX-Retail was launched to provide transparent and fair pricing. 8. **Futures on currencies in India are traded only in the OTC market. True or False?** - False. Currency futures are exchange-traded products. 9. **Which system initially primitive stage of trade before any currency or money was invented facilitated the exchange of goods and services by trading them directly for each other?** - A. Barter system - B. Gold standard - C. Fiat system - D. Bretton Woods system Answer - A. The trading of goods and services was by a barter system where goods were exchanged for each other. 10. **Non-divisibility of certain goods and high transportation costs were major difficulties of the barter system. True or False?** 1. True. The text highlights that the barter system had difficulties primarily because of the non-divisibility of certain goods and the cost of transporting them. Consider the challenge a farmer would face trying to divide livestock to buy small amounts of salt. 11. **Why did metals gradually become a prominent medium of exchange?** - A. Due to ease of transportation, divisibility, certainty of quality, and universal acceptance - B. Because metals were lighter than paper currency - C. Because governments mandated their use by decree from the very beginning - D. Due to their non-divisibility and scarcity Answer - A 12. **Which metal emerged as the final prominent standard means of exchange in coin form before paper currency?** - A. Gold - B. Silver - C. Copper - D. Bronze Answer - A 13. **How did the initial system of paper currency begin?** - A. By book entry of depositing gold/silver coins with a bank in exchange for a promising paper note - B. By royal decree printing paper without any underlying commodity backing - C. By international treaties signed during the Bretton Woods conference - D. Through the introduction of digital ledger technologies by central banks Answer - A. Early paper currency started when people deposited gold or silver coins with banks and received a paper promising equal value in coins at any time. 14. **What is the fundamental driver behind the evolution of foreign exchange (FX)?** - A. Growth in international trade across borders due to cost differences and production capabilities - B. The complete global ban on the usage of gold coins - C. The absolute enforcement of the Bretton Woods System by the IMF - D. A decline in the volume of global transactions and corporate acquisitions Answer - A. International trade growth showed that countries couldn't produce everything or that costs varied, resulting in the need to value one currency versus another. 15. **What is money called when it is uniquely branded alongside a country's flag?** - A. Currency - B. Fiat - C. Legal tender - D. Commodity Answer - A 16. **In what year did documented history suggest countries first agreed to value their currencies using gold as a benchmark?** - A. 1870 - B. 1913 - C. 1944 - D. 1973 Answer - A. Some time in 1870, countries agreed to value their currencies using gold as the benchmark. This marked the formalization of the international gold standard in the late 19th century. 17. **Under the classic gold standard, what backing must central banks hold against the paper currency they issue?** - A. An equivalent amount of gold in their reserve - B. A basket of foreign fiat currencies like USD and EUR - C. Short-term government bonds and equity shares - D. Special Drawing Rights issued by the IMF Answer - A. As per the gold standard process, central banks issue paper currency and hold an equivalent amount of gold in their reserve. The currency's value was directly tied to a physical commodity stored by the monetary authority. 18. **If 1 unit of gold is valued at INR 10,000 and USD 500, what is the exchange rate of USD in terms of INR under the gold standard?** - A. 1 USD = INR 20 - B. 1 USD = INR 50 - C. 1 INR = USD 20 - D. 1 INR = USD 50 Answer. A 19. **What primary pressures forced countries to shift away from the gold standard to floating exchange rates?** - A. Growth in international trade, changing political situations (world wars, civil wars), and deficit/surplus - B. The establishment of the International Organization for Standardization (ISO) - C. A sudden global preference for returning to the primitive barter system - D. The invention of electronic multi-bank trading platforms Answer - A. Physical commodity backing became too rigid to support expanding trade imbalances and wartime financing needs. 20. **Under a floating exchange regime, central banks never intervene to manage the value of their currency. True or False?** 1. Answer - False. Central banks often step in to preserve trade competitiveness or curb extreme volatility. 21. **What defines fiat money?** - A. Government-issued currency not backed by a physical commodity but by the issuing government - B. Currency that can be directly converted into a fixed weight of gold at the central bank - C. Money created exclusively by commercial banks through credit derivatives - D. Currency used only in decentralized over-the-counter international markets Answer - A. Fiat money is government-issued currency that is not backed by a physical commodity like gold or silver, but by the issuing government itself. So its value comes from legal decree and public trust rather than intrinsic commodity worth. 22. **From what is the value of modern fiat money primarily derived?** - A. Supply and demand dynamics and the stability of the issuing government - B. The current market price of gold and silver reserves - C. The total volume of industrial production base years - D. Rules established by the Financial Benchmarks India Private Limited Answer - A. The value of fiat money is derived from the relationship between supply and demand, public trust, and the stability of the issuing government. 23. **The gold standard is currently used by a few minor developing governments to back their paper currency. True or False?** 1. False. Gold standard is not currently used by any government. 24. **In what year did the United States completely abandon the final remnants of the gold standard system?** - A. 1973 - B. 1931 - C. 1944 - D. 1913 Answer - A. In 1971 when the United States (under President Richard Nixon) abandoned the direct convertibility of the U.S. dollar into gold, and effectively dismantled the Bretton Woods system and ended the era of gold-backed currency. 25. **Under the Bretton Woods System, how were currencies valued?** - A. All currencies were pegged to the USD at a fixed rate, and the USD value was pegged to gold - B. All currencies were allowed to clean float purely based on daily market forces - C. Currencies were pegged to a localized basket of agricultural commodities - D. Currencies were valued based on a standard standard deviation of +/- 3 SD Answer - A. As part of the system, all currencies were pegged to USD at a fixed but adjustable, exchange rates allowing a fluctuation of +/-1%, and the USD value was pegged to gold 26. **Which system, active from 1944 to 1971, represented a blend of the gold standard and floating rate systems?** - A. Bretton Woods System - B. Federation of Forex Dealers System - C. Fiat Clearing Agreement - D. Non-Delivery Forward Regime Answer - A. During 1944–1971, countries adopted the Bretton Woods System, which was a blend of the gold standard system and floating rate system. 27. **Which two prominent international institutions were created by the Bretton Woods Agreement?** - A. International Monetary Fund and World Bank - B. Bank for International Settlements and Federal Reserve - C. Financial Benchmarks India Pvt Ltd and CCIL - D. World Trade Organization and European Central Bank Answer - The Bretton Woods Agreement created the International Monetary Fund (IMF) and the World Bank. These organizations were initially established to manage global monetary cooperation and help rebuild postwar Europe. 28. **Why did the prominent forex market come into full existence after the breakdown of the gold standard framework?** - A. Because currencies became freely floating, creating a real-time need to value them against one another - B. Because central banks stopped executing any foreign exchange transactions entirely - C. Because international trade plummeted, requiring tighter retail dealer regulation - D. Because governments ordered that all transactions be settled on a Cash-Tom basis Answer - A. When gold was removed as a common denominator, currencies became freely floating, creating a need for a real-time market to determine exchange rates 29. **What is another term used to describe a clean float exchange rate?** - A. Free Float/Pure exchange rate - B. Dirty float - C. Fixed parity index - D. De facto controlled rate Answer - A. Clean float, also known as a pure exchange rate, occurs when the exchange rate is determined purely by supply and demand in the market. 30. **Managed float is the opposite of a clean float. True or False?** 1. True. A dirty float, also called managed float, when central banks only intervene to buy or sell foreign exchange to smooth out extreme volatility. 31. **Turkish Lira (TRY) is NOT included in the group of global currencies known as the "Majors". True or False?** 1. True. The Majors include EUR, USD, JPY, GBP, AUD, CAD, and CHF, and the Turkish Lira (TRY) is classified as an emerging/exotic market currency. 32. **What standard specifies the three-letter alphabetic currency codes, like EUR, USD, INR, used globally in forex trading?** - A. ISO 4217 - B. ISO 20022 - C. BIS Triennial Code - D. FEDAI Norm 2019 Answer. A. Currency quotations use abbreviations prescribed by the International Organization for Standardization in standard ISO 4217. This global standard gives us identifiers like USD, INR, and EUR. 33. **According to the April 2022 BIS survey, which currency pair commands the highest percentage share in global average daily turnover?** - A. EURUSD - B. USD/JPY - C. GBP/USD - D. USD/CNY Answer. A. EUR/USD had the largest global share at 22.7%. 34. **What percentage share did the USD/INR currency pair hold in global average daily forex turnover as of the 2022 BIS survey?** - A. 1.6% - B. 5.5% - C. 9.5% - D. 22.7% Answer - A. 35. **What are currency pairs that are not directly associated with the U.S. dollar called?** - A. Exotic currency pairs - B. Minor currencies or crosses - C. Greenbacks - D. Base vehicle pairs Answer - B. Currency pairs that are not associated with the U.S. dollar are referred to as minor currencies or crosses. 36. **Which of the following constitutes an example of an exotic currency pair?** - A. USDJPY - B. EUR/USD - C. USD/MXN - D. GBP/USD Answer - C. Exotic pairs consist of one major currency and a currency from a developing or emerging market, such as the Turkish Lira (TRY). 37. **What is the popular nickname given to U.S. banknotes due to their color?** - A. Cables - B. Greenbacks - C. Vehicles - D. Swaps Answer - A. U.S. banknotes are popularly called greenbacks due to their predominantly green color. 38. **Under what legislative act was the Federal Reserve System founded in 1913?** - A. Bretton Woods Agreement Act - B. Reserve Bank of India Act - C. Foreign Exchange Management Act - D. Federal Reserve Act Answer - A. The Federal Reserve System was founded in 1913 under the Federal Reserve Act to furnish an elastic currency and supervise banking. 39. **If a system contains 10 currencies and handles transactions without any vehicle currency, how many distinct currency pairs exist?** 1. The formula for calculating currency pairs without a vehicle currency is $n(n-1)/2$. For $n=10$, $10(9)/2 = 45$. 40. **Why is the US Dollar described as a "vehicle currency" in global foreign exchange?** - A. Because it is used primarily to clear cross-border automotive and transport logistics bills - B. Because market practice is to trade two non-dollar currencies via the USD rather than directly - C. Because it maintains a completely fixed exchange rate with every other global currency - D. Because it is issued in physical book entries that travel across oceans via deep-sea cables Answer - B. ==A vehicle currency means instead of trading two currencies directly, market practice is to trade each against a common third currency (the USD) as an intermediate step.== 41. **How many currency pairs can dealt with in a 10-currency system if one currency is selected as the single vehicle currency?** - A. 90 - B. 45 - C. 10 - D. 9 Answer - D. 9 pairs cannot be traded directly, so all the 9 pair with the single vehicle currency. So there are only 9 pairs in this system. 42. **Which institution based in Frankfurt has sole authority to set monetary policy for the Eurozone?** - A. Federal Reserve System - B. European Central Bank (ECB) - C. Financial Benchmarks India Pvt Ltd - D. Bank for International Settlements Answer - B. The euro is managed and administered by the Frankfurt-based European Central Bank (ECB), which has sole authority to set monetary policy. It is the apex central bank governing the shared currency of the European monetary union. 43. **How many member states of the European Union use the Euro as their official currency according to the text?** - A. 20 - B. 27 - C. 15 - D. 100 Answer - As of June-2026, 21 out of 27 countries have adopted Euro as their official currency. These 21 countries are collectively called Euro area or Eurozone. 44. **Which major currency is highly preferred as a funding currency for "carry trades" by hedge funds?** - A. Canadian Dollar - B. Indian Rupee - C. US Dollar - D. Japanese Yen Answer - D. The Yen is preferred as a funding currency for carry trades by hedge funds because of its historically low interest rates. Investors look to borrow in currencies with very low rates to invest in higher-yielding destinations. 45. **Why is the USDGBP referred to as 'cable' in the forex market?** - A. Due to the tight boundaries applied to its standard deviation curve - B. Because its value is tied directly to the industrial manufacturing of fiber-optic wires - C. Because it requires fixed electronic hardware cables to be settled at CCIL - D. Due to historical transatlantic telegram cables used to update GBPUSD rates Answer - A. The nickname is derived from the telegrams sent across the Atlantic cable (underwater telecommunications networks) used to update the GBPUSD rates across the ocean. 46. **The Swiss Franc is considered a safe-haven currency due to the stability of the Swiss government and financial system. True or False?** 1. True. Swiss franc is considered a safe-haven currency, facing upward pressure during times of global strain due to Switzerland's stability, long history of neutrality, low inflation, high level of forex reserves. 47. **What is the de facto exchange rate regime for the Indian Rupee (INR)?** - A. Clean float - B. Managed float - C. Rigidly fixed peg - D. Free un-interventionist float Answer - B. RBI allows market pricing but steps in to prevent excessive volatility spikes. 48. **USDINR is generally quoted up to two decimal places, but major pairs like EUR/USD, GBP/USD, USD/CAD are quoted up to 4 decimal places. True or False?* 1. False. USDINR market convention also uses four decimals 49. **How is an abbreviated offer price of 82.0575 typically written if the bid side is quoted as 82.0525?** - A. 82.0525/75 - B. 82.0525/0575 - C. 82.0525/50 - D. 82.0525/82 Answer - According to market norms for four-decimal pairs, the offer price is abbreviated using the last two decimal places, turning 82.0575 into /75 50. **In majority of the merchant forex markets, banks are price-takers and merchants are price-makers. True or False?** 1. False. Banks usually make prices while merchants accept them. 51. **Suppose a bank quotes a EURINR spot price of 110.0600/110.0800 to a merchant. At what price can the merchant sell EUR?** 1. 110.06 52. **Suppose the interbank rate for EURINR is 110.0600/110.0800, and the bank charges a exchange margin of 2 paise ($0.02$ INR) to its customers.** If an importer wants to buy EUR using INR, what will the bank's offer price be? 1. 110.08 + 0.02 = 110.10 53. **Suppose the interbank rate for USDINR is 94.0625/94.0675, and bank charges a margin of 1 paisa to its customers.** If an exporter wants to sell its USD receivables to the bank and receive INR, what will the bank's bid price be? 1. 94.0625 - 0.01 = 94.0525 54. **Bid and offer prices are always quoted by the banks to the merchants from the perspective of the banks (market maker). True or False.** 1. True. The quoted prices represent the market maker's willingness to buy or sell. 55. **In a USDINR quote of 75.0550/75.0600 to the customers, the bank is willing to buy USD from the customers at:** - A. 75.0600 - B. 75.0550 - C. 75.0500 - D. 75.0650 Answer - B. The first price is the bid at which the bank buys USD. If you select 75.0600, then bank will lose the spread every trade. 56. 65. **If GBPINR is 128, and USDINR is 94, value of GBPUSD calculated using INR as vehicle currency is?** 1. 1 GBP = 128 INR. But 94 INR is 1 USD. So 1 GBP = 1.36 USD 2. So GBPUSD = 129/94 = 1.36 57. **If USDINR is 94, and JPYINR is 59 (for 100 yen), value of USDJPY calculated using INR as vehicle currency is?** 1. USDJPY = 94/0.59 = 159.32 58. **What is the term for the arithmetic difference between a market maker's bid price and ask price?** - A. Standard deviation - B. Premium - C. Notional amount - D. Bid-Ask Spread Answer - D 59. **A narrower spread generally indicates:** - A. Lower liquidity - B. Higher liquidity - C. Market closure - D. Higher settlement risk Answer - B. Liquid markets typically have tighter spreads. 60. **Which side of a two-way quote is normally lower?** - A. Offer - B. Ask - C. Bid - D. Both equal Answer - C. Bid is lower than offer. 61. **USDINR = 94.25. Here INR is the base currency and USD is the quote currency? True or False?** 1. False. USD is the base currency and INR is the quote currency. Value of USD has been quoted in terms of INR. USDINR = 94.25 means 1 USD = INR 94.25 62. **In EURJPY, JPY is:** - A. Base currency - B. Reserve currency - C. Quote currency - D. Futures currency Answer - C. The second currency is the quote currency. 63. **Which component of currency pair is the base currency?** - A. First currency named - B. Second currency named - C. Currency with higher rate - D. Currency with lower rate Answer - A. The first currency in the pair is always the base currency. 64. **When a base currency buys MORE units of the quotation currency, what has occurred?** - A. The base currency has appreciated, and the quotation currency has depreciated - B. The base currency has weakened, and the quotation currency has strengthened - C. The entire currency pair has shifted from a direct quote to an indirect quote - D. The bid-ask spread has widened due to a standard deviation network failure Answer - A 65. **If USDINR rises from 82 to 83, it means?** - A. USD depreciates - B. INR appreciates - C. USD appreciates - D. Both currencies appreciate Answer - C. One USD now buys more INR. So USD has appreciated in terms of INR 66. **If you buy USDINR currency pair, it implies that you are:** - A. Bearish on USD and Bullish on INR - B. Bullish on USD and Bearish on INR - C. Expecting the price of the pair to drop toward 75 - D. Hedging an export order denominated in USD Answer - B 67. . **If USDINR is 90, then INRUSD is 1/90. True or False?** 1. True. 68. **If INRUSD moves from 1/95 to 1/94, we say INR has fallen against USD. True or False?** 1. False. INR has appreciated against USD. 69. **Selling a currency pair implies bearishness on the base currency. True or False?** 1. True. Selling a currency pair means base currency is sold to receive quote currency. So you profit if the base currency weakens. 70. **It is mathematically possible for the US Dollar to appreciate against the Indian Rupee while simultaneously depreciating against the Euro. True or False?** 1. True. Appreciation and depreciation are always relative terms between currency pairs, a currency can strengthen against one currency while softening/weakening/depreciating against another. 71. **What are the normal daily market hours stipulated by FEDAI for inter-bank INR forex market in India?** - A. 9.00 a.m. to 5.00 p.m. IST - B. 11.30 a.m. to 12.30 p.m. IST - C. 9.00 a.m. to 12.00 noon IST - D. Around the clock 24 hours without any daytime boundaries Answer - A. 72. **Transactions and value cash transactions for individual persons can be undertaken on weekends if permitted by a bank's internal policy. True or False?** 1. True 73. **What does the acronym NOOP stand for in Indian foreign exchange exposure regulations?** - A. Non-Overlapping Operational Price - B. National Order Output Protocol - C. Net Outlier Option Premium - D. Net Overnight Open Position Answer - D. NOOP refers to the Net Overnight Open Position limit prescribed by the central bank to manage forex risk. 74. **For banks incorporated in India, how is the foreign exchange exposure limit aggregated?** - A. For all domestic branches, including overseas branches and Off-shore Banking Units - B. Separately for each individual city branch without central compounding - C. Solely based on transactions executed during the 15-minute random window - D. Based exclusively on retail transactions filled on the FX-Retail platform Answer - A. For banks incorporated in India, the exposure limits fixed by the Board should be the aggregate for all branches, including their overseas branches and Off-shore Banking Units 75. **The Net Overnight Open Position Limit (NOOPL) fixed by a bank's board should generally not exceed what percentage of its total capital?** - A. 10% - B. 25% - C. 50% - D. 1% Answer - B. As of June-2026, such limits should not exceed 25 percent of the total capital (Tier I and Tier II capital) of the bank, unless specified by RBI. 76. **At what exact time does the Spot date Roll over take place for FCY/INR transactions in India?** - A. 12.00 midnight IST - B. 5.00 p.m. IST - C. 9.00 a.m. IST - D. 1.30 p.m. IST Answer - A 77. **Why do banks maintain a significantly wider spread on daily fixed "card rates" compared to the interbank rates?** - A. Because the ISO 4217 protocol mandates a penalty on all retail merchants - B. To cover the risk of intraday price fluctuations while the card rate remains fixed - C. To automatically match the closing prices of the previous day's New York close - D. Because retail transactions are settled strictly via physical gold delivery mechanisms Answer - B. The difference between IBR and card rate is high to cover the risk of price fluctuation since card rates remain fixed while the market moves 78. **Card rates between two banks are always same. True or False?** 1. False. Banks use different margins and pricing policies. 79. **What is a Non-Deliverable Forward (NDF) contract?** - A. An exchange-traded futures contract clearing on the National Stock Exchange platform - B. contract that must be settled exclusively by shifting physical bars of gold reserves - C. A delivery transaction that can only be executed by Authorised Dealers on a Saturday - D. A cash-settled, usually short-term, currency forward contract where the notional amount is never physically exchanged. Answer - A 80. **FBIL computes reference rates for CADINR. True or False?** 1. False. 81. **FBIL publishes reference rates for multiple currency pairs in the spot market. True or False?** 1. True. ==FBIL publishes reference rates for multiple currency pairs in the spot market, which are USD/INR, GBP/INR, EUR/INR, JPY/INR, AEDINR, IDRINR, and also RUBINR== 82. **JPY/INR reference rate is published for:** - A. 1 JPY - B. 10 JPY - C. 100 JPY - D. 1000 JPY Answer - C. JPYINR is the price 100 yen in terms of INR. 83. **Which independent entity is recognized by the RBI for computing and disseminating reference exchange rates in India?** - A. Financial Benchmarks India Private Limited (FBIL) - B. Clearing Corporation of India Limited (CCIL) - C. Foreign Exchange Dealers' Association of India (FEDAI) - D. Refinitiv D2 Trading Desk Answer - A. FBIL is the benchmark administrator for key financial benchmarks, and publishes Spot Reference Rates for USD/INR, GBP/INR, EUR/INR, and JPY/INR) and the USDINR forward premia. 84. **At approximately what time on business days does FBIL publish daily currency reference rates?** - A. Exactly 9.00 hours - B. Around 13.30 hours - C. At 12.00 midnight IST - D. At 17.00 New York Time Answer - B 85. **Between what specific hours is actual transaction-level data sampled from electronic platforms to compute the FBIL USD/INR reference rate?** - A. 11.30 and 12.30 hours - B. 9.00 and 17.00 hours - C. 12.00 and 13.00 hours - D. 13.30 and 15.00 hours Answer - A. The USD/INR reference rate is computed and published using the transaction level data available on electronic trading platforms between 11.30 and 12.30 hours. 86. **How long is the random sampling window chosen within the 11.30 to 12.30 timeframe for FBIL reference rate calculations?** - A. 30 minutes - B. 5 minutes - C. 15 minutes - D. 1 hour Answer - C. Randomizing this quarter-hour snapshot prevents market players from intentionally manipulating or gaming the benchmark rate. 87. **What basic threshold criteria must be met within the selected sampling window to calculate the FBIL reference rate?** - A. A minimum of ten transactions with an aggregate amount of USD 25 million - B. At least fifty transactions with an aggregate amount of INR 100 crores - C. Exactly five quotes submitted via email by foreign branches of central banks - D. A standard deviation curve that stays strictly within a +/- 1 SD boundary Answer - A. The threshold criteria of ten transactions with an aggregate amount of USD 25 million are required to be met for calculating the reference rate. This ensures the benchmark is backed by an adequate institutional volume. 88. **What mathematical rule is applied by FBIL to eliminate extreme outlier data points from transaction logs?** - A. Chain rule left-hand right-hand formula - B. +/- 3 Standard Deviation (SD) rule - C. A volume-weighted average reduction of 25% - D. A random 5-times looping algorithm subtraction Answer - B. This standard statistical filter removes anomalous spikes that fall far outside normal distribution bounds. 89. **How many times can a new random 15-minute window be generated if the initial window lacks enough transactions to meet the threshold?** - A. Infinitely until the 5 PM market close - B. Only 2 times - C. Up to 10 times - D. Up to a maximum of 5 times Answer - D. This process is repeated up to a maximum of 5 times to obtain an adequate number of transactions that satisfy the threshold criterion. The system attempts multiple samplings within the one-hour block before reverting to an alternative calculation rule. 90. **If all random sampling windows fail to meet the threshold criteria, how is the reference rate computed?** - A. Data from the entire one-hour window (11.30 to 12.30) is used, provided it meets the threshold - B. The market is declared illiquid and the previous day's New York close is used - C. The bank immediately defaults to calculating a clean float vehicle swap rate - D. The rate is frozen at the opening card rate fixed at 9:00 AM IST Answer - A. If all 5 randomly selected time-periods fail, the transactions data of the whole one-hour window from 11.30 hours to 12.30 hours are taken into account. The system expands its view to absorb the full hour of data to achieve an adequate sample size. 91. **The reference rates in respect of USD, EURO, GBP in terms of INR are published for 1 unit of USD, Euro and GBP, and the reference rate in respect of JPY is for 100 units of JPY in terms of INR. True or False?** 1. True. 92. **What are currency prices called when they are quoted without dollar, like USDJPY, EURGBP are called? - A. Outlier values - B. Spot premiums - C. Reference indices - D. Cross rates Answer - D. Historically, currencies had to be converted to dollars first because they did not trade directly. So two active pairs had to be crossed to extract a third implied valuation. But today major cross-currency pairs trade actively on their own 93. **If EURUSD is 1.1150/1.1275 and USDINR is 75.65/75.66, what is the calculated cross rate for buying 1 EUR in terms of INR?** - A. 84.3498 - B. 67.8475 - C. 75.6500 - D. 67.10 Answer - D. 1.1275 * 75.66 Rupees buys 1.1275 US dollars, which buys 1 Euro. So 1 euro = 1.1275 * 75.66 = INR 85.30 94. **If EURUSD is 1.1150 (offer) and USDINR is 75.65 (offer), what is the calculated cross rate for buying 1 EUR in terms of INR?** - A. 84.3498 - B. 67.8475 - C. 75.6500 - D. 67.10 Answer - A. 75.65 $\times$ 1.1150 Rupees buys 1.1150 US dollars, and 1.1150 US dollars buys 1 Euro. So 1 Euro = 84.3498. 95. **If USD/TRY is 34.2000 (offer) and USD/UZS (Uzbekistani Som) is 12,800.00 (bid), what is the calculated cross rate for a trader looking to sell Turkish Lira (TRY) to buy Uzbekistani Som (UZS) via the USD vehicle?** - A. 2,188.00 UZS - B. 437.76 UZS - C. 374.27 UZS - D. 437,760.00 UZS Answer - C. 34.2 TRY buys 1 USD. And 1 USD can be sold for 12,800 SOM. So 34.2 TRY gives 12,800 SOM, and hence 1 TRY = $\dfrac{12,800}{34.20}$ = 374.27 UZS 96. **If GBP/USD is 1.2500 (offer) and USD/INR is 83.5000 (offer), what is the calculated cross rate for an importer looking to buy 1 Great Britain Pound (GBP) in terms of Indian Rupees (INR)?** - A. 66.8000 INR - B. 104.3750 INR - C. 84.7500 INR - D. 96.2500 INR Answer - 83.50 $\times$ 1.2500 Rupees = 1.25 US dollars. And 1.25 US dollars can buy 1 GBP. So 1 GBP can be bought with 83.50 $\times$ 1.2500 Rupees = INR 104.3750 97. **If USD/JPY is 155.00 (bid) and USD/INR is 83.70 (offer), what is the calculated cross rate for buying 100 Japanese Yen (JPY) in terms of Indian Rupees (INR)?** - A. 54.00 INR - B. 129.74 INR - C. 53.64 INR - D. 18.51 INR Answer - 83.70 Rupees buys 1 US dollar, and 1 US dollar can be sold for 155 yen. So 1 yen = 83.70/155 Rs. So 100 yen = 100 $\times$ $\dfrac{83.70}{155}$ = INR 54 98. **In the forex market, what is the definition of the "Settlement date" or "Value date"?** - A. The day on which currencies are actually transferred between the buyer and seller - B. The day on which both parties initially agree to enter a future trade contract - C. The random 15-minute timeframe chosen to clear transaction level data anomalies - D. The calendar deadline when a bank must calculate its Net Overnight Open Position Answer. A. The settlement date/value date is the day on which currencies are actually transferred between the buyer and seller by payment and receipt, as opposed to the day the trade was agreed. 99. **How long does it take for a standard Spot transaction to be settled after the trade execution date?** - A. One calendar month after the initial trade execution date - B. Immediate real-time execution within the same instance - C. Exactly one business day later (tomorrow) - D. Two business days Answer - A. The most important value date is the "spot" value date, which is the settlement after two business days ($T+2$). 100. **What is a "Tom" transaction in the foreign exchange value date timeline?** - A. Delivery of foreign exchange to be made on the business day next to the transaction date - B. Settlement that occurs on the exact same calendar day as the trade date - C. A cash-settled forward transaction maturing beyond one full year - D. A transaction settled on weekends using automated retail card rates Answer - Tom stands for tomorrow; it means the delivery of foreign exchange is to be made on the business day next to the date of transaction ($T+1$). 101. **Cash transaction settlement occurs:** - A. Same day - B. T+1 - C. T+2 - D. T+3 Answer - A. Cash transactions settle on the trade date itself. 102. **Tom transaction settlement occurs:** - A. Same day - B. Next business day - C. Second business day - D. Third business day Answer - B. Tom (Tomorrow) transactions settle on the next business day. 103. **If a settlement date falls on a holiday in one of the two clearing currency centers, settlement is deferred to the next business day when both centers are open. True or False?** 1. True. The spot definition requires both transaction clearing centers to be open. If one is closed, settlement shifts to the next day when both are simultaneously open. Banks in both countries must be open to process the two legs of the transaction. 104. **What are settlement dates that occur anywhere after the standard spot value date ($T+2$) called?** - A. Forward value dates - B. Ready cash dates - C. Tom transaction timelines - D. Outlier transaction horizons Answer - A. Any settlement dates after the spot value date are called "forward" value dates, which are standardized into monthly tenors. 105. **NFP data stands for Non-Farm Production? True or False?** 1. False. NFP stands for Non-Farm Payroll data, and it is released monthly by the Bureau of Labor Statistics in the US. It is one of the most important indicators analyzed by market participants. 106. **Non-Farm Payroll data of US tells about the new jobs added in the farming sector. True or False?** 1. False. Non-farm payrolls represent the number of jobs added or lost in the economy over the last month, not including jobs relating to the farming industry, government jobs, household jobs and employees of non-profit organization that provide assistance to individuals. 107. **Wholesale price index (WPI) and the consumer price index (CPI) are two main indicators of inflation in India. True or False?** 1. True. 108. **Normally the excess of imports over exports i.e. trade deficit is positive for the domestic currency. True or False?** 1. False 109. **How does the real interest rate relate to foreign portfolio flows and currency strength in India?** - A. Real interest rates force the currency to convert instantly into a fixed gold standard parity - B. High real interest rates cause massive flight of capital, weakening the local currency value - C. Real interest rates are completely erased from calculation by the FBIL reference system - D. High real interest rates attract FPI debt inflows, increasing dollar supply and strengthening the INR Answer - D, When real interest rates are high, more foreign capital flows into domestic debt instruments. As more dollars come in, this supply makes the INR stronger. ### Ch.2 - Foreign Exchange Derivatives 1. What is the general definition of a derivative? - A. A financial contract that has intrinsic value independent of any other asset class - B. Something that is derived from another independent asset called the underlying - C. A physical commodity that can only be traded on recognized screen-based order matching platforms - D. A government-issued currency contract that does not allow any leverage or margin extensions Answer - B - A derivative is something that is derived from another called the underlying, which is independent, while the derivative is dependent on it. 2. **According to accounting standards like IAS 39 (superseded by IFRS 9) and AS 30 (superseded by Ind AS 109), which of the following is true regarding a financial derivative?** - A. It must require a full cash outlay on the initial trade date - B. It must be settled immediately on a $T+2$ spot timeline - C. There should be no full cash outlay on the trade date - D. It must be backed by a physical commodity reserve Answer - C - Both IAS 39 and AS 30 require that for a contract to qualify as a financial derivative, there should be no full cash outlay on the trade date. 3. **What operational benefit does the lack of a full cash outlay on the trade date provide to a derivative market participant?** - A. Price Stability - B. Perfect Hedging - C. Counterparty Credit Risk Elimination - D. Leverage Answer - D - Leverage. Lack of full cash outlay allows to buy the underlying without fully paying for it immediately or sell it without delivering it immediately. 4. **Derivatives are broadly classified into which five financial asset classes?** - A. Interest rate, credit, equity, forex, and commodity - B. Wheat, cash, options, futures, and forwards - C. Forwards, futures, swaps, options, and warrants - D. Residential, commercial, agricultural, corporate, and sovereign Answer - A 5. **What are the four generic types of derivative products available within each asset class?** - A. Call, put, long, and short - B. Hedging, speculation, insurance, and diversification - C. Forward, futures, swap, and option - D. Spot, tom, cash, and forward Answer - C 6. **Currency Swap is a type of derivative available in OTC forex market in India. True or False?** 1. True. Forward, forex swap (forex swap and currency swap), and option are types of derivatives in OTC forex market 7. **Historically, how did derivative products initially emerge in the markets?** - A. As highly leveraged speculative tools for international equity hedge funds - B. As central bank open-market interventions to fix the international price of gold - C. As electronic screen-based order matching networks under FEMA regulations - D. As hedging devices against fluctuations in commodity prices Answer - D 8. **What historical catalyst brought financial derivatives into the global spotlight in the post-1970 period?** - A. Growing instability in the financial markets - B. The absolute worldwide enforcement of the gold standard standard deviation curve - C. The complete legal ban on over-the-counter transaction level data by the IMF - D. A sudden collapse in international cross-border trade volumes. Answer - A. Financial derivatives came into the spotlight in the post-1970 period due to growing instability in the financial markets. 9. **What name is given to the activity of intentionally taking on market risk using derivatives in pursuit of a positive or negative future return?** - A. Speculation - B. Hedging - C. Diversification - D. Novation Answer - A. Speculation is defined as taking risk, more formally called trading, which results in the possibility of a positive or negative return in the future. 10. **If a participant is already exposed to an inherent market risk and wishes to substantially reduce that risk to lock in a future return at a known level, what strategy should they employ?** - A. Speculation - B. Hedging - C. Insurance - D. Novation Answer - B. In hedging, you are already exposed to risk, and hedging substantially reduces that risk and locks in the future return at a known level. 11. **Which specific derivative product is required to implement an "Insurance" approach to market risk management?** - A. Option - B. Forward - C. Futures - D. Swap Answer - A. The insurance approach selectively eliminates negative returns but retains positive returns 12. **How does "Diversification" operate as an approach to market risk management according to the curriculum text?** - A. It reduces both return and risk, but reduces risk more than return to minimize risk per unit return - B. It completely eliminates all counterparty credit risk and settlement risk through mandatory novation. - C. It locks in a single fixed exchange forward rate with an Authorised Dealer bank over the telephone - D. It requires a participant to maintain a Net Overnight Open Position below 25 percent of total capital Answer - A. Diversification reduces both return and risk, but in such a way that risk is reduced more than return so that risk is minimized per unit return. 13. **What is considered the primary, fundamental function of the global derivatives market?** - A. Risk management - B. Leveraged retail speculation - C. Bypassing the provisions of FEMA 1999 - D. Creating complex, non-standardized multi-currency asset pools Answer - A. While there are multiple secondary operations, the primary function of derivatives is risk management. 14. **Which is the primary function of derivatives?** - A. Speculation - B. Risk management - C. Tax planning - D. Accounting Answer: B. Derivatives were primarily developed to manage risk. 15. **Futures and forwards contribute significantly to:** - A. Price discovery - B. Tax collection - C. Monetary policy - D. Auditing Answer: A. Futures and forwards provide information about expected future prices. 16. **How can an investor use a derivative contract to execute a hedge against an asset they already own?** - A. By purchasing a contract whose value moves in the opposite direction to the value of the asset - B. By buying a contract that perfectly matches the exact directional gains and losses of the asset - C. By abandoning the contract on the trade execution date to avoid any cash outlay margins - D. By moving the transaction entirely to an unorganized over-the-counter telephone desk Answer - A. An investor can purchase a derivative contract whose value moves in the opposite direction to the asset they own, so profits in the derivative offset losses in the underlying asset. 17. **In India, the Reserve Bank of India (RBI) utilizes derivatives as an intervention tool in the forex market to promote INR stability. True or False?** 1. True. Central banks use derivatives for stabilizing currency prices, and in India, the RBI actively intervenes in the forex market through derivatives for INR stability. 18. **What can happen to an organization if financial derivatives are not used properly or are left unmanaged?** - A. It automatically triggers a shift from a direct currency quote to an indirect quote framework - B. It can lead to financial destruction in an organization - C. The organization is legally forced to become an independent central counterparty via novation - D. It completely eliminates all operational, legal, and regulatory risk exposures Answer - B. Financial derivatives are considered risky and, if not used properly, can lead to severe financial destruction in an organization. 19. **Which risk arises when the counterparty may fail to fulfill its obligation?** - A. Price risk - B. Liquidity risk - C. Counterparty risk - D. Operational risk Answer: C. Counterparty risk is the risk of default by the other party. 20. **Leverage can magnify both gains and losses. True or False** 1. True. Leverage increases exposure relative to invested capital. 21. **A foreign exchange derivative derives its value from:** - A. Exchange rates - B. Equity prices only - C. Gold prices only - D. GDP growth only Answer: A 22. **Exchange-traded currency derivatives are:** - A. Customized OTC contracts - B. Standardized contracts traded on recognized exchanges - C. Informal contracts - D. Insurance products Answer: B. ETCDs are standardized and traded on recognized stock exchanges. 23. **Which feature is standardized in futures?** - A. Lot size - B. Expiry date - C. Underlying - D. All of the above Answer: D 24. **A forward contract is an agreement to buy or sell an underlying asset at a future date at a price fixed today. True or False?** 1. True. The price to be paid or received in the future is agreed upon at the time of entering the contract. 25. **Forward contracts are primarily:** - A. Exchange traded - B. OTC contracts - C. Government tender contracts - D. Spot contracts Answer: B. Forward contracts are privately negotiated OTC contracts. 26. **In a forward contract:** - A. Only buyer has obligation - B. Only seller has obligation - C. Both parties have obligation - D. Neither party has obligation Answer: C. Both parties must honor the contract. 27. **All deliverable forward contracts are settled through delivery. True or False?** 1. True, but in non-deliverable forward (NDF) contracts there is no delivery of the notional amount of the underlying currencies of the contract and is cash settled. 28. **All OTC foreign exchange derivative contracts are settled through delivery except the Non-deliverable derivative contracts (NDDC). True or False?** 1. True. All OTC foreign exchange derivatives contracts like forwards, swaps, and option are settled through delivery except the Non-deliverable derivative contracts (NDDC). 29. **Swaps are also called spot-forward contracts. True or False?** 1. True. 30. **Generally, currency forward contracts do not require margin. True or False?** 1. False. While the classical/traditional forward did not require margin, to mitigate the high counterparty risk, CCIL as CCP collects margin from both the parties. 31. **A foreign exchange outright forward involves exchange of currencies:** - A. On same day - B. One day later - More than two business days later - Only after one year Answer: C. FX outright forwards settle beyond the spot settlement date. Swaps are also called forwards, and they can be spot-forward, or forward-forward, or up to spot (also called near maturity swaps) 32. **What are three types of up to spot swaps?** 1. They are Cash/Spot - Today and T+2, Tom/Spot - Tomorrow and T+2, Cash/Tom swap - Today and Tomorrow 33. **A forward contract helps reduce cash flow uncertainty. True or False?** 1. True. It locks in a future exchange rate. 34. **According to the Report of the Internal Working Group on Currency Futures in 2008, what behavior do real exchange rates exhibit over the long run?** - A. Nominal random walks with a permanent upward drift - B. Mean reverting - C. Complete pegging to the price of physical gold - D. Continuous appreciation against all five generic asset classes Answer - B. The report explicitly notes that nominal exchange rates are often random walks with or without drift, while real exchange rates over the long run are mean reverting.) 35. **What systematic hazard can occur in unmanaged OTC derivative spaces if large counterparties default?** - A. An immediate automatic shift from an indirect currency quote to a clean float parity - B. The instant conversion of all active options contracts into physical gold assets at CCIL - C. A domino effect of default by other counterparties as well, thereby making financial markets unstable - D. A complete elimination of all transaction fees and regulatory capital requirements Answer - B. A default by one or two large counterparties may lead to a domino effect of default by other counterparties, making financial markets unstable. 36. **What operational requirement must Authorised Dealers (banks) verify when offering an OTC foreign exchange derivative contract involving the INR (other than NDDCs) to a user?** - A. They must require the user to hold an explicit offshore asset account in Nepal or Bhutan - B. They must collect a mandatory upfront premium margin equal to 50 percent of capital - C. They must ensure the transaction is executed over a public stock exchange matching platform - D. Authorised Dealers shall ensure that the contract is for the purpose of hedging Answer - D. While offering an OTC foreign exchange derivative contract involving INR (other than NDDCs) to a user, Authorised Dealers must ensure that the contract is for the purpose of hedging. 37. **All OTC forex derivatives involving INR must generally be for:** - A. Speculation only - B. Hedging purpose - C. GamblingCCIL provides CCP services in India for certain forex contracts. - D. Tax planning Answer: B. Authorized dealers can offer OTC contracts, and stock exchanges can offer exchange-traded derivative contracts involving INR to users, solely to hedge contracted exposure. Non-INR pairs: 1. Authorised Dealers may offer OTC foreign exchange derivative contracts (both deliverable and non-deliverable) not involving INR to users without any restriction in terms of purpose 2. Recognized Stock Exchanges may offer foreign exchange derivative contracts not involving INR without any restriction in terms of purpose. 38. **Which organization in India provides Central Counterparty (CCP) clearing services for settlement with a trade guarantee for USDINR forward and swap contracts?** - A. Securities and Exchange Board of India (SEBI) - B. Foreign Exchange Dealers' Association of India (FEDAI) - C. Clearing Corporation of India Ltd (CCIL) - D. Financial Benchmarks India Private Limited (FBIL) Answer - C 39. **Exchange-traded currency options were introduced in India to expand available hedging tools. True or False?** 1. True 40. **Apart from hedgers, currency futures also attract:** - A. Arbitrageurs - B. Speculators - C. Traders - D. All of the above Answer: D 41. **A derivative (deliverable and non-deliverable) other than those which are traded on exchanges and shall include those traded on electronic trading platforms (ETPs) are OTC derivatives. True or False?** 1. True. 42. **What specialized facilities have some international derivatives exchanges introduced to help bridge exchange and OTC structures?** - A. Non-Deliverable Derivative Contracts (NDDC) and International Banking Units - B. Request-for-quote (RFQ) and Exchange-for-Physical (EFP) - C. Master Direction Circulars and Standard Deviation random selectors - D. Multilateral Netting Systems and Dual Card Rate sheets Answer - B 43. **What primary risk management processes does a Clearing Corporation implement to protect itself from default risks?** - A. Novation and Bilateral Telephone Auditing - B. Margining and mark-to-market - C. Standard Deviation Filtering and Random Window Sampling - D. Capital Account Asset Freezing and Card Rate Interventions Answer - B. The Clearing Corporation protects itself from counterparty credit risk and settlement risk from both buyer and seller by implementing two processes called margining and mark-to-market. 44. **Margining and mark-to-market help protect CCP from risk. True or False?** 1. True. These processes reduce default exposure. 45. **The primary role of an Exchange is to act as the central counterparty and absorb credit defaults, while the primary role of a Clearing Corporation is to provide the screen platform to match orders. True or False?** 1. False. The role of the Exchange is to bring a buyer and seller together and enable a trade, while the role of the Clearing Corporation is to settle the trade with a trade guarantee. 46. **Clearing Corporation primarily performs:** - A. Settlement and trade guarantee - B. Auditing - C. Taxation - D. Lending Answer - A 47. **Exchange's primary role is:** - A. Trade execution - B. Loan sanction - C. Tax collection - D. Insurance Answer - A. Exchanges bring buyers and sellers together. 48. **What is "Novation" in the context of exchange clearing house operations?** - A. The sudden conversion of a standard direct currency quote into an indirect benchmark quote - B. The regulatory audit executed by SEBI to eliminate small-volume retail investors - C. The process where the Clearing Corporation becomes a common central counterparty (CCP) to the buyer and seller - D. The private negotiation of an exotic option contract over a commercial telephone desk Answer - C. The settlement guarantee is provided by the Clearing Corporation becoming a common central counterparty (CCP) to the buyer and seller through the process of novation. 49. **A key advantage of currency futures over forwards is:** - A. Customization - B. Price transparency - C. Unlimited maturity - D. No regulation Answer - B. Exchange trading improves price transparency. 50. **Currency futures eliminate:** - A. Inflation risk - B. Counterparty credit risk - C. GDP risk - D. Political risk Answer - B. CCP guarantee removes counterparty exposure. 51. **Currency futures help investors:** - A. Hedge currency risk - B. Eliminate taxes - C. Avoid regulation - D. Avoid exchanges Answer - A. Hedging is a primary rationale for currency futures. 52. **Poorly managed OTC markets can create systemic risk. True or False?** 1. True. Counterparty defaults can spread through the system. 53. **CCIL provides CCP services in India for certain forex contracts. True or False?** 1. True 54. ETDs may provide imperfect hedges because: - A. They are customized - B. Contract specifications are standardized - C. They have no liquidity - D. They have no expiry Answer - B. Standardization may not perfectly match exposure 55. **OTC contracts are generally:** - A. Standardized - B. Exchange matched - C. Guaranteed by exchange CCP - D. Customized Answer - D. OTC contracts can be tailored to participant requirements. 56. **What primary feature makes Exchange-Traded Derivatives (ETD) significantly more transparent than Over-the-Counter (OTC) derivatives?** - A. They allow participants to fully customize their market lot sizes over the phone - B. They are screen-based order matching platform and settled contracts with the aid of an Exchange and Clearing Corporation - C. They are cleared on a gross physical basis without any standard lot limits - D. They completely bypass the surveillance activities of organized clearing corporations Answer - B. ETDs use a screen-based order matching platform and are settled via an exchange and clearing corporation, making them more transparent than privately negotiated OTC contracts. 57. **OTC derivatives are privately negotiated contracts. True or False?** 1. True. OTC contracts are negotiated directly between counterparties. 58. **Exchange-traded derivatives (ETD) are:** - A. Screen-based - B. Standardized - C. Centrally cleared - D. All of the above Answer - D. ETDs possess all these characteristics. 59. **Derivatives are preferred by traders because they offer leverage, along with benefits. True or False?** 1. True 60. **Interest rate swaps typically exchange:** - A. Fixed and floating cash flows - B. Equity shares - C. Currency notes - D. Commodities Answer - A. Interest rate swaps commonly exchange fixed and floating interest payments. 61. **A call option gives the right to:** - A. Sell - B. Buy - C. Borrow - D. Lend Answer - B. Call buyer has the right to buy, but not obligation. 62. **A put option gives the right to:** - A. Buy - B. Borrow - C. Sell - D. Lend Answer - C 63. **Option seller has obligation if the buyer exercises. True or False** 1. True. The seller must honor the contract. 64. **An option gives the buyer:** - A. Obligation only - B. Right but not obligation - C. Obligation and penalty - D. Guaranteed profit Answer - B. The buyer may choose whether to exercise. 65. **Option buyers pay premium. True or False?** 1. True. Premium is paid to obtain the right. 66. **Option sellers:** - A. Pay premium - B. Receive premium - C. Receive margin only - D. Have no obligation Answer: B. Sellers receive premium and assume obligation 67. **Which statutory authority empowered under Indian law is NOT involved in providing guidelines or regulations for financial institutions dealing in currency derivatives?** - A. Reserve Bank of India (RBI) - B. Securities and Exchange Board of India (SEBI) - C. The United States Federal Reserve System Board - D. Insurance Regulatory and Development Authority of India (IRDAI) Answer - C 68. **In India, a person entering a foreign exchange derivative contract must comply with the provisions of which primary statutory act?** - A. Foreign Exchange Management Act (FEMA), 1999 - B. Federal Reserve Act, 1913 - C. Financial Benchmarks Administrator Code, 2018 - D. Securities and Exchange Board of India Bulletin Mandate, 2022 Answer - A 69. **What defines the financial activity known as Arbitrage?** - A. A long-term strategy designed to selectively eliminate negative returns via options - B. An open market intervention executed by a central bank to maintain currency parities - C. A deal that produces profit by exploiting a price difference in a product in two different markets - D. A speculative trading bet built on high-speed processors and data entries Answer - C 70. **Why are classic arbitrage opportunities highly unlikely to persist for a long time in efficient financial markets?** - A. Arbitragers would rush in to profit from these transactions, thus closing the price gap - B. The clearing corporation instantly cancels any position that shows a riskless profit - C. Regulators impose an immediate penalty fee under the provisions of FEMA 1999 - D. The underlying cash market automatically suspends trading if an inequality is detected Answer - A 71. ==If USDINR is 94 (offer) and USDMXN is 19 (bid) and the direct MXNINR is 5.5 (bid), is there an arbitrage between two cross pairs and MXNINR?== 1. Yes, one can borrow rupees to buy dollar and sell those dollars for 19 MXN, thereby pay INR 4.94 for each MXN. But one MXN can be sold for INR 5.5. So we sell each MXN for INR 5.5, and thus get INR 19 $\times$ 5.5 = INR 104.5. So net profit is 104.5-94 = INR 10.5. 72. ==If EURUSD is 1.10 (offer), USDINR is 85.00 (offer), and EURINR is 92.00 (bid), is there an arbitrage opportunity between the cross pairs and the direct EURINR rate? Yes or No== 1. No, because you can buy EUR for INR 93.5, and sell for 92. This will lead to loss. 73. ==If USDINR is 84.00 (offer), USDTHB (Thai Baht) is 35.00 (bid), and THBINR is 2.50 (bid), is there an arbitrage opportunity between the cross pairs and the direct THBINR rate? Yes or No== 1. Yes. One can buy THB for INR 2.4 and sell THB for INR 2.5, and make INR 0.1 on every THB. 74. ==If EURUSD is 1.10 (bid), USDINR is 85.00 (bid), and EURINR is 92.00 (offer), is there an arbitrage opportunity between the cross pairs and the direct EURINR rate? Yes or No== 1. Yes. One can buy EUR for INR 92, and sell it for 1.10 $\times$ 85 = INR 93.5, and make INR 1.5 for every INR 92. 75. ==If EURUSD is 1.10 (bid), USDINR is 85.00 (sold), and EURINR is 92.00 (offer), is there an arbitrage opportunity between the cross pairs and the direct EURINR rate?== - A. Yes - B. No - C. Insufficient information to carry out trade Answer - C 76. **If EURUSD is trading at 1.1200 and USDINR is trading at 83.0000, what is the theoretical equilibrium cross-rate for EURINR?** - A. 94.1200 - B. 74.1071 - C. 92.9600 - D. 93.1200 Answer - C. Price of EUR in terms implied by two rates would be $\text{EURUSD} \times \text{USDINR} = 1.1200 \times 83.00 = 92.96$ 77. **In a Credit Default Swap (CDS) contract, what are the formal designations given to the two participating counterparties?** - A. Authorised Dealer and Price taker merchant - B. Buyer of protection and Seller of protection - C. Central counterparty clearing house and Novated client - D. Speculator trader and Arbitrageur hedger Answer - B 78. **Under a Credit Default Swap contract, what specific event triggers a mandatory compensatory payment from the protection seller to the protection buyer?** - A. A "credit event" (e.g., default) occurring during the life of the CDS contract - B. Any basic fluctuation in daily retail banking card rates - C. A random 15-minute network failure window on an electronic trading platform - D. The simple expiration of an unexercised European-style call option contract Answer - A. The protection seller agrees to pay the protection buyer for any loss in value on the specified reference obligation if a default occurs. 79. **Forwards are OTC but Futures are Exchange-traded. True or False?** 1. True 80. **In a cross-currency swap, an initial exchange of principal amounts at the very start of the contract is not obligatory. True or False?** 1. True 81. **How can an Indian company who has raised external commercial borrowings in USD eliminate both exchange rate risk and interest rate risk on the USD floating rate loan using a currency swap?** - A. By receiving from the bank/other party USD floating interest rate payments/principal amortisations, and paying the bank/other party fixed interest in INR and equivalent INR principal - B. By executing a series of short-term option contracts without paying any initial upfront cash layout premiums - C. By transferring their entire corporate asset base to an offshore banking unit located in Nepal or Bhutan - D. By forcing the bank to calculate a daily reference rate using a random 15-minute standard deviation rule Answer - A 82. **What makes a Currency Swap (cross-currency swap) distinct from a basic FX swap?** - A. A standardized exchange contract that completely prohibits any interest payment exchanges - B. A contract that can only be executed if one of the underlying assets is an equity-linked commodity - C. An OTC derivative which commits two counterparties to exchange streams of interest payments and/or principal amounts in different currencies on specified dates over the duration of the swap. - D. An unorganized over-the-counter deal that must settle physically within a maximum of 48 hours Answer - C 83. **A foreign exchange swap means an OTC derivative involving the actual exchange of two currencies on a near date, followed by a reverse exchange of the same two currencies further in the future. True or False?** 1. True 84. **What are the two distinct categories of swaps traded inside the foreign exchange and currency markets?** - A. Interest rate forwards and Equity options - B. Foreign exchange swap and currency swap - C. Direct card rate swaps and Indirect vehicle swaps - D. Vanilla margin swaps and Exotic credit default swaps Answer - B 85. **Interest Rate Swap is a derivative contract that involves exchange of a stream of agreed interest payments on a 'notional principal' amount with/without principal payments during a specified period? True or False?** 1. True 86. **In a forex swap contract, one cash flow is generally fixed, while the other is variable and based on a benchmark interest rate, floating currency rate, or index? True or False?** 1. True 87. **How does an option contract differ from a futures or forward contract regarding obligations?** - A. Options require a full cash outlay on the trade date; forwards/futures provide absolute leverage - B. In futures/forwards it is an obligation for both buyer and seller to settle, whereas the option buyer has the right but not the obligation - C. Forwards/futures are traded strictly OTC; options can never be traded on an exchange platform - D. Options carry extreme settlement risk; forwards/futures completely eliminate it via central clearing Answer - B. In futures and forwards, both matching parties are legally obligated to settle the contract, whereas an option buyer holds a right without any binding obligation. 88. **Mark-to-market (MTM) are applicable for seller of exchange-traded currency options contract? True or False?** 1. False. The seller of option has to maintain sufficient margin. 89. **Buyer of an option receives mark-to market profit/loss when the option is in the ITM? True or False?** 1. False. 90. **Currency futures contracts in Indian exchanges are settled via the physical delivery of foreign banknotes. True or False?** 1. False. In certain stock exchanges outside India like (CME Group), they are physically settled. 91. **If Rupee strengthens to 94.50 for a USD in 3 months, then exporter's net realisation for a dollar is Rs 94.50 even if they had sold forward contract at INR 95.80 for a dollar. True or False?** 1. False. As exporter had already sold dollars in the forward market, they had locked-in the rate of INR 75.80 and hence does not have to worry if USDINR falls. 92. **If the exporter ABC Pvt. Ltd. entered into a forward sales contract at the rate of INR 95.80/USD for USD 5 million, then the total Rupee inflow guaranteed upon maturity is INR 5 million $\times$ 93, if USDINR in the spot market falls to 93 upon maturity of the forward. True or False?** 1. False. The spot rate at time of maturity does not affect the total rupee value as the exporter had already locked-in the rate of dollar by selling the dollar receivables in the forward market for 95.80/USD. So the total rupee inflow is INR 5 million $\times$ 95.80. 93. **Suppose an Indian corporate entity ABC Pvt. Ltd. exports goods and expects to receive USD 5 million at the end of 3 months.** The spot rate is 1 USD = INR 75.10. ABC Pvt. Ltd. locks in a 3-month forward rate with their bank to sell USD at INR 75.80. What is this locked-in rate called? - A. Forward rate - B. Card rate - C. Real interest rate - D. Reference rate Answer - A 94. **Where are forward contracts negotiated and traded?** - A. Over-the-counter (OTC), that is bilaterally over the phone and confirmed through appropriate documentation after agreeing upon the terms and conditions. - B. On recognized public stock exchanges - C. Inside the centralized clearing platform of NSE or BSE - D. Exclusively at the physical headquarters of the Reserve Bank of India Answer - A 95. **If INR appreciates after entering a forward sale of USD, then** - A. Exporter benefits from spot market - B. Exporter loses hedge protection - C. Forward hedge protects exporter - D. Contract becomes void as forward buyer incurs loss Answer - C 96. **Locking a forward rate protects against adverse currency movement. True or False?** 1. True 97. **An exporter expecting USD receipts after 3 months is exposed to:** - A. INR weakening - B. INR strengthening - C. Interest rate risk only - D. Commodity risk Answer - B. INR appreciation reduces INR receipts from exports. 98. **An exporter expecting to buy USD after 3 months to import raw materials is exposed to:** - A. INR weakening - B. INR strengthening Answer - A 99. **Under Foreign Exchange Derivative Contracts Regulations, contracts involving currencies of which countries are explicitly excluded from qualifying under the definition of a foreign exchange derivative contract?** - A. Switzerland - B. China and Japan - C. United States and the Eurozone - D. Nepal and Bhutan Answer - D 100. **What defines a foreign exchange derivative (currency derivative)?** - A. A financial derivative whose payoff depends on the exchange rates of two (or more) currencies - B. A contract that can only be settled via the physical delivery of bars of gold bullion - C. A contract traded exclusively by retail merchants outside the scope of FEMA 1999 - D. A contract that completely eliminates price risk by maintaining an immutable fixed exchange rate Answer - A 101. **A trader who bought 10 lots of USDINR is unable to sell/exit/square off his position. What type of risk is the investor facing?** - A. Price risk - B. Liquidity risk - C. Legal risk - D. Operational risk Answer - B. liquidity risk as the inability to exit from a position. 102. **In FEM (foreign exchange derivatives contracts) Regulations, 200, a foreign exchange derivative contract is defined as a financial contract** whose value derives from changes in the exchange rate of two currencies, at least one of which is _not_ the Indian Rupee. True or False? 1. True. So it can be a pair having INR like USDINR or a pair not involving INR like EURUSD. 103. **Why do the prices of an underlying asset and its associated derivative tend to remain in strict equilibrium?** - A. Because the clearing corporation guarantees that both prices are legally forced to be identical - B. To avoid arbitrage opportunities, which increases financial market efficiency - C. Because the underlying market is completely shut down during New York and Tokyo sessions - D. Due to mandatory requirements specified under the Foreign Exchange Management Act (FEMA) of 1999 Answer - B 104. **The process of marking member positions to the daily settlement price at the end of each trading day other than expiry day, and to final settlement price on expiry day, is called cash accounting. True or False.** 1. False. It is called Mark to Market (MTM) ### Ch.3 - Exchange Traded Currency Futures 1. **What does Interest Rate Parity (IRP) primarily explain?** - A. Relationship between inflation and exchange rates - B. Relationship between spot and forward exchange rates based on interest differentials - C. Relationship between stock prices and currency prices - D. Relationship between GDP and exchange rates Answer - B. IRP states that forward exchange rates reflect interest rate differentials between two currencies. 2. **Under Interest Rate Parity, the forward rate is determined mainly by:** - A. Trade balance - B. Fiscal deficit - C. Interest rate differential - D. Gold reserves C. The difference between domestic and foreign interest rates drives forward pricing. 3. **If USD interest rates were to be higher than INR interest rates, USDINR futures would likely trade:** - A. At a premium to spot - B. At a discount to spot - C. Equal to spot - D. At zero value Answer - B. Higher INR rates generally cause USDINR futures to be above spot. 4. **If domestic interest rates exceed foreign rates, domestic currency usually trades:** - A. At forward discount - B. At forward premium - C. At spot parity - D. At intrinsic value Answer - A. Higher-rate currencies generally trade at discounts. 5. **In the IRP formula, "S" represents:** - A. Settlement price - B. Spot exchange rate - C. Strike price - D. Swap rate Answer - B. S denotes the current spot exchange rate. 6. **Which formula represents Interest Rate Parity?** - A. $\displaystyle \frac{F}{S} = \frac{1 + R_{INR}}{1 + R_{USD}}$ - B. $\displaystyle \frac{F}{S} = R_{INR} − R_{USD}$ - C. $F = S \times \text{Volatility}$ - D. $F = S^{2}$ Answer - A. This is the standard arbitrage-free IRP relationship. 7. **A trader who buys futures contracts has which of the following position?** - A. Short position - B. Square position - C. Long position - D. Floating position Answer - C 8. **A trader who sells futures contracts has which of the following position?** - A. Long position - B. Short position - C. Open physical position - D. Net position Answer - B. The trader who sells futures takes a short position. 9. **An importer who has to buy USD by end of the next month has long position in USD in the spot market. True or False?** 1. False. They have short position in USD in terms of INR. 10. **An exporter who has received USD for this exports has a short position in USD in the spot market. True or False?** 1. False. They have long position 11. **An exporter who has received USD for this exports has to make an equal amount of payment in USD for the imports of some raw material in coming days. What is his net position in USD in terms of INR in the spot market?** - A. Long position - B. Short position - C. Open physical position - D. No exposure Answer - D. No exposure to INR. He just have to transfer the dollar balances to his exporter for the imports of raw materials. 12. **In currency futures trading in India, the words "buy" and "sell" means the underlying asset changes hands between buyer and seller at execution? True or False** 1. False 13. **Currency futures market helps in price discovery. Which of the following explains the reason for this?** - A. there is free interaction of buyers and sellers on the exchange - B. there is fixed daily mandates by the RBI - C. the closing price of over-the-counter forwards is selected - D. Through bilateral negotiations between large corporate clients Answer - A 14. **Initial margin payments in exchange-traded futures contracts are mandatory for?** - A. Buyers only - B. Sellers only - C. Retail traders only - D. Institutional participants only - E. Both the parties Answer - C 15. **From whom does the exchange/Clearing Corporation collect MTM margins on a day-to-day basis?** - A. The gainers of the day - B. The loss-making participants - C. All brokers, regardless of position - D. The commercial banks acting as market makers Answer - B. The exchange/CC collects these margins (MTM margins) from the loss-making participants and pays to the gainers on a day-to-day basis. 16. **A futures contract has standardized quantity. Which of the following explains this?** - A. The total daily volume of the exchange is fixed - B. The price is locked across all exchanges - C. There is no delivery of notional amount, and the standard rule is to settle only the gains/loss - D. The lot size is decided today by the exchange Answer - C 17. **When did the National Stock Exchange (NSE) launch its currency futures trading platform?** - A. August 2000 - B. February 2010 - C. August 2008 - D. April 2018 Answer - C 18. **In which specific segment of the NSE was the currency futures trading platform launched?** - A. Capital Market segment - B. Futures and Options retail segment - C. Wholesale debt segment - D. Currency derivatives segment Answer - D 19. **Which currency pair was initially introduced for trading when the NSE platform launched in 2008?** - A. EURINR - B. USDINR - C. GBPINR - D. JPYINR Answer - B 20. **Assuming all other conditions being constant, if Indian interest rates rise while US rates remain unchanged, USDINR futures will generally:** - A. Increase - B. Decrease - C. Become zero - D. Remain unchanged Answer - A. Higher INR rates increase the forward premium. 21. **Assuming all other conditions being constant, if USD interest rates rise while EUR rates remain unchanged, EURUSD futures will generally:** - A. Increase - B. Decrease - C. Become zero - D. Remain unchanged Answer - A. Higher USD rates increase the forward cost of EUR 22. **Assuming all other conditions being constant, if futures price of USDINR is less than the futures price derived from IRP, then one can borrow in USD and invest in INR, and buy USDINR futures for risk-free gains. True or False?** 1. True. Because the actual futures price is lower than the IRP price, dollars are undervalued in the futures market. By borrowing USD, converting it to INR to invest at the higher Indian interest rate, and buying the cheap USDINR futures contract, you lock in a cheap rate to buy back the USD. At maturity, your INR proceeds will buy back more USD than you owe on your loan, securing a risk-free profit. 23. **Assuming all other conditions being constant, if futures price of USDINR is higher than the futures price derived from IRP, then one can borrow in INR and invest in USD, and SELL USDINR futures for risk-free gains. True or False?** 1. True. Because the actual USDINR futures price is higher than the theoretical price derived from IRP, the forward dollar is overpriced. Borrowing INR, investing in USD, and selling the overpriced USDINR futures contract locks in a risk-free arbitrage profit. 24. **When were Cross Currency Futures contracts introduced on Indian exchanges?** - A. August 2008 - B. February 2010 - C. April 2012 - D. In the year 2018 Answer - D. In 2018, Cross Currency Futures contracts on EUR-USD, GBP-USD and USD-JPY were also introduced 25. ==In global finance, a cross currency pair is any currency pair that does not involve the US Dollar like EUR/GBP). However, in India, under RBI regulations, cross currency means any currency pair that does not involve the Indian Rupee (INR). True or False?== 1. True 26. **Cross currency derivative in the exchange-traded currency derivatives in India are:** - A. Any contract involving the Indian Rupee - B. A derivative on a currency pair not involving the Indian rupee - C. A contract traded across multiple physical exchanges - D. A contract that converts directly into gold delivery Answer - B 27. **Why are currency futures classified as derivative contracts?** - A. Their settlement is handled by the Central Government - B. Their value is derived from the value/price of the underlying asset which is USDINR - C. They can only be traded via over-the-counter methods Answer - B 28. **Which of the following pair is not an underlying asset for INR-based currency futures?** - A. USDINR - B. JPYINR - C. EURINR - D. CHFINR Answer - D 29. **Which interest rate corresponds to the quote currency in USDINR?** - A. INR rate - B. USD rate - C. LIBOR only - D. SOFR only Answer - A. Here INR is the quote currency 30. **The period variable in futures pricing formula represents:** - A. Number of currencies - B. Time in years - C. Interest frequency - D. No of days since the trade has happened Answer - B 31. **In the theoretical formula for futures price which is $F = S \times e^{(r_{INR} - r_{USD})t}$, "t" approximately equals:** - A. Tax rate - B. Turnover - C. Trade size - D. Time to expiry Answer - B 32. **A forward rate higher than spot implies:** - A. Forward discount on base currency - B. Base currency trades at a forward premium. - C. No premium or discount - D. Market inefficiency Answer - B 33. **Which factor is NOT DIRECTLY part of the IRP formula?** - A. Spot rate - B. Interest rates - C. Time period - D. GDP growth Answer - D 34. **If spot USDINR is 95 and future is 95.45, we say the forward price of INR is:** - A. trading at premium to USD - B. trading at discount to USD - C. trading at parity - D. not enough information Answer: B, because more INR is required per USD in future. 35. **If USD and INR interest rates are almost same, forward rate should be:** - A. Above spot - B. Below spot - C. Close to spot - D. Zero Answer - C. No difference in interest rate implies minimal premium or discount. 36. **The term "risk-free rate" refers to:** - A. Guaranteed stock returns - B. Benchmark interest rate without default risk - C. Exchange rate target - D. Inflation rate Answer - B. It represents a theoretically riskless return. 37. **Currency futures pricing depends heavily on:** - A. Interest rates - B. Corporate profits - C. Dividend yields - D. Bond ratings only Answer - A 38. **Which formula gives theoretical futures price?** - A. $F = S \times e^{(r_{INR} - r_{USD})t}$ - B. F = S² - C. F = S + GDP - D. F = Spot × Inflation Answer - A. This is the theoretical pricing formula 39. In the theoretical formula for futures price which is $F = S \times e^{(r_{INR} - r_{USD})t}$, "e" approximately equals: - A. 1.414 - B. 2.71828 - C. 3.14159 - D. 0.618 Answer - B 40. **What is defined as the price at which a currency pair trades in the spot market?** - A. Futures price - B. Strike price - C. Spot price/rate - D. Base price Answer - C 41. **What is the current price of a specified futures contract called?** - A. Spot rate - B. Reference rate - C. Futures price - D. Execution cost Answer - C 42. **What happens to the futures price on the expiry date of the contract?** - A. It drops down to zero B. - It diverges wildly from the spot price - C. It converges with the spot price - D. It is frozen by the central exchange at its base price Answer - C 43. **How is the price quoted for a JPY-INR futures contract?** - A. The exchange rate in Indian Rupees for 1 Japanese Yen - B. The exchange rate in Japanese Yen for 100 Indian Rupees - C. The exchange rate in Indian Rupees for 100 Japanese Yen - D. The exchange rate in US Dollars for 1000 Japanese Yen Answer - C. For JPYINR, the base currency is 100 YEN and so the rate in terms of Indian Rupees is for every 100 Japanese Yen. The minimum yen that can be traded, that is lot size, is thus 100,000 yen. 44. **In a monthly contract cycle, what name is given to the contract maturing in the immediate (same) month?** - A. Far month contract - B. Mid-month contract - C. Near month contract - D. Current spot contract Answer - C 45. 43. **In a monthly contract cycle, what name is given to the contract maturing in the following, that is after the immediate month?** - A. Far month contract - B. Mid-month contract - C. Near month contract - D. Current spot contract Answer - B 46. **Monthly currency futures contracts on recognized Indian exchanges can extend up to a maximum of:** - A. 3 months - B. 6 months - C. One year - D. 2 years Answer - C. These contracts can extend up to one year 47. **Weekly currency futures contracts on pairs involving INRon recognized Indian exchanges can extend up to a maximum of how many consecutive weekly contracts - A. 11 - B. 10 - C. 9 - D. 8 Answer - A 48. **How many weekly contracts for currency futures are available on on recognized Indian exchanges for cross-currency pairs?** - A. 11 - B.10 - C. Zero Answer - C. 49. **INR based currency futures have weekly and monthly contracts but cross currency futures may have only monthly contracts. True or False?** 1. True 50. **What is another term used to describe the "expiry date" of a futures contract?** - A. Strike date - B. Last trading day or maturity date - C. Base date - D. Execution launch day Answer - C 51. **A new monthly contract on NSE CDS is introduced on the trading day immediately following the expiry of the previous near-month contract. True or False?** 1. True 52. **All weekly futures contracts expire at exactly 12:30 PM on the expiry day, which is Friday? True or False?** 1. True 53. **For all monthly currency futures contracts, when does the expiry date occur?** - A. On the very last calendar day of the month at 5:00 PM - B. Two working days prior to the last business day of the expiry month at 12:30 PM - C. The last Thursday of the contract month at 3:30 PM - D. The first Monday of the succeeding month at 9:00 AM Answer - B 54. **If the last business day of April is Tuesday, April 30th, what is the expiry date for the contract, assuming there is a holiday on 29th April?** - A. Monday, April 29th - B. Friday, April 26th - C. Thursday, April 25th - D. Saturday, April 27th Answer - C. The final settlement on T+2, so the last trading day (expiry date of the current month) contract will be Thursday, April 25th. 55. **What does the "Contract Size" or "Lot Size" specify?** - A. The total cash margin required to trade - B. The number of participants trading a specific pair - C. The daily maximum trading limit per member - D. The amount of the base currency that has to be delivered for a single contract Answer - B 56. **If an importer plans to hedge his future purchase of 1 million yen to pay for their imports, what is the lot size of the pair JPYINR that they have to buy in currency futures contract in India?** - A. 10 lots - B. 100 lots - C. 1000 lots - D. 1,00,000 lots as 1 lot is 10 yen Answer - A. One lot of JYPINR has 1,00,000 yen. So 10 lots will buy 1 million yen, as 1 million is 10 lakh. 57. **If an exporter plans to hedge his dollar receivables of 1 million USD, what is the lot size of the pair USDINR that they have to sell in currency futures contract in India?** - A. 1,00,00 lot - B. 1000 lot Answer - B. 1 lot is equal to 1000 USD. So 1000 lots is 10^(6) USD, which is 1 million USD. 58. **How is the "Contract Value" of a futures position calculated?** - A. Dividing the spot price by the tick size - B. Multiplying the futures price with the number of lots - C. B. Multiplying the futures price with the number of lots and size of each lot - D. Multiplying the daily margin by the total open interest Answer - C. To arrive at contract value, we multiply the futures price the number of lots and size of each lot. $\text{Contract Value} = \text{Futures Price} \times \text{Number of Lots} \times \text{Lot Size}$ 59. **What serves as the reference price for trading at the start of the first day of a new futures contract?** - A. The previous year's average spot rate - B. The theoretical futures price - C. The opening spot price of the RBI - D. A dummy value fixed at Rs. 100 Answer - B 60. **After day 1, that is on subsequent trading days, what is used as the base price of a currency futures contract?** A. The opening price of the spot market B. The daily settlement price computed by the Clearing Corporation C. The volume-weighted average price of the first 30 minutes D. The closing price of the international cross markets Answer - B. The base price of the contracts on subsequent trading days is the daily settlement price of the futures contracts 61. **There is no daily circuit filter applicable for Futures contracts? True or False** 1. True. However, in order to prevent erroneous order entry, daily operating price range shall be kept at certain percentage of base price of the contract, which is +-3% of all tenure up to 6 months, and +/-5% for all contracts of tenure more than 6 months. 2. It is true for both INR and cross currency pairs. 3. It acts like a dummy operating range. 62. **If the settlement price of previous day for JPYINR is 55, then the base price for today is 55 +/- 3%? True or False?** 1. False. It is 55. The base price of the contracts on subsequent trading days, that is other than the first trading day of the futures contract, is the daily settlement price of the futures contracts of the previous day. 2. 55 +/- 3% is the operating range for futures price for the day. 63. **Following is the rule for Base Price Determination? True or False** First Trading Day: The base price is the opening price or the previous day's underlying spot/closing price. Subsequent Trading Days: The base price is the Daily Settlement Price (DSP) of the futures contract from the previous trading day. Answer - True 64. **If a trader takes long position in USDINR futures contract on the day 1 of the contract at 92, then MTM loss(-)/profit(+) for the day is calculated as?** - A. = Base Price $-$ 92 - B. = Daily settlement price $-$ 92 - C. It is not calculated for day 1 Answer - B 65. **If June-2026 USDINR futures contract closed at 92 on 14-May-2026, Thursday, then for Friday, the operating range is?** - A. 89.24 to 94. - B. 92-92 - C. 90-95 - D. there is no concept of operating range in currency futures contract in exchanges in India. Answer - A. Range is 92-3% to 92+3% 66. **If Sept-2026 USDINR futures contract closed at 90 on 14-May-2026, Thursday, then for Friday, the operating range is?** - A. 89.24 to 94.76 - B. 85.5 to 94.5 - C. 92-95 - D. there is no concept of operating range in currency futures contract in exchanges in India. Answer - B. Range is 92-5% to 92+5% as the tenure (days until expiry) is greater than 6 months. 67. ==Cross-Currency Derivatives on NSE are traded till 7:30 pm IST, from Monday to Friday? True or False?== 1. False. They are traded from Monday to Friday, but from 9:00 a.m. to 5:00 pm IST. 68. **Daily settlement price (DSP) in Cross-Currency Futures (which is the settlement price of cross-currency futures contracts on all the trading days other than expiry day), in terms of INR is arrived by using FBIL reference rate of USDINR for EURUSD, GBPUSD. True or False?** 1. True. DSP is the weighted average price of the last half hour of trading. It is converted to INR using FBIL reference rate of USDINR for EURUSD, GBPUSD, which is [published at 1 PM](https://www.fbil.org.in/uploads/Press_Release_Revised_Time_of_Publication_of_FBIL_Reference_Rate_39972819e0.pdf). 2. DSP is used for mark-to-market settlement on all trading days, other than expiry date. It is the settlement price is the weighted average futures price (VWAP) of the trades generally in the last 30 minutes of trading. If no trading is done in last 30 mins, theoretical futures price is used. 3. FSP is used on final/last/expiry day. 69. **USDJPY Futures daily settlement, other than expiry day, is arrived in INR by using FBIL reference rate of USDINR. True or False?** 1. False. DSP is the weighted average price of the last half hour of trading. It is converted to INR using JPYINR reference rate 70. **If EURINR is 110, and USDINR is 94 then EURUSD is?** 1. 1 EURO = 110 INR. But 94 INR is 1 USD. So 1 EURO = 110/94 USD 2. So EURUSD = 110/94 71. **If USDINR is 94, and JPYINR is 55.10 (for 100 yen), value of USDJPY calculated using INR as vehicle currency is?** 1. USDJPY = 94/0.55 = 170 72. **If JPYINR (value of 100 yen in terms of INR) has increased from 55.10 to 59, JPY has weakened against INR. True or False?** 1. False. It has strengthened against INR as 100 JPY is worth more rupees 73. ==Cross-Currency Futures final/last trading/expiry day price is derived by using INR spot rate of the currencies, published by FBIL. True or False?== 1. True. EURUSD, GBPUSD, USDJPY are 3 cross-currency futures 1. Closing value of EURUSD on final day = EURINR/USDINR references rates published by FBIL at 1 pm. This is used to the derive the mark-to-market settlement in terms of quote currency USD for the last/final trading day. To convert this mark-to-market USD gains/loss to INR, it is multiplied by FBIL USDINR spot reference rate. 2. Closing value of GBPUSD on final day = GBPINR/USDINR references rates published by FBIL at 1 pm. This is used to the derive the mark-to-market settlement in terms of quote currency USD for the last/final trading day. To convert this mark-to-market USD gains/loss to INR, it is multiplied by FBIL USDINR spot reference rate 3. Closing value of USDJPY on final day = USDINR/(JPYINR/100), where USDINR, JPYINR are references rates published by FBIL at 1 pm. This is used to the derive the mark-to-market settlement in terms of quote currency JPY for the last/final trading day. To convert this value/mark-to-market gains/loss to INR, it is multiplied by FBIL (JPYINR/100) spot reference rate. 74. **From whom does the exchange/Clearing Corporation collect MTM margins on a day-to-day basis?** - A. The gainers of the day - B. The commercial banks acting as market makers - C. All brokers, regardless of position - D. The loss-making participants Answer - B. The exchange/CC collects these margins (MTM margins) from the loss-making participants and pays to the gainers on a day-to-day basis. 75. **What instruments does code FUTIRC, FUTIRT, FUTCUR in NSE mean?** 1. FUTIRC - Interest Rate Futures Contracts (All) 2. FUTCUR - Currency Futures 3. FUTIRT - Interest Rate Futures on Treasury Bills 76. **If the theoretical futures price for the contract on day 1 of the contract is INR 94.50, and the first day of trading has settled at INR 93.50, and you had bought 1 lot futures in afternoon at INR 93.40, mark to market gain/loss for you for the day is?** - A. 93.50-93.40 - B. 93.50-94.50 - C. 94.50-93.40 Answer - A. Day 1 P/L is = End of Day Closing Price - Your Execution Price 77. **Calendar spreads allow to hedge rollover risk up to only 7 months (M7) from the current month (M1). True or False?** 1. True 78. **How is the Daily Settlement Price (DSP) mainly derived for MTM settlement for days other than the expiry day?** - A. The highest traded price of the afternoon session - B. The midpoint of the day's operating range - C. The exact closing transaction at 5:00 PM - D. The volume-weighted average futures price (VWAP) in the last 30 minutes of trading Answer - B. The settlement price is the weighted average futures price (VWAP) of the trades generally in the last 30 minutes of trading. If no trade is done in the last 30 minutes, then it is derived using the Base price formula 79. **How is the daily MTM settlement done on the expiry day for weekly and monthly futures contract? - A. Using the FBIL reference rate for the expiry day - B. The midpoint of the day's operating range - C. The exact closing transaction at 5:00 PM - D. The volume-weighted average futures price (VWAP) in the last 30 minutes of trading Answer - A. Weekly currency futures contracts on the NSE are settled on Friday, while the monthly contracts are settled on their expiry day. Both type of contracts are settled using the Final Settlement Price, which is the official FBIL reference rate published at 1 PM on that day. Trading stops at 1 PM, and trade modification ends by 1 PM. If Friday is a trading holiday, the previous trading day shall be the expiry/last trading day of the weekly futures contract. 11 serial weekly cycle (excluding expiry week wherein monthly contracts expires on a Friday) and 12 month trading cycle (for pairs involving INR) are available for trading on NSE. For cross-currency pairs (pairs not involving INR), weekly contracts are not available. 80. **For cross-currency pairs, weekly contracts are not available. True or False?** 1. True 81. **What is the contract trading cycle for cross-currency futures contracts?** - A. 11 serial weekly cycles only - B. 12 serial monthly trading cycles - C. 3 quarterly cycles only - D. Annual calendar rolls only Answer - B 82. **What agency rate is used for the Final Settlement Price calculation of INR-linked contracts on the last trading day?** - A. The FBIL reference rate - B. The exchange floor closing bid - C. The daily spot median rate - D. The international Interbank offer rate Answer - A 83. **Just like Deposit Insurance and Credit Guarantee Corporation (DICGC), Financial Benchmarks India Private Limited (FBIL) is an RBI's subsidiary. True or False?** 1. False. 84. **FBIL is an independent entity and not regulated by RBI. True or False or Partially Correct?** 1. Partially Correct. While FBIL (Financial Benchmarks India Private Limited) is an independent private limited company, it is is authorised and regulated by the RBI under Section 45W of the RBI Act, 1934. 85. **What is the formula for the base price, which is the theoretical Futures price?** 1. $F_0 = S_0 \times e^{(R - R_{f})T}$ - $F_0$ = Theoretical futures price - $S_0$ = Value of the underlying - $R$ = Cost of financing (using continuously compounded interest rate) = relevant Modified MIFOR rate or such other rate = risk free rate here is the cost to borrow cash overnight or over a specific term when backing the loan with 100% risk-free government collateral. - $R_f$ = Foreign risk-free interest rate - $T$ = Time till expiration - $e$ = $2.71828$ - Rate of interest ($r$) may be the relevant Modified MIFOR rate or such other rate as may be specified by the Clearing Corporation from time to time. - Foreign risk-free interest rate ($r_f$) is the relevant SOFR rate or such other rate as may be specified by the Clearing Corporation from time to time. **Derivation of the Theoretical Futures Price of USDINR in terms of MIFOR:** We derive this from the forward value of USDINR: $\displaystyle \text{Forward Value of USD in terms of INR} = S \times (1 + R_{\text{Forward}}) = S \times \left( \frac{1 + R_{INR}}{1 + R_{USD}} \right)$ where $R_{\text{Forward}}$ is the forward rate of USDINR from the (CCIL's FX-Clear) in terms of % p.a. $(1 + R_{USD}) \times S \times (1 + {R}_{Forward}) = S \times (1 + R_{INR})$ Canceling the spot rate ($S$) from both sides: $\displaystyle (1 + R_{USD})(1 + F) = 1 + R_{INR}$ $\displaystyle (1 + R_{USD})(1 + F) - 1 = R_{INR}$ Now LHS is MIFOR rate. ${R}_{MIFOR}= R_{INR}$ Substituting this value of $R_{INR}$ back into the continuous compounding formula gives the final theoretical futures pricing formula: $F_0 = S_0 \times e^{(R_{MIFOR} - R_{USD})T}$, where $R_{MIFOR}$ and $R_{USD}$ are annualised rates in %, and T is in years. 86. **What is the theoretical futures price for a contract expiring in 24 days if 1-month FBIL Modified MIFOR rate is 6.6303% p.a., and 1-Month Term SOFR rate is 3.62% p.a., and the spot rate is 95.35?** 1. $\displaystyle \text{Futures Price-for a contract expiring in 24 days} = 95.35 \times e^{(0.061703 - 0.03919) \times \frac{24}{365}} = 95.4913$ 87. **What is the theoretical futures price for a contract expiring in 24 days if the 1-month term domestic Rupee (INR) interest rate is 6.6303% p.a., and 1-Month Term SOFR rate is 3.62% p.a., and the spot rate is 95.35?** 1. $\displaystyle F_0 = 95.35 \times e^{(0.066303 - 0.0362) \times \frac{24}{365}} = 95.5389$ 88. ==If futures price of 1-year USDINR is 99 , spot rate of USDINR is 95, 1-year domestic Rupee (INR) interest rate is also 6.6303% p.a., the USD interest rate is 3.62% p.a., is there way to benefit from these price levels, ignoring all the transaction/haircut/ costs?== 1. Cost - A bank can borrow a risk-free G-Sec and pledge it to raise INR 95 via TREPS (Triparty Repo), and buy it back a year later after paying INR interest rate of 6.6303%. This becomes the minimum cost *(ignoring the fee paid to borrow G-Sec)* at which a bank can raise rupee funds. 2. Gains - Convert INR 95 to 1 USD to earn USD risk-free rate of 3.62% p.a. on 1 USD, and hedge the INR value of these dollar returns by selling USDINR futures to receive total INR 102 by the end of year, which is a return of $\displaystyle \left( \frac{99}{95} \times (1 + 0.0362) \right) - 1 = 7.983\%$ 3. So the risk-free profit at the end of the year = Gains - Cost = 7.983-6.630% = 1.353% = INR 1.2850 on every INR 95 borrowed/invested to buy 1 USD. 89. ==If futures price of 1-year USDINR is 97 , spot rate of USDINR is 95, 1-year domestic Rupee (INR) interest rate is 6.6303% p.a., the USD interest rate is 3.62% p.a., is there way to benefit from these price levels, ignoring the transaction/haircut costs?== 1. Cost - A US bank can borrow a risk-free US govt. bond and pledge it to raise 1 USD, and buy it back a year later after paying 3.62% p.a. interest on it. This becomes the minimum cost *(ignoring the fee paid to borrow G-Sec)* at which a bank can raise USD funds. 2. Gains - Convert it to INR at spot rate of USDINR 95 to earn an INR coupon rate of 6.6303%, and hedge the USD value of these INR returns by buying USDINR futures at INR 97 to a dollar, to receive total USD 1.0443 by the end of year, which is a return of USD 1.0443 - USD 1 = 4.34%. $\displaystyle \left( \frac{95}{97} \times (1 + 0.066303) \right) - 1 = 4.431\%$ = $\left( \dfrac{1+{R_{INR}}}{1+{R}_{Forward Rate}}\right) - 1$ 3. So the risk-free profit at the end of the year = Gains - Cost = 4.431% - 3.62% = 0.811% = USD 81 cents of every 100 dollar borrowed. 90. **When are all open positions marked to the Final Settlement Price (FSP)?** - A. Every Friday evening - B. On the first trading day of the contract cycle - C. On the last trading day of the currency futures contract - D. Exactly 10 days after contract expiration Answer - A. Weekly currency futures contracts on the NSE are settled on Friday, while the monthly contracts are settled on their expiry day. Both type of contracts are settled using the Final Settlement Price, which is the official FBIL reference rate published at 1 PM on that day. Trading stops at 12:30 PM, and trade modification ends by 1 PM. If Friday is a trading holiday, the previous trading day shall be the expiry/last trading day of the weekly futures contract. 11 serial weekly cycle (excluding expiry week wherein monthly contracts expires on a Friday) and 12 month trading cycle are available for trading on NSE. 91. **In which type of settlement is only the profit and loss paid or received by participants?** - A. Physical settlement - B. Cash settlement - C. Gross commodity settlement Answer - B 92. **Given an India interest rate of 7%, a USA interest rate of 5%, and a USD-INR spot rate of 83, what is the approximate 6-month futures price using the covered interest rate parity) method?** 1. $\displaystyle F_0 = 83 \times \left( \frac{1 + \frac{0.07}{2}}{1 + \frac{0.05}{2}} \right) = 83.8122$ 93. **Everything else remaining the same, if the USD interest rate rises and the INR interest rate remains constant, USD-INR futures price is expected to increase. True or False??** 1. False. The futures price would decline. As the USD interest rate rises, investors earn higher interest holding physical dollars. Under Covered Interest Rate Parity, the forward/futures price of USD must depreciate (fall) against the INR to offset this higher yield and prevent arbitrage. 94. In the covered IRP formula ($F = S \times \frac{1 + R_{QC} \times \text{Period}}{1 + R_{BC} \times \text{Period}}$), what does $R_{BC}$ represent? - A. Interest rate on buying contract - B. Risk-free balance coefficient - C. Interest rate on quoting currency - D. Interest rate on base currency Answer - D. Here F is the forward price of the base currency in terms of quote currency 95. **The standard trading hours for currency contracts involving the Indian Rupee is Monday to Friday: 9:00 a.m. to 5:00 p.m? True or False?** 1. True 96. **SEBI and RBI both regulate exchange-traded currency futures within the Indian financial markets? True or False?** 1. True 97. **A short futures position is profitable when:** - A, When prices rise - B. When the daily settlement price matches the theoretical spot rate - C. When trading hours are extended - D. When prices fall Answer - B. Profit is when selling price is higher than the buying price. 98. ==If a trader goes sells 5 lot in USDINR futures contract at INR 94, and the underlying price increases to Rs. 97 at expiry, the net result is loss of INR 3 per lot, ignoring transaction cost? True or false?== 1. True. Total loss is INR 5000 $\times$ 3 = INR 15,000 99. ==If a trader goes sells 5,00,000 yen for INR at JPYINR = 59 and squares off the position at JPYINR = 58.0075 on the exchange, ignoring transaction cost, the net result is?== 1. Total profit is INR 5,00,000 $\times$ (58.0075-59)/100 = 5,00,000 $\times$ (0.9925/100)= INR 4962.5 100. **Minimum exposure to JPY in JPYINR futures contract is 1,00,000 yen. True or False?** 1. True. 1 lot is 1,00,000 yen 101. **Why is the X-axis of a currency payoff chart not drawn to the left-hand side of the vertical axis?** - A. Because profits cannot exceed the contract lot size - B. Because asset prices cannot drop below zero - C. Because exchanges block negative trading hours - D. Because the clearing house mandates standard values Answer - B 102. **In a standard payoff diagram, what parameters are mapped on the X-axis and Y-axis respectively?** - A. X-axis: Profits/Losses; Y-axis: Time till expiration - B. X-axis: Contract Size; Y-axis: Spot price - C. X-axis: Daily Settlement Price; Y-axis: Margin amounts - D. X-axis: Price of the underlying asset; Y-axis: Profits / Losses Answer - D 103. **Pay off on a position in derivatives is also called profit or loss that would accrue to a participant with a change in the underlying asset price at expiry? True or False?** 1. True 104. **How does a client close a position that they originally opened by selling a futures contract?** - A. By selling an equal number of contracts of a different maturity - B. By buying back the same contract type and maturity - C. By demanding physical delivery of foreign currency notes - D. By keeping the position open until a far month cycle begins Answer - B. A long position is closed by selling equal number of contracts of the same contract. 105. **Mr. Alex shorts 2 USDINR contracts/lot and buys 3 EURUSD contracts. On day two, he sells 2 EURUSD contracts. What is his final open position?** - A. Short 2 USDINR and Long 5 EURUSD - B. Short 5 USD-INR and Long 1 EURUSD Answer - B 106. **An outstanding or unsettled buy position in a futures contract is known as "Long Position". True or False?** 1. True 107. **Both short and long positions are added together when calculating open interest. True or False?** 1. False. Only one sided is considered, as total long positions will always be equal to total short positions 108. **Level of Open Interest does not indicate depth in the market but the credit risk rating of the exchange members. True or False?** 1. False. The level of open interest indicates depth in the market 109. **"Open Interest" in the context of the currency derivatives market is the total number of contracts outstanding (yet to be settled) for an underlying asset. True or False?** 1. True. It is equal to the total number of long contracts or total short contracts 110. **In which type of final settlement is only the profit and loss paid or received by participants?** - A. Tailored settlement - B. Cash settlement - C. Gross commodity settlement - D. Physical settlement Answer: B. In the case of cash settlement only the profit/loss resulting from positions is received/paid by/from the participants. In case of physical settlement, participants must physically give/take delivery of stocks/underlying asset to settle the open transactions 111. **If 3 lots of USDINR currency futures is bought on Day 1 at 94.4500, and sold 2 at 94.90 on Day 3, what is booked gain/loss here?** 1. Gains = (94.90-94.45) $\times$ 2 $\times$ 1000 = 900, and I lot is still open. 112. **On the final trading day, a trader squares off a short position of 15 lots of JPYINR futures at 61.2500, which was bought at 61 yesterday.** At 12:30 PM IST, trading ceases, and at 1:00 PM IST, the FBIL publishes the final JPYINR reference rate as 61.8500. What is the net profit or loss debited from or credited to the trader's account? - A. Profit of INR 3750 - B. Loss of INR 3750 - C. Loss of INR 37,500 - D. Profit of INR 37,500 Answer - Profit of 0.25 $\times$ 15 $\times$ 1000 = INR 3750. 113. **A trader buys 2 lots of EURUSD futures at 1.0850. At expiry, the FBIL daily reference rates are published at around 1:00 PM IST as follows: USDINR = 84.0000 and EURINR = 91.5600. What is the final profit or loss credited to or debited from the trader's account in INR?** - A. Profit of INR 840 - B. Loss of INR 840 - C. Profit of INR 10 - D. Loss of INR 10 Answer - A 1. EURUSD settlement price = 91.56/84 = 1.09 2. Here Selling Price > Buy Price, so there is profit. Profit (in terms of USD) per 1 euro = 1.09-1.0850=0.0050 3. Total profit for 2 lots of Euro is = 0.0050 $\times$ 2 $\times$ 1000 = USD 10. 4. But we need profit in INR. So USD 10 * 84 = INR 840. *(Do not forget this step)* 114. **A trader buys 2 lots of EURUSD futures at 1.0850 on a day prior to the expiry day, which closed at 1.0975.** On the expiry day, the FBIL daily reference rates are published at around 1:00 PM IST as follows: USDINR = 84.0000 and EURINR = 91.5600. What is the MTM gain/loss on the expiry day? - A. Profit of INR 1260 - B. Loss of INR 1260 - C. Profit of INR 15 - D. Loss of INR 15 1. Answer - B. 2. MTM gain (+)/loss (-) for a long position for a given day = DSP (for that day) - DSP (prior day); MTM gain (+)/loss (-) for a short position for a given day = DSP (prior day) - DSP (that day) 3. Here MTM gain (+)/loss (-) for a long position on expiry day = FSP (expiry day) - DSP (a day prior) = (91.56/84) - 1.0975 = 1.09 - 1.0975 = - USD 0.0075 for 1 euro. As it is negative, it is a loss. 4. For 2 lots, it is loss of USD 0.0075 $\times$ 2 $\times$ 1000 = USD 15. 5. But we need the MTM (loss) amount in INR. So USD 15 $\times$ 84 = $-$ INR 1260. *(Do not forget this step)* 115. **A trader buys 2 lots of EURUSD futures 3 working days prior to the last business day of the month. He incurs MTM loss of INR 200 on day 1 of his trade (trade date-T), gain of INR 300 on day 2 (next day,T+1), loss of INR 100 on day 3 (T+2). The total gain/profit for the trade is INR 0. True or False? 1. False. The total cumulative profit or loss of a futures trade is simply the running sum of all its daily MTM settlements from day 1 until the final settlement day. 2. Now we know monthly contracts _expire 2 working days prior_ to the last business day of the expiry month. Example: If Friday is the last business day, then expiry day will be Wednesday. 3. Since the trader took his trade position 3 working days prior to Friday (the last business day), the trade took place on Tuesday. So the exchange only calculates MTM values for Tuesday (T) and Wednesday (T+1 / Expiry Day). 4. MTM given for "Day 3 (T+2)" is completely irrelevant because the contract has already ceased trading and and reached final settlement on Wednesday (T+1). 5. The final profit is calculated strictly using Day 1 and Day 2, which equals a net gain of INR 100 (-200 + 300). 116. **A trader buys 2 lots of EURUSD futures 5 working days prior to the last business day of the month. He incurs MTM loss of INR 200 on day 1 of his trade (trade date-T), gain of INR 300 on day 2 (next day,T+1), loss of INR 100 on day 3 (T+2), loss of INR 100 on day 4 (T+3), and gain of INR 200 on day 5 (T+4). The total gain/profit for the trade is?** - A. Gain of INR 100 - B. Loss of INR 100 C. Gain of USD 100 - D. Loss of USD 100 Answer is B. -200+300-100-100 = -INR 100 117. **Assume, if the last business day of the month is 25-May (Thursday), and both 22-May and 24-May is a holiday, then expiry day for the May-month futures contract is?** A. Thursday of the previous week B. Friday of the previous week C. 23-May Answer - B. Settlement for the last trading day is T+2. So the last trading day is 2 working days prior to the last business day of the month. 118. ==An importer has to buy USD in spot at the time of the expiry of the futures contract where he has hedged his expected spot dollar purchases. He squares (sells) off his long futures position at profit in futures, but at a rate higher than the spot price. Also the spot is higher than futures buy price but lower than futures sell price. So the net price/cost of the dollars for the importer is higher than the futures buy price? True or False== 1. Numerical Assumption - Assume futures buy price is 100 and since it is squared off in profit, let us assume futures sell price to be 105. Spot is lower than futures sell price but higher than futures buy price, so it is between 100 and 105, and so can be assumed to be 103. 2. The Sign Convention - Let us consider inflows with a positive (+) sign and outflows (costs) with a negative (-) sign. 3. So net cost of dollars = -buy futures + sell futures + buy dollars in spot = -100 (outflow) + 105 (inflow) - 103 (outflow) = -98 4. -98 means the actual net cost to the importer is 98. 5. 98 is smaller than futures buy price of 100. 6. So the answer is False 119. **An importer has to buy USD in spot one day before the expiry day of the futures contract where he has hedged his expected spot dollar purchases through long futures position. Will there be basis risk for this spot purchase?** 1. Yes. Because the position is closed one day before expiry, the spot price and futures price have not yet converged. This difference (the basis) means the selling price of the futures and the purchase price of the spot will not perfectly offset, leading to a basis gain or loss against the original locked-in (hedge) futures buy rate. ### Ch. 4 - Exchange Traded Currency Options 1. **What is European Call Option-CE?** 1. A Call option is a contract between two parties giving the option buyer the right, but not the obligation, to *buy* the underlying asset at a specific price on a certain date. 2. **What is European Put Option-CE?** 1. A Put option is a contract between two parties giving the option buyer the right, but not the obligation, to *sell* the underlying asset at a specific price on a certain date. 3. **Which style of options are traded in NSE CDS?** - A. European - B. American Answer - A 4. **American-styled options does not allow to square off/sell options. True or False?** 1. False 5. **Both European and American-styled options can be squared-off in the market before expiry but only American options can be exercised before expiry. True or False?** 1. True 6. **What is underlying asset in ETCD in India?** 1. SPOT USDINR is the underlying in ETCD 7. **What is a strike price?** 8. **What is expiration date of an option contract?** 9. **What is time to maturity?** 10. **What are all other variables that decide price of an option?** 1. Strike price, time to expiry, spot price, INR interest rate, USD interest rate, implied volatility (IV) 11. **What is IV?** 1. It is expected volatility of the spot price (the underlying currency pair) implied by the current value/market price of the option. 12. **Call option buyer pays premium when buying a call option. True or False?** 1. True 13. **Call option seller pays premium when buying a call option. True or False? 1. False 14. **Who is put option buyer?** 1. A trader who buys the right, but not the obligation, to sell the underlying asset at the strike price. 15. **Who is put option seller?** 1. A trader who receives the premium and has the obligation to buy the underlying asset at the strike price if exercised. 16. **What does it mean to "exercise" the option?** 1. To "exercise" means putting into effect your right to buy or sell the underlying security specified in the options contract. 2. If the spot price closes above the strike price on expiry date, the holder of a call option (buyer of a call option) is said to exercise the contract, and receive the value of the option = closing price - strike price. 17. **What are the purposes for options trading?** 1. It can be traded for hedging, speculate (that is to expect returns by taking a position based on view about the future direction of the price), or for arbitrage. 18. **Options act as insurance policy against adverse price movements for those hedging the risk of their existing portfolio. True or false?** 1. True. By paying a premium upfront, a hedger establishes a price floor to limit potential losses on their portfolio without giving up the opportunity for gains *(minus the cost)* 19. **Which derivative uniquely provides insurance-like protection?** - A. Forward - B. Futures - C. Option - D. **Swap** Answer: C. Options protect against adverse outcomes while retaining upside. 20. **What are similarities between options and futures?** 1. There is a buyer and seller, prices are locked-in, and there is a final settlement date 21. **What are differences between them?** | Feature | Futures | Options | | -------------- | ------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------- | | Obligation | Both parties are obligated to fulfill the contract at expiration. | Only the seller is obligated. The buyer has the _right_, but not the obligation. | | Upfront Cost | No upfront cost (only exchange levied margins are to be paid by both the parties, which are refundable) | The buyer pays a non-refundable premium to the seller on Day 1. | | Risk Profile | Unlimited for both buyer and seller if the market moves violently. | Buyer: Capped strictly at the premium paid.<br>Seller: Theoretically unlimited. | | Reward Profile | Unlimited for both. | Buyer: Theoretically unlimited.<br>Seller: Capped strictly at the premium received. | | Daily MTM | Yes. Daily cash exchange for both buyers and sellers. | Buyer: No daily cash movement.<br>Seller: Monitored via MTM for margin adjustments. | 20. **What are the differences between European vs. American Options?** | **Feature** | **European Options** | **American Options** | | ------------------------ | ----------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------ | | **Exercise Timing** | Only on the exact expiration date. | Any time on or before the expiration date. | | **Flexibility** | Lower flexibility since execution is locked to a single day. | Higher flexibility because the buyer can choose any trading day. | | **Pricing (Premium)** | Lower relative value. | Higher than or equal to European options (all other factors being equal) due to the added flexibility. | | **Early Exit Mechanism** | Cannot be exercised early, but position can be squared off by selling it in the secondary market prior to expiry. | Can be squared off early via the secondary market or by physically exercising the option. | 21. **What is 'In the money (ITM) option'?** 1. An option is said to be in the money, if on exercising it, the option buyer gets a positive cash flow. 2. Thus, a call option would be in the money, if underlying price is higher than the strike price and similarly a put option would be in the money, if underlying price is lower than the strike price. 3. If strike price is 85, and spot is 82, put option is in the money *(but call option is out of the money)* 4. If strike price is 85, and spot is 87, call option is in the money *(but put option is out of the money)* 22. **What is 'Out of the money (OTM) option'** 1. An option is said to be out of the money, if on exercising it, the option buyer gets a negative cash flow. Thus, a call option would be out of the money, if underlying price is lower than the strike price and similarly a put option would be out of the money, if underlying price is higher than the strike price. 23. **If strike price is 85, and spot is 82, call option is out of the money. True or False?** 1. True, but put option of same strike price is 'in the money'. 24. **If strike price is 85, and spot is 87, put option is in the money. True or False** 1. False, put option is OTM *but call option is ITM* 25. **If strike price is 92 and the spot is 93, is the call option 'out of money'? True or False** 1. False. It is 'in the money' option 26. **For call and put options, premiums on ITM > premiums on OTM?** 1. True. This is because there is intrinsic value. 27. **A put option of strike price 83 and of strike price 81 when spot is 81 have same value with all other variables being same?** 1. No, 83 is more 'in-the money' than 81. So former has higher value than latter. 28. **What is 'At the money (ATM) option'?** 1. An option is said to be at the money if the spot price is equal to the strike price. On exercise of ATM option buyer gets zero cash flows. Any movement in spot price of underlying from this stage would either make the option ITM or OTM. 2. If strike price is 85, and spot is 85, call and put option is 'at the money'. 29. **If strike price of call option is 81, and that of a put option is 83, and spot is 82, which option is 'at-the-money'?** 1. None, call and put both are ITM | Moneyness Status | Call Option | Put Option | | :------------------------- | :------------------------ | :------------------------ | | **In-the-money (ITM)** | Strike Price < Spot Price | Strike Price > Spot Price | | **At-the-money (ATM)** | Strike Price = Spot Price | Strike Price = Spot Price | | **Out-of-the-money (OTM)** | Strike Price > Spot Price | Strike Price < Spot Price | 24. **What are 2 components of option value?** 1. Option value = intrinsic vale + time (extrinsic) value, where time value depends on time to expiry, moneyness and volatility 25. **What is intrinsic value of option?** Intrinsic value is exactly the real-world value of the option if it were to be exercised right this second. 1. For Call option, It is equal to max{0, Spot-Strike Price (K)} 2. For Put option, It is equal to max{0, Strike Price (K)- Spot,0} 26. **Can intrinsic value be negative?** 1. No. It is 0 for at-the money (ATM) and out of money (OTM) options. 27. **Is the intrinsic value for 'in the money' option always negative?** 1. No. It is always greater than 0 28. **A call option of strike price Rs 82 and of strike price Rs 84 when spot USDINR is Rs 81 have same intrinsic value?** 1. Yes and is zero, as both are 'out-of-money' option 29. **Two call options, one of strike price Rs. 83 and the other of strike price Rs 81, when spot is Rs 81 have same intrinsic value?** 1. Yes and is zero, as they are OTM and ATM options respectively 30. **Two put options, one of strike price 83 and the other of strike price 81, when spot is 84 have same value?** 1. No. Both are 'out-of-money' option and have 0 intrinsic value but option of strike price 83 has higher time value, because its strike price is closer to the current spot price of 84, giving it a significantly higher time value. 31. **Two call options, one of strike price 81 and the other of strike price 82, when spot is 80 have same value?** 1. No, former has greater value than the latter. 32. **What is time value of option?** 1. **Time Value** is the portion of an option's premium exceeding its intrinsic value, representing the price paid for the _probability_ of favorable market movement before expiration. The time value is directly proportional to the length of time to expiration date of the option. So it reduces/decays daily due to time erosion and drops to exactly zero at expiry. 2. It depends on moneyness, time to expiry and volatility. 33. **Deeper in the ITM options have lower time value than near the strike price?** 1. True. As the options goes deeper into the money, it behaves just like the underlying. Delta gets close to 1, and premium changes almost identically with spot price. So there is less “uncertainty premium” (time value) left. Deep ITM option price ≈ intrinsic value + very small time value (extrinsic value). 34. **If strike price is 82 and spot is 85 and time to expiry is 1 month, the option value will be higher than Rs 3, that is 3 + time value? True or false?** 1. True 35. **If strike price is 82 and spot is 85, and the option buyer expects spot price to settle at Rs 86 on expiry day, he would be willing to pay the present value of the expected extra profit of Rs 1 as the time value today while buying the option. True or False?** 1. True 36. **True of false? The longer the time to expiration, lower is the time value.** 1. False. The time value is directly proportional to the length of time to expiration date of the option. The longer the time to expiration, higher is the time value. 37. **All else being equal, two put options with same strike price of Rs 85 with time to expiry of 11 and 42 days, which strike price has the higher value?** 1. The latter one. 38. ==If strike price is 85 and spot is 85 and both have same time to expiry and other variables, which option, call or put, has higher value?== 1. Call Option, both have 0 intrinsic value but positive interest rates (cost of carry) gives higher time value to call option than put 39. **Which option has higher time value? Call Option of strike price 83 and 85 when spot is Rs 85, all else being same?** 1. ATM have the highest time value. As we move away, the time value falls. So the call option of strike price Rs 85 has the highest time value. But total value is highest for the call option of strike price 83 as it has intrinsic value. 40. **Which option has higher time value? Call Option of strike price 83 and 87 when spot is Rs 85?** 1. Both are equally spaced from the spot price, but one is OTM and other is ITM. OTM options are cheap and hence have higher demand. But theoretically, time value is higher for ITM option compared to OTM equally spaced. 41. **If strike price is 83, and spot rises frm 83 to 100, then option value rises, intrinsic values gains but time value falls. True or False** 1. True 42. **At expiry, time value of call option is higher than put option?** 1. No. It is Zero for both, and value of option becomes equal *(or very close)* to its intrinsic value 43. **Which option is expected to higher time value? A call option of strike price 85, or of strike price 82 with time to expiry 55 days when spot is at Rs 86 ?** 1. Strike price 85. Strike 85 is just Rs 1 away from the spot price, placing it right near the peak of the time value bell curve, whereas 82 is deep in-the-money. 44. **OTM options carry no intrinsic value and only time value, making them cheaper but riskier. True of False?** 1. True. By definition, an out-of-the-money option cannot be exercised for an immediate profit, meaning 100% of its price consists entirely of time/volatility value. 45. **Which option is expected to have lower value, assuming all other variables are same? A put option of strike price 80 or 82 when spot is 82?** 1. Option of strike price 80. A put option gives you the right to sell. The right to sell at a lower price (80) is always worth less than the right to sell at the current market price (82). 46. **Which option is expected to have higher time value, assuming all other variables are same? A put option of strike price 82 or 84 when spot is 82?** 1. Option of strike price 82. 47. **Which option is expected to have higher value, assuming all other variables are same? A put option of strike price 82 or 84 when spot is 82?** 1. Option of strike price 84. 48. **Which option is expected to have lower time value, assuming all other variables are same? A put option of strike price 80 or 81 when spot is 82?** 1. Option of strike price 80. 49. **Which option is expected to have higher time value, assuming all other variables are same? A put option of strike price 83 or 84 when spot is 82?** 1. Option of strike price 83 50. **Which option is expected to have higher total value, assuming all other variables are same? A put option of strike price 83 or 84 when spot is 82?** 1. Option of strike price 84 because it has more intrinsic value 51. **Which option is expected to have lower value, assuming all other variables are same? A put option of strike price 80 or 84 when spot is 82?** 1. Option of strike price 80. 52. **True of false? The longer the time to expiration, higher is the time value.** 1. The time value is directly proportional to the length of time to expiration date of the option. 2. The longer the time to expiration, higher is the time value. 53. **Which option is expected to have higher time value, assuming all other variables are same? A call option of strike price 83 or 85 when spot is 83?** 1. Option of strike price 83 54. **Which option is expected to have higher time value, assuming all other variables are same? A call option of strike price 82 or 80 when spot is 82?** 1. Option of strike price 82 55. **Which option is expected to have higher value, assuming all other variables are same? A call option of strike price 82 or 80 when spot is 82?** 1. Option of strike price 80 as it has higher intrinsic value = 2 vs 0, so higher total value. 56. **Which option is expected to have lower time value, assuming all other variables are same? A call option of strike price 80 or 81 when spot is 79?** 1. Option of strike price 81 as it farther than 80 from 79 57. **Which option is expected to have higher time value, assuming all other variables are same? A call option of strike price 83 or 84 when spot is 85?** 1. Option of strike price 84 58. **Which option is expected to have higher total value, assuming all other variables are same? A call option of strike price 83 or 84 when spot is 82?** 1. Option of strike price 83 because it has a higher total value purely because it has higher **time value** (since it is closer to the At-the-Money peak of 82). 59. **Which option is expected to have lower value, assuming all other variables are same? A call option of strike price 80 or 84 when spot is 82?** 1. Option of strike price 84 60. **Delta of the call option is a value between -1 and 1. True or False?** 1. False, it is between 0 and 1. Delta of call option = increase in price/increase in spot, and Delta of put Option (between -1 and 0) = fall in price/increase in spot 61. **Delta of the call option increases if strike price is decreased from 84 to 82 and spot price is kept same at 85. True or False?** 1. Yes, delta of the call option increases with moneyness. 62. **How will the Delta of the call option moves towards 0 if strike price is moved deep out of money from 120 to 150, and spot price is kept same at 85?** 1. It will move towards 0. ### Ch. 5 - Strategies Using Exchange Traded Currency Derivatives 1. **An exporter is about to receive USD for his exports by next month. He is worried about?** - A. depreciation of USD against INR, so he can hedge this risk by selling USDINR futures - B. appreciation of USD against INR, so he hedge this risk by buying USDINR futures - C. depreciation of USD against INR, so he hedge this risk by buying USDINR futures - D. appreciation of USD against INR, so he hedge this risk by selling USDINR futures Answer - A 2. **Hedgers are types of participants in ETCD who have a real exposure to foreign currency risk on account of their underlying exposure and their objective is to reduce or mitigate the foreign currency risk using ETCD. True or False?** 1. True. This exposure could be imports/exports of goods/services, foreign investments or foreign expenditure on account of travel, studies, etc. Here's a definition of Hedgers, Speculators, and Arbitragers - Hedgers: Market participants with a real underlying foreign currency exposure arising from commercial business (imports, exports, loans, or investments). Their primary goal is to mitigate or entirely remove currency risk by locking in future cash flows, converting unhedged uncertainty into a predictable benchmark rate. - Speculators (Traders): Participants without any real underlying currency exposure. They intentionally absorb price risk from hedgers, taking directional views (bullish or bearish) to profit from price fluctuations, thereby providing vital liquidity and depth to the exchange. - Arbitragers: Participants who identify localized mispricing between two or more markets (e.g., ETCD futures vs. OTC forwards) or across currency pairs. They execute simultaneous, riskless counter-transactions to lock in a guaranteed profit, driving the market back into macroeconomic equilibrium. 3. An arbitrage desk notices that the 6-month USDINR currency futures on the exchange are trading at ₹83.2500 / 83.2600 (Bid/Ask). Also, the 6-month forward contract in the interbank OTC market is quoted by an Authorized Dealer (AD) Bank at ₹83.1500 / 83.1600. The settlement dates match exactly. What is the arbitrage trade here, ignoring transaction costs? 1. Arbitrage gain = Buy in OTC Forward - Sell ETCD Futures 4. **A market participant who has no genuine foreign currency inflow or outflow but regularly buys currency futures based on technical indicators is classified as a:** - A. Hedger - B. Arbitrager - C. Speculator - D. Clearing Member Answer - C 5. An entity having a mismatch in foreign exchange earnings and expenditures faces real financial exposure and uses derivatives to ensure cash-flow predictability. This entity is a: A. Arbitrager B. Hedger C. Scalper D. Momentum Trader Answer - B 6. **An entity having equal foreign exchange earnings and expenditures, and also realized at the same time, faces real financial exposure and uses derivatives to ensure cash-flow predictability. True or False?** 1. False. Even if the exchange rate is volatile, gains/loss in earnings/inflows will offset loss/gains in expenditures/outflows. 7. **A trader finds that buying USD with INR and then selling USD to receive EUROs makes price of EURO in INR less than directly buying EURO with INR using EURINR trade. Which of the following defines the fundamental risk borne by an institutional arbitrager when executing a cross-market cash-futures trade simultaneously?** - A. Infinite directional price risk - B. Execution lag/Time gap risk between various legs. - C. Underlying macroeconomic risk - D. Interest rate parity inflation shift Answer - B. Execution lag or time gaps between order fills can leave an arbitrage leg unexecuted, creating an unintended naked position. For instance, if the trader has successfully converted INR to USD and USD to EUR, they are now holding long EUR exposure. To lock in the profit, they must immediately sell EUR for INR via the EURINR pair. If an execution delay occurs and the EURINR price drops during that time gap, it would erase the arbitrage profit and leading to a loss. 8. **Compute the gross arbitrage profit for an investor who buys $10,000 in the spot market at ₹82.40 and shorts 10 lots of USDINR futures ($1,000 contract size) at ₹82.95 if the contract expires at ₹83.10.** - A. INR 2,500 - B. INR 5,500 - C. INR 1,500 - D. USD 5,500 Answer - B. Sell Price is greater than buy price, so there is indeed profit. Profit = 82.95-82.40 $\times$ 10 $\times$ 1000 = INR 5500 9. ==If the actual market rate in spot for EURINR is 92.50 while the theoretical cross-rate (Hint - USD as vehicle currency, that is converting EUR to USD, and then USD to INR) is calculated as 92.96, including all transaction costs, the arbitrager will:== - A. Sell EURINR on spot, buy EURUSD, buy USDINR - B. Buy EURINR on spot, buy EURUSD, sell USDINR - C. Buy EURINR on spot, sell EURUSD, sell USDINR - D. Do nothing as transaction costs eliminate it Answer - C. 92.50 is less than 92.96. So we make 92.50 as our buy price, and 92.96 as our sell price. For this, we buy 1 EUR with INR 92.50. And then sell it to receive USD, and then further sell USD to receive INR. 92.96. So the profit is 92.96-92.50. But as soon as such cross-rate misalignments crop up, market participants exploit them instantly, causing rapid price adjustments that collapse the opportunity. Hence, profitable triangular arbitrage opportunities exceptionally rare in liquid pairs in the spot market or highly liquid and developed ETCD platforms. 10. **A bank buys a USDINR forward contract in the OTC market at ₹82.10 and shorts USDINR futures on the exchange at ₹82.10. If transaction costs are zero, this position represents:** - A. A speculative long position - B. A triangular arbitrage play - C. Zero arbitrage potential due to matching price levels - D. A calendar spread strategy Answer - C. The short position in futures just hedged their forward long position 11. **If an arbitrageur encounters a market where one leg is cash-settled (say futures contract) and the counter-leg requires delivery-based physical settlement (like forward), what additional risk is introduced?** - A. Infinite margin-call escalation risk - B. Unwinding and trade reversal execution price mismatch risk - C. Counterparty credit risk with the exchange clearing house Answer - B. If the closing of both trades do not happen at same price, that is both contracts do not expire to offset each other, it will lead to execution/liquidation (or settlement mismatch) risk. 12. **If a speculator shorts 250 lots of EURINR futures at INR 91.20 and the contract settles on expiry at INR 89.40, calculate the absolute payout, ignoring transaction costs.** 1. (+)Profit/(-)Loss = (Sell Price - Buy Price) $\times$ Lots $\times$ Lot size = $1.80 \times 250 \times 1,000 = 4,50,000$ 2. Payoff is value at expiry 13. **A trader faces execution risk if one leg of an arbitrage strategy executes while the other leg remains completely unfulfilled due to sudden illiquidity. True or False?** 1. True. Here the trader is left holding an unhedged (open/not closed) naked position. 14. What is the theoretical/implied cross-rate of GBPUSD if GBPINR is ₹105.00 and USDINR is ₹84.00. 1. ₹84 gives 1 USD, but 1 GBP requires ₹105. So we see how many 84s are there in 105 to find how many USD equals to 1 GBP. 2. 1 GBP = USD 105/84 3. GBPUSD = 105/84 = 1.25 15. Create a table to show the currency risk of an exporter and importer along with hedge strategy for each one currency futures and options | **Underlying Corporate Exposure** | **Primary Currency Risk** | **Futures Strategy** | **Options Strategy** | | ----------------------------------------- | ----------------------------------------------------------- | ------------------------ | -------------------------------- | | **Exporter** (Receiving Foreign Currency) | Local Currency Appreciation / Foreign Currency Depreciation | **Short Futures** (Sell) | **Buy Put Options** (Long Put) | | **Importer** (Paying Foreign Currency) | Local Currency Depreciation / Foreign Currency Appreciation | **Long Futures** (Buy) | **Buy Call Options** (Long Call) | >Combined Effective Price: >Import = Spot Buy Rate - (Futures Sell Price - Futures Buy Price); (+) for outflow, (-) for inflow >Combined Effective Price (Export) = Spot Sell Rate + (Futures Sell Price - Futures Buy Price); (+) for inflow, (-) for outflow 16. ==Speculators serve what critical secondary function within exchange ecosystems?== - A. They eliminate all structural basis risks for importers - B. They act as clearing house backstops during structural defaults - C. They absorb the price risks shed by hedgers and add liquidity - D. They regulate the reference rates set by the RBI Answer - C. Futures markets cannot clear trades without speculators participating to take the counterparty side of hedging transactions, giving the market necessary depth. 17. ==An Indian infrastructure company imports heavy equipment costing USD 2 million. Initial Deal Date Spot Rate is INR ₹81.00. Leaning toward an appreciation of the Rupee, the management decides to hedge exactly 50% (USD 1 million) of the exposure. So they buy 1000 Lots of 2-month USDINR contracts at a rate of ₹81.50. The Rupee depreciates over the next two months. The spot market drops to ₹82.00, and the futures contract settles at ₹82.05. Find the following:== 1. Calculate Futures Contract P&L 2. Calculate Hedged Cash Remittance Component (50%) - This is the effective value of dollars which were hedged 3. Calculate Unhedged Cash Remittance Component (50%) - This is the effective value of dollars which were unhedged 4. Calculate Final Blended Effective Exchange Rate 5. Calculate Final Blended Effective Exchange Rate if the company hedged 100% of the exposure? 6. Calculate Final Blended Effective Exchange Rate if the company left the position entirely unhedged? Answer: 1. (82.05-81.50) $\times$ 1000 $\times$ 1000 = 55 paise $\times$ INR 1 million = INR 5,50,000 2. (82-0.55) $\times$ 1 million = INR 81.45 million 3. 82 $\times$ 1 million = INR 82 million 4. $\displaystyle \dfrac{82+81.45}{2}$ = 81.725 5. 82-0.55 = INR 81.45 6. INR 82 18. ==An investor from Mumbai deploys $100,000 in US equities. Entry Spot Exchange Rate is INR 83.00 per USD. So Total Capital Deployed = INR 83,00,000. One Year the portfolio grows by 15% in USD terms, reaching a value of USD 115,000. Liquidation Remittance Reality: The investor closes out the equity portfolio, but the Rupee has appreciated to ₹81.00. Find the following:== 1. Calculate Return in INR Terms Due to Unhedged Currency Loss: 2. Formula hedge strategy using currency futures Answer: 1. Initial Value = 83. Final Value = $1 \times 1.5 \times 81$. So Return is $\left(\dfrac{1 \times 1.5 \times 81}{83}\right)-1$ = 12.23% 2. Could he have hedged by selling USDINR futures just once, or sold in parts? 19. ==An Indian exporter ships textile goods worth EUR 500,000 on January 15. Realization is expected on March 20. The exchange offers weekly expiries every Friday and monthly expiries on March 26. Which contract should the exporter use?== - A. January Monthly Contract - B. March Monthly Contract - C. April Monthly Contract - D. February Weekly Contract Answer - B. The chosen contract month must ensure that the expected date of cash remittance falls close to, but prior to, the contract's expiration date. Here, March 20 occurs just before the March 26 expiry. If futures expiry date is prior then the cash will remain unhedged. Also what if you sell further month expiry like April? In that case, the basis wider/higher, and could also be more volatile. To recall, realised sell price for the exporter = Futures sell price (locked-in price) $+$ (Sell Price in the spot - Futures Buy Price) {basis risk}; (+) for inflow, (-) for outflow 20. **A firm needs to pay a USD 45,250 invoice in 3 months in INR. Given the USDINR standard lot size of $1,000, what hedging problem does the firm face if it uses ETCDs?** - A. Liquidity mismatch - B. Cross-rate asymmetry - C. Mandatory delivery execution - D. Over-hedging or under-hedging due to standard lot sizing Answer - D. It is a kind of basis risk. 21. **An exporter budgets a transaction at a USDINR spot rate of ₹81.00. He shorts futures at ₹81.75. On the cash realization day, the spot rate is ₹83.00 and futures are squared up at ₹83.05. Calculate the final effective locked-in exchange rate per dollar.** - A. ₹81.00 - B. ₹83.00 - C. ₹81.70 - D. ₹82.35 Answer - C - final effective locked-in exchange rate per dollar = Spot Sell Price + (Futures Sell Rate (locked in rate) - Futures Buy Price) = 83 $+$ (81.75 $-$ 83.05) = 81.70 = final effective locked-in exchange rate per dollar = Futures Sell Rate (locked in rate) + *Basis* (Sell Rate in Spot-Futures Buy Price) = 81.75 -(83.05-83) =81.70; ; (+) for inflow, (-) for outflow 22. ==What is the Net Price of a dollar for an importer, after continuous rollover in futures?== 1. Net Buying Price = Futures Buy Price (Current Month/First Month) + {Futures Buy Price (next month)- Futures Sell Price (current month)}.......- (Spot Buy Price - Futures Sell Price of the last month). 2. $\text{Net Buying Price} = \text{Futures Buy Price}_{1} + \sum_{t=1}^{n-1} \left( \text{Futures Buy Price}_{t+1} - \text{Futures Sell Price}_{t} \right)$ $+$ $\left( \text{Spot Buy Price} - \text{Futures Sell Price}_{n} \right)$; where $n$ is the total number of months (including the current month) means the total number of individual contracts traded across the entire timeline is $n$. 3. t= $1$ is the the current/first month. 4. $t=n$ is the the final month (total months) when the physical invoice is paid, that is the final futures month. 23. ==What is the Net Price of a dollar for an exporter for its receipts, after continuous rollover in futures?== 1. Net Price = Futures Sell Price (Current Month/First Month) + {Futures Sell Price (next month)- Futures Buy Price (current month)}.......- (Spot Buy Price - Futures Sell Price of the last month) 2. $\text{Net Selling Price} = \text{Futures Sell Price}_1 + \sum_{t=1}^{n-1} \left( \text{Futures Sell Price}_{t+1}-\text{Futures Buy Price}_t \right)$ $-$ $\left( \text{Futures Buy Price}_n - \text{Spot Sell Price}_n \right)$ where $n$ is the total number of months (including the current month) means the total number of individual contracts traded across the entire timeline is $n$. 3. t= $1$ is the the current/first month. 4. $t=n$ is the the final month when the physical invoice is paid, that is the final futures month. 24. ==If USDINR is 91, and USD gained 2 % against INR, so the new USDINR value is?== 1. 91 $\times$ 1.02 = 92.82 25. ==If USDINR is 91, and INR depreciated 2 % against USD, so the new USDINR value is?== 1. Here we convert USDINR to INRUSD and then apply the % change to value of INR. 2. INRUSD = $\dfrac{1}{91} \times 0.98$ 3. So USDINR = $\dfrac{91}{0.98}$ = 92.8571 26. **An investor holds an INR-denominated Gold ETF. Gold gains 20% in USD terms over a period, but the Rupee appreciates by 6% against the USD. What is the approximate return of the unhedged Gold ETF?** - A. 26.00% - B. 13.20% - C. 14.00% - D. 15.00% Answer - B. 1. Cost = Say INR 93 was borrowed to buy a dollar (cost) and a gold worth same. 2. Final Value in INR = $\displaystyle \dfrac{1 \times 1.20 \times 93}{1.06}$ = 105.28 3. So Returns in % = $\left( \dfrac{\text {Final Value}}{\text Cost}\right)$ - 1 = $\dfrac{1 \times 1.20 \times 93}{1.06\times 93}$ = 13.2% 27. ==A corporate treasurer faces an asymmetric trade exposure: exports of USD 4 mn and imports of USD $4.85 mn due in the same month and at the same time. What is the optimal residual hedging strategy?== - A. Short USDINR futures for $4,000,000 - B. Long USDINR futures for $4,850,000 - C. Short USDINR futures for the residual $850,000 - D. Long USDINR futures for the residual $850,000 Answer - C. Long USDINR futures for the residual USD 0.85 million, which is $850,000. 28. A student's university fees require a remittance/fee payment of $30,000 in 6 months. Current spot is ₹82.00, and the 6-month futures premium is exactly 2%. The student's family invests in fixed deposits yielding 6% per annum to build the fund. What futures rate will they lock in? - A. ₹82.00 - B. ₹83.64 - C. ₹84.12 - D. ₹82.82 Answer - B. Locked Future Buy Rate = Spot $\times$ (1+Premium Percentage) = 82.00×1.02= INR 83.64 29. ==Why is a short futures hedge considered a double-edged sword for an exporter compared to an options-based hedge?== - A. It demands higher ELM fees across all monthly cycles - B. It protects against downside drops but cuts off all potential upside gains - C. It is vulnerable to time decay losses - D. It can only be executed through an unhedged trading members Answer - B 30. **If an exporter hedges its future dollar receivables by buying a USDINR Put option with a strike of ₹83.00 at a premium of ₹0.25, what is the guaranteed floor (minimum) exchange rate locked in, along with cost?** - A. ₹83.25 - B. ₹83.00 - C. ₹82.75 - D. ₹81.50 Answer - C. Minimum rate to exporter to the exporter = Min {83-0.25, any rate above spot rate-0.25} = 82.75 31. **A company bids (not confirmed yet) for a multi-million dollar asset construction project in Europe. Why is an option contract superior to a futures contract for hedging this future revenue pipeline risk?** - A. Futures are restricted to imports only - B. Options provide a variable delta match C. If the bid fails, the options can simply be left to expire, capping losses at the premium - D. Options are exempt from upfront margin blocking Answer - C 32. **A corporate importer buys a USDINR Call option with a strike of ₹82.80 at a premium of ₹0.30. If the spot rate explodes to ₹84.50 at month-end, what is the maximum effective rate paid by the importer?** - A. ₹82.80 - B. ₹84.50 - C. ₹82.50 - D. ₹83.10 Answer - D. 82.80 $+$ 0.30 *( cost is added to buy price, and not subtracted)* = ₹83.10 1. 84.50 (Spot Buy Rate) - (Sell value of Option - Buy Value of Option) = 84.50 - (1.70-0.30) = ₹83.10 33. **An exporter unwinds (sold) a long USDINR Put option (Strike ₹83.00) early at a price of ₹0.48. They initially bought the put at a premium of ₹0.37. If they convert their commercial dollars at a bank spot rate of ₹82.45, calculate their final effective exchange rate.** - A. ₹82.45 - B. ₹82.56 - C. ₹82.08 - D. ₹82.93 Answer - B. Final effective exchange rate = Selling Spot Rate + Gains/(-) loss in Options = Selling Spot Rate + (Put Sell - Put Buy) = 82.45 + (0.48-0.37) = 82.56. 34. **If a company hedges its foreign currency risk using an ETCD contract that is cash-settled, what final step must it take to execute its physical commercial settlement?** - A. File a delivery application with the clearing corporation - B. Trade through the SPAN margin pool account - C. Complete the actual foreign currency exchange through an Authorized Dealer Bank - D. Swap contracts with a speculative clearing member Answer - B. Because currency derivatives on the exchange are cash-settled, no physical cash changes hands. Importers and exporters must execute their actual currency conversions through authorized commercial banking channels 35. **Bull Call Spread (Directional Bullish, Net Debit) = Buy/Long Lower strike call ($K_1$) and Short higher strike call ($K_2$). So net cost of bull call spread = Premium of call bought - premium received of the call sold of higher strike. True or False?** 1. True 36. **Max Cost for Bull Call Spread = Buy Call (of lower strike price) - Sell Call (higher strike price). True or False?** 1. True. Initial Cost for Bull Call Spread = Max Cost = Max Loss 37. **Max Profit for Bull Call Spread = {$K_2$ (higher strike price) - $K_1$ (lower strike price)} - Initial Cost. True or False?** 1. True. 38. **Break even point for Bull Call Spread will be?** 1. When spot price is at level where value of call option of lower strike is greater than the cost of bull call spread 2. At expiry Spot price = $K_1$ + Cost 39. **What is Long Straddle?** 1. Long Straddle is a Long Call + Long Put of same strike price (K). This is strategy is traded when one expects big movements either way.** 2. Total Cost = Premium of Call ($P_{Call}$) + Premium of Put ($P_{Put}$) 3. Max Loss = Total Cost = If spot expires at strike price (K), both options expire worthless. 4. Breakeven point = When spot price is at level higher than (K + ($P_{Call}$ + $P_{Put}$ ) 5. Max Profit = On Downside, it is realised when spot falls to 0. So max profit = K (Sell value of Put Option) + 0(Sell Value of Call Option)- (Cost) = K + 0 - ($P_{Call}$ + $P_{Put}$ ) = K - ($P_{Call}$ + $P_{Put}$ ) 6. Max Profit = On Upside, it is uncapped/unlimited 40. **What is Long Strangle?** 1. Long Strange is just like long straddle, but cost is reduce further by buying OTM options like Call (strike price higher than the spot price, say $K_2$) + Put (of strike price lower than the spot price, say $K_1$). Here the trader is extremely bullish. 2. Total Cost = Premium of Call ($P_{Call}$) + Premium of Put ($P_{Put}$) 3. Max Loss = Total Cost = If spot expires between the two strike prices 4. Breakeven point = When spot price is at level higher than ($K_2$ + ($P_{Call}$ + $P_{Put}$ ) or lower than $K_1$ - ($P_{Call}$ + $P_{Put}$ ) 41. **What is Short Straddle?** 1. Long Straddle is a Selling Call + Selling Put of same strike price (K). This is strategy is traded when the trade DOES NOT expect big movements either way. 2. Total Premium Received = Premium of Call ($P_{Call}$) + Premium of Put ($P_{Put}$) 3. Max Loss = On Upside, it is uncapped/unlimited. On downside, it is realised when spot price falls to. So max loss on downside = $K$ - ($P_{Call}$ + $P_{Put}$ ) 4. Max Profit = It is realised when spot ends at strike price (K) and both options expire worthless, that is, their value falls to 0. So max profit = ($P_{Call}$ + $P_{Put}$ ) - 0 =$P_{Call}$ + $P_{Put}$ 42. **A derivatives trader expects significant currency volatility following an upcoming central bank interest rate decision, but the direction remains highly uncertain. Current USDINR Spot: ₹83.00, Strategy Selected: Long Straddle at the 83.00 Strike. Call Premium ($K=83$) is ₹0.20, and Put Premium ($K=83$): ₹0.15. His Position Size: 100 Lots** 1. Calculate Total Upfront Premium Cost 2. Determine Break-Even Thresholds/Spot Prices 3. Loss/gain if the market remains flat and expires exactly at ₹83.00) 4. Loss/gain if the pair rallies to ₹84.00 5. Loss/gain if the pair falls to ₹82.00 6. Loss/gain if the pair falls to ₹82.00 Answer: 1. Total Upfront Premium Cost = 0.20+0.15 = ₹0.35 $\times$ 10000 2. Break-Even Thresholds/Spot Prices are ₹(83-0.35) and ₹(83-0.35) 3. If the pair ends at ₹83.00, the value of option becomes zero. So sell value becomes zero and the trader receives nothing in the second leg of the option 4. If the pair rallies to ₹84.00, the value of call option becomes 1, and value of put option becomes 0. so the traders gets ₹1 in the second leg as the selling value of his portfolio of options. His cost was ₹0.35. So there is gain, which is 1-0.35=₹0.65 $\times$ 10000 5. If the pair falls to ₹82.00, the value of call option becomes 0, and the value of put option becomes 1. so the traders gets ₹1 in the second leg as the selling value of his portfolio of options. His cost was ₹0.35. So there is gain, which is 1-0.35=₹0.65 $\times$ 10000 43. **A trader combines a long call option at a lower strike with a short call option at a higher strike price on the same underlying asset and expiry. This strategy is a:** - A. Bull Put Spread - B. Bear Call Spread - C. Bull Call Spread - D. Long Iron Butterfly Answer - C 44. **Calculate the maximum risk potential for a trader who enters a Bull Call Spread using an 83.00 strike call at ₹0.10 and shorts an 83.50 strike call at ₹0.04.** - A. ₹0.14 - B. ₹0.06 - C. ₹0.44 - D. ₹0.50 Answer - B. Maximum risk potential is the cost of the bull call spread, which is call premium paid - call premium received. 45. **Calculate the maximum profit for a trader who enters a Bull Call Spread using an 83.00 strike call at ₹0.10 and shorts an 83.50 strike call at ₹0.04.** - A. ₹0.14 - B. ₹0.06 - C. ₹0.50 - D. ₹0.44 Answer - D. Maximum Profit is when spot expires at 83.50 and above. Profit = Sell Value of Long Call - Cost = 0.50-0.04=0.44 46. **Under what market conditions will a short straddle generate its maximum profit?** - A. When the underlying asset price remains completely unchanged at the strike price on expiry - B. High volatility across cross-currency pairs - C. Extreme directional market expansion - D. When the near-month premium drops below the far-month basis Answer - A. In case of Long straddle, option A gives maximum loss. 47. **A long strangle option position consists of:** - A. A short call and long put with matching strikes - B. A long call and long put with identical strikes and expiries - C. Buying futures while simultaneously selling an at-the-money call option - D. A long call at a higher strike and a long put at a lower strike, both out-of-the-money Answer - D 48. **Determine the upper break-even point for a Long Strangle if the Long Put strike is ₹82.75 (Premium = ₹0.12) and the Long Call strike is ₹83.25 (Premium = ₹0.17).** - A. ₹83.54 - B. ₹83.25 - C. ₹82.46 - D. ₹83.42 Answer - A. For Long Strange, break even points are 82.75-(0.12+0.17), 83.25+(0.12+0.17). So upper break even point is ₹83.54. 49. **What is Long Calendar Spread with Calls?** 1. Here the view is spot will rise but after the expiry of near month. So you sell current/near month and buy next-month call of same strike price. 50. **What is Long calendar spread with Puts?** 1. Here the view is spot will fall but after the expiry of near month. So you sell current/near month Put and buy next-month Put of same strike price. 51. **What is Short Calendar Spread with Calls?** 1. Here the view is spot will rise in the current month but fall around the expiry of next month. So you buy current/near month Call and sell next-month call of same strike price. 52. **What is Short Calendar with Puts?** 1. Here the view is spot will fall in the current month but rise back around the expiry of next month. So you buy current/near month Put and sell next-month Put of same strike price. 53. **Here is a table of Options strategies:** | Market Expected (View) | Instruments | Strategy - Name | Strategy - Description | Strategy - Explanation | Max Profit & Max Loss Scenario | | ------------------------------------------ | --------------------- | ------------------------------------ | ------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | | Minor Bullish | 2 Calls | **Bull Call Spread** | Buy ATM/ITM Call + Sell Out-of-the-Money (OTM) Call (Same Expiry). | Bull market is expected. So NTM/ITM call option is bought. To lower the cost/protect from market not rising, OTM call is sold | • Cost = Premium paid - premium received.<br>• Max Profit is Limited to (Spread - Net Premium paid) if spot rises above higher strike.<br>• Max Loss is Limited to Net Premium paid if spot falls below lower strike. | | Minor Bullish | 2 Puts | **Bull Put Spread** | Buy OTM Put + Sell ATM/ITM Put (Same Expiry) | Bull market is expected. So ITM/NTM put option is sold. To lower the cost/protect from market not rising/or actually falling, OTM put is bought | • Net Received (Leg-1) = Premium received - Premium paid<br>• Max Profit is Limited to Net Premium received if spot stays above higher strike.<br>• Max Loss is Limited to (Spread - Net Premium received) if spot falls below lower strike. | | Minor Bearish | 2 Calls | **Bear Call Spread** | Buy OTM Call + Sell ATM/ITM Call (Same Expiry) | Bear market is expected. So ITM/NTM ($K_1$) call is sold. To protect from unexpected rise, higher strike price (>$K_1$) but OTM (> $S_0$) call is bought | • Net Received (Leg-1) - Premium received - Premium paid<br>• Max Profit is Limited to Net Premium received if spot stays below lower strike.<br>• Max Loss is Limited to (Spread- Premium received) if spot rises ends at/above higher strike. | | Minor Bearish | 2 Puts | **Bear Put Spread** | Buy ATM/ITM Put + Sell OTM Put (Same Expiry) | ITM/NTM put is bought. To protect from market not falling/unexpected rise, OTM put is sold | • Cost = Premium paid - premium received<br>• Max Profit is Limited to (Spread - Net Premium paid) if spot falls below lower strike.<br>• Max Loss is Limited to Net Premium paid if spot rises above higher strike. | | Moderate Volatility (any direction) | 1 Call, 1 Put | **Long Straddle** | Buy Call + Buy Put at the same Strike Price and same Expiry | Market can move in either direction. So both Call and Put of same strike price is bought | • Cost = Premium paid on Call + Premium paid on Put<br>• Max Profit (Unlimited on upside) = Spot - Strike price - (total premium paid), <br>• Max Profit (Limited on downside) = Strike price - (total premium paid) (if the spot price crashes to zero)<br>• Max Loss - Limited to Total Premium paid if spot expires exactly at the strike. | | Flat Market | 1 Call,<br>1 Put | **Short Straddle** | Sell Call + Sell Put at the same Strike Price and same Expiry | Market won't move. So premium earnings is maximised, by selling call and put of the same strike price. | • Total Received (Leg-1) = Premium received on Call + Premium received on Put<br>• Max Profit is Limited to Total Premium received if spot expires exactly at the strike.<br>• Max Loss (Unlimited on upside) = Spot - Strike price - (total premium received), <br>• Max Loss (Limited on downside) = Strike price - (total premium received) (if the spot price crashes to zero) | | Very High Volatility (any direction) | 1 Call, <br>1 Put | **Long Strangle** | Buy OTM Put + Buy OTM Call at different Strike Prices (Same Expiry) | Market can move in either direction sharply. So initial cost is reduced, by buying OTM/D-OTM Put and Call of the same strike price | • Cost = Premium paid on Call + Premium paid on Put<br>• Max Profit is Unlimited on upside = (Spot-Strike Price)- Cost<br>• Max Profit is limited on downside = (Strike Price-Cost) (if the spot price crashes to zero)<br>• Max Loss is Limited to Total Premium paid if spot expires between the two strikes. | | Range-bound | 1 Call, <br>1 Put | **Short Strangle** | Sell OTM Put + Sell OTM Call at different Strike Prices (Same Expiry) | Market expected to stay within a range. So premium earnings is maximised, by selling call and put of the same strike price.OTM call is sold, and OTM put is also sold. | • Total Received = Premium received on Call + Premium received on Put <br>• Max Profit - Limited to Total Premium received if spot expires between the two strikes. <br>• Max Loss is Unlimited on upside = (Spot-Strike) - Total Premium Received<br>• Mass Loss is Limited on on downside = Strike Price-Total Premium Received (if the spot price crashes to zero) | | Range-bound | 4 Calls | Long Call butterfly | Buy 1 ITM Call + Buy 1 OTM Call +<br>Sell 2 ATM Calls | Here market is expected to be range bound.<br><br>Other butterfly spreads are-long call butterfly spreads, Short call butterfly spreads, Long put butterfly spread, Short put butterfly spread, Iron Butterfly Spread etc. | • Total Paid = (1 ITM Call + 1 OTM Call) - (2 ATM Calls<br>• Max Profit - If spot ends at ATM strike price<br>• Max Loss is Total premium paid, when spot rises above higher strike price, or falls below strike price | | Stable this month, bullish next month | 2 Calls | **Long Calendar Spread with Calls** | Sell Near-Month Call + Buy Far-Month Call (Same Strike/ATM or near ATM) | So we buy next-month call, and also sell current month call (and reduce cost further) of ATM strike price as ATM has highest time value (and almost zero intrinsic value), and so its loses time value quicker as days pass by. | • Cost (Leg-1) = Premium paid - lower premium received<br>*Here, profit and loss is calculated at the end of near month, as after that, it a single long call position and not a calendar spread position*<br>• Max Profit is limited if spot closes at/below the strike price = Cost - time value of the far-month call (which is highest when spot is equal to the strike price)<br>• Max Loss is Net cost (Leg-1) - value of far-month call (very little value left) if spot aggressively falls to zero/rises (as option gets deeper into money, time value falls) | | Stable this month, bearish next month | 2 Puts | **Long Calendar Spread with Puts** | Sell Near-Month Put + Buy Far-Month Put (Same Strike/ATM or near ATM) | So we buy next-month put, and also sell current month call (and reduce cost further) of ATM strike price as ATM has highest time value (and almost zero intrinsic value), and so its loses time value quicker as days pass by (theta is highest). | • Cost (Leg-1) = Premium paid for far-month - lower premium received for near month<br>• Max Profit is Limited, but maximized if spot sits exactly at strike at near expiry.<br>Max Loss - Limited to Net Premium paid if spot moves aggressively higher/lower. | | Bullish this month, but stable next month | 2 Calls | **Short Calendar Spread with Calls** | Buy Near-Month Call + Sell Far-Month Call (Same Strike/ATM or near ATM) | | • Net Received (Leg-1)= Premium paid - received<br>• Max Profit is net premium received in Leg-1, and is realised if next month call loses its time value heavily, that is if spot falls down sharply<br>• Max Loss - Limited, but maximized if spot stalls exactly at strike at near expiry as far month call will have highest time value. | | Bearish this month, but stable next month | 2 Puts | **Short Calendar Spread with Puts** | Buy Near-Month Put + Sell Far-Month Put (Same Strike/ATM or near ATM) | | • Max Profit - Limited to Net Premium received if spot breaks heavily early on.<br>• Max Loss Limited, but maximized if spot stalls exactly at strike at near expiry. | | Bullish with minor protection for downside | 1 Spot, 1 Call (Sell) | **Covered Call** | Buy Underlying Spot + Sell OTM Call to get MINOR Cover | Underlying is bought as view is bullish, and OTM call is sold to reduce cost of buying the underlying. Premium received protects against small drops in price of the underlying. | • Cost (Leg-1) = Spot Price - Premium Received<br>• Max Profit is Limited = Strike - (Spot - Premium), if stock rises.<br>• Max Loss is substantial = (Spot-Premium received) - Spot at expiry (if 0, then Leg-1), if the underlying stock price crashes. | | Bullish but protection for downside | 1 Spot, 1 Put (Buy) | **Protective Put** | Buy Underlying Spot + Buy OTM/ATM Put to get almost full Protection | Underlying is bought as view is bullish, and cheaper ATM or OTM put is bought to protect against downside. Expensive ITM put is not bought as view is bullish. | • Cost (Leg-1) = Spot Price + Premium paid<br>• Max Profit is Unlimited as the underlying rises = Spot at expiry - Cost<br>• Max Loss is limited = Cost - Strike price of Put | | Bearish with minor protection for upside | 1 Spot, 1 Put (Sell) | **Covered Put** | Sell Underlying Spot + Sell ATM/OTM Put to get Minor Cover | Underlying is sold as view is bearish, but ATM or OTM Put is sold. Premium received protects against small rise in price of the underlying. | • Received = Spot Sell Price + Put premium received<br>• Max Profit is limited, if spot expires at strike price or below it = Spot Selling Price (Leg-1) + Put premium received - Strike Price<br>• Max Loss is unlimited if spot rises = Spot at expiry - (Spot Selling + Put premium received) | | Bearish but protection for upside | 1 Spot, 1 Call (Buy) | **Protective Call** | Short Underlying Equity + Buy ATM/OTM Call to get almost full Protection | Underlying is sold as view is bearish, but ATM or OTM call is bought to protect against upside | • Received (Leg-1) = Spot Selling Price - Call Premium Paid<br>• Max Profit is limited, and can be huge if stock drops to zero = (Spot Selling Price -Call Premium Paid) - Spot at expiry (can be 0) <br>• Max Loss is limited=Strike Price-(Spot Selling Price-Call Premium Paid) | 54. ==GlobalTech Ltd., an Indian infrastructure firm, has submitted a formal bid for a cross-border engineering project denominated in Euros (€). If they win the contract, they face significant foreign exchange risk due to potential depreciation of the Euro against the INR before the project cash flows materialize. To hedge this specific, uncertain exposure, the treasury team evaluates using either Currency Put Options or Currency Futures. Which of the following statements accurately highlights why an option contract is structurally superior to a futures contract for hedging this specific contingent cash flow?== - A. If GlobalTech loses the bid and the Euro appreciates, a futures contract would limit their losses to the initial margin, whereas a put option would force them into a speculative loss. - B. If the bid fails and the Euro depreciates, a forward contract allows the firm to walk away for free, while a put option forces them to absorb a loss by exercising the contract. - C. Put options require GlobalTech to execute the trade only if the bid fails, whereas a forward contract must be settled regardless of the bidding outcome only if the Euro depreciates. - D. A futures contract locks the firm into a binding obligation; if the bid fails, they are left with an unhedged speculative position with unlimited losses due to appreciation in EURINR, whereas a put option limits their worst-case loss to just the premium paid. Correct Answer - D 55. **In a long call butterfly spread, the 3 strike prices are 92, 92.50 and 93, and option value is 55 paise, 20 paise and 10 paise.** 1. How much can be the maximum profit? 2. Between what spot prices does the strategy yield profit? Answer: 1. Total Cost = 0.55+0.10-(0.40) = 0.25 2. If spot closes above 92.25, it starts yielding profit till 92.75. 92.25 and 92.75 is lower and upper breakeven points. 56. **A trader executes bear put spread, and buys and sells put option of strike price 93 and 92.50, for 7 and 5 paise respectively.** 1. What is the maximum profit? 2. What is the maximum loss? 3. What is the breakeven point? Answer 1. Cost of trade is 7 paise-5 paise = 2 paise. Maximum profit is when spot expires at 92.50 or lower, and so the value of put option bought is 50 paise and sold is 0. So max profit = Payoff (50 paise, received in leg-2) - 2 paise (cost, paid in leg 1) = 48 paise 2. Max Loss is when payoff from the option bought (and thus option sold) is zero. This would happen if spot ends at 93 or above. So max loss = Payoff (0) - 2 paise cost = 2 paise. 3. The breakeven point (BEP) is when payoff is above 2 paise. This would happen when spot ends at 92.98 paise and below. so BEP is 92.98. 57. **A trader executes bear call spread, he sells 92 strike price call option for 10 paise and buys 92.50 call for 4 paise, when USDINR spot is at 92.** 1. What is the maximum profit? 2. What is the maximum loss? 3. What is the breakeven point? Answer: We first recall all bear/bull call/put strategies, - Bull Call Spread - Buy lower strike (ATM/ITM) Call + Sell higher strike (OTM) Call - Bull Put Spread - Buy lower strike (OTM) Put + Sell higher strike (ATM/ITM) Put - Bear Call Spread - Buy higher strike (OTM) Call + Sell lower strike (ATM/ITM) Call - Bear Put Spread - Buy higher strike (ATM/ITM) Put + Sell lower strike (OTM) Put 1. Max Profit = Cost (received) - Payoff (to give in the second leg) - Cost = 6 paise - 0 = 6 paise 2. Max Loss = 6 paise - 50 paise = 44 paise 3. BEP is 92+6 paise = 92.06. From 92.06 and above, trader starts losing money. 58. **A trader executes bull put spread, he sells 94 strike price put option for 10 paise and buys 93.50 put for 5 paise, when USDINR spot is at 94.** 1. What is the maximum profit? 2. What is the maximum loss? 3. What is the breakeven point (BEP)? Answer: 1. Max Profit = 5 paise 2. Max Loss = 50 paise - 5 paise = 45 paise 3. BEP = 94-5 paise. If spot falls below 93.95, he starts losing the initial net premium earned. 59. **A trader executes bull call spread, he sells 94 strike price call option for 6 paise and buys 93.50 put for 10 paise, when USDINR spot is at 93.40.** 1. What is the maximum profit? 2. What is the maximum loss? 3. What is the breakeven point (BEP)? Answer - Bull Call Spread - Buy lower strike (NTM/ITM) Call + Sell higher strike (OTM) Call 1. Max Profit = Payoff-Cost = 50 paise-4 paise = 44 paise, when spot expires at or above higher strike price 2. Max Loss = Cost - Payoff (0) = 4 paise 3. BEP is 93.50+4 paise = 93.54, so if USDINR ends above 93.54, the trader makes profit. 60. ==Options can be primarily categorized into following three sections. True or False?== - Vertical Spreads - Horizontal Spreads - Diagonal Spreads Answer - True 1. Vertical Spreads - Different Strikes, Same Expiry 2. Horizontal (Calendar) Spreads - Same Strike, Different Expiries 3. Diagonal Spreads - Different Strikes, Different Expiries. 61. **Vertical spreads options involve same underlying, same expiry but different strike prices. True or False?** 1. True 62. **Horizontal Spreads involve same underlying, same strike prices, but different expiry. True or False?** 1. True 63. **Diagonal Spreads involve same underlying, but different strike prices, and different expiry. True or False?** 1. True 64. **A person is required to remit (transfer abroad) a sum for his relatives in USD after 9 months. The current USDINR is trading at 92 and the futures premium is 4% p.a. The person invested Rs. 2,00,000 in FD for 9 months @ rate of 6% p.a. The person hedges his currency risk using USDINR 9-month futures. How many dollars can this person remit at the end of 9 months?** 1. Answer - USD 2205.58 2. Final INR amount with person at the end of 9 months: $2,00,000 \times \left( 1 + \dfrac{0.06 \times 3}{4}\right)$ = 2,09,000. 3. Final USD buying rate for the person - As the person knows that he will receive INR 2,09,000, he must have bought 209 lots of USDINR futures, and the rate he received was $92 \times \left( 1 + \dfrac{0.04 \times 3}{4}\right)$ = 94.76. This locks-in the cost of buying dollars 9 months from now, irrespective of the spot rate of USDINR. 4. Total USD amount the person could buy for transfer = $\dfrac{\displaystyle \text {Total Amount in INR}}{\text {USDINR}}$ = $\dfrac{2,09,000}{94.76} = \text{USD} \;{ 2205.58}$ ### Ch.6 - Trading Mechanism in ETCD 1. **Derivatives on which 2 different underlying assets trade in Currency Derivatives Segment (CDS) segment of the exchange?** 1. Both Currency Derivatives and interest rate derivatives are traded in Currency Derivatives Segment 2. **On NSE, the trading and settlement are conducted by which two distinct (but not unrelated, separated by only activity) legal entities of NSE?** 1. Trading is conducted by the Exchange and settlement and clearing by the NSE Clearing Limited (NCL), formerly known as the National Securities Clearing Corporation Limited (NSCCL), as per the guidelines in the [Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2018](https://www.sebi.gov.in/legal/regulations/nov-2025/securities-contracts-regulation-stock-exchanges-and-clearing-corporations-regulations-2018-last-amended-on-november-22-2025-_98205.html) 3. **Which entity guarantees the settlement of all currency futures trades on an organized exchange?** - A. The Reserve Bank of India - B. The Clearing Corporation associated with the exchange - C. The Securities and Exchange Board of India - D. The commercial banks involved in the trade Answer: B 4. **What is the definition of a stock exchange in the Securities Contracts (Regulation) Act, 1956?** 1. “Stock exchange” , as defined in the Act means — (a) any body of individuals, whether incorporated or not, constituted before corporatisation and demutualisation under sections 4A and 4B, or (b) a body corporate incorporated under the Companies Act, 1956 (1 of 1956) whether under a scheme of corporatisation and demutualisation or otherwise, for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities 5. **What are few functions of stock exchanges?** Few functions are: 1. assisting, regulating or coordinating the business of buying, selling or dealing in securities, 2. establishing a nation-wide trading facility for various financial instruments. 3. Ensuring equal access to investors across the nation through an appropriate communication network. 4. Disseminating information, providing Investor education, ensuring awareness and protection, facilitating Surveillance and Investigation, redressal mechanism 5. Formulating and implementing rules and regulations, in coordination with market regulators, to govern the securities, member registration, securities listing, transactions, compliance by members (including listed companies) to SEBI / RBI regulations, investor 6. Inspection and monitoring of member compliance 6. **Can banks become trading members of CDS?** 1. Banks are permitted to become member of the currency derivative segment of recognized stock Exchanges subject to fulfillment of minimum prudential requirements. 7. **Can an individual open a trading account with an exchange directly?** 1. No. It is done by opening account with trading member/brokers, who also appoint authorised persons. The sub-broker category has been discontinued by SEBI. Zerodha, Angel One, HDFC Securities are few examples 8. **Who is an Authorised person?** 1. ‘Any person, individual, partnership firm, LLP or body corporate, who is appointed as such by a Stock Broker (including Trading Member) and who provides access to trading platform of a Stock Exchange *as an agent of the Stock Broker*. 9. **Who are Investors/Traders in CDS/exchanges?** 1. They may be individuals, body corporates, domestic financial institutions, Authorised Dealers (all categories), foreign portfolio investors etc. They are assigned UCC upon opening a trading account by the trading member, which is sent to exchanges along with order details. 10. **How can one place trade?** 1. It can be done through trading application of the TM on a laptop/desktop (IBT), by phone, or direct market access (DMA) (for institutional clients), and STWT (Securities Trading through Wireless Technology) when trading specifically through wireless devices like mobile phones, tablets, or laptops using cellular data cards/Wi-Fi using Internet Protocol (IP). 11. **Which exam the dealer has to pass?** 1. A dealer is an employee of trading member which puts orders in the dealing system. To get access to the trading system, dealers have to obtain NISM Series-I: Currency Derivatives or NISM-Series-XIII Common Derivatives Certification 12. **Can a trading member also become a clearing member (through its related entity)?** 1. Yes. There are three kinds of clearing members - Professional Clearing Members (PCM), Trading Cum Clearing Member (TCM) and Self Clearing Member (SCM). 13. **List important features of exchange trading system** 1. Fully automated: No manual intervention. 2. Transparent: Quantity and price information related to orders and trades is disseminated on the trading system on a real-time basis. 3. Anonymous order matching: The identity of buyer and seller is not revealed to market. Only price and quantity information are available on the system. It is an order-driven platform where order matching is done strictly on price-time priority basis. 4. Higher speed of execution: Handling of multiple orders and trade execution. 5. Connected to multiple interfaces: Trading system is connected to clearing corporation system, surveillance system of the Exchanges, data vendors system for dissemination of data. 6. Risk management facility: To mainly avoid errors related to order entry. 7. Nationwide reach: Trading members/participants can have access from any part of the country. 8. Trading members can connect to the system by various mode such as lease line, VSAT, co-location etc. 14. **What is co-location of a trading system?** 1. The facility of co-location or proximity hosting (or by whatever name called) is offered by the stock exchanges to stock brokers and data vendors whereby their trading or data-vending systems are allowed to be located within or at close proximity to the premises of the stock exchanges, and are allowed to connect to the trading platform of stock exchanges through direct and private network. 15. **What is Trader Workstation (TWS)?** 1. It refers to the literal computer terminal or software screen (like NEAT by NSE) from which a registered trading member (broker or their dealer) logs into the core NSE NEAT system using a unique Member ID and User ID. 16. **How can investors place order?** 1. Exchanges have allowed members to develop their customized trading workstation as per their requirements and connect to Exchange trading system. 2. NSE provides the trading network exclusively to its registered Trading Members (Brokers). Under this facility, the exchanges have made available products (Non-NEAT) such as Computer to Computer Link (CTCL) / Internet based trading (IBT) / Direct Market Access (DMA) / Security trading through wireless technology facility (STWT) / Automated / Algorithm Trading (ALGO) / Smart order router (SOR) to the Trading Members. 3. So Brokers act as the gatekeepers. They provide the browser or desktop software, mobile apps like Zerodha Kite, Groww, Angel One, etc., call-centre facility that individuals use. 17. **Can investor put order through phone?** 1. It is a facility to be provided TM, whereby the client can place order(s) over the phone, to be executed on behalf of clients by the broker.. But the stock broker must mandatorily use telephone recording system to record the instructions and maintain telephone recordings as part of its records 18. **Do brokers have to maintain records of the trades executed by their clients?** 1. To strengthen the regulatory provisions against un-authorized trades and to harmonise the requirements across equity & derivative market, all brokers are required to execute trades of clients only after maintaining the evidence of such order placement, which could be, inter alia, in the form of: (a) Physical record written and signed by client, (b) Telephone recording, (c) Email from authorized email id, (d) Log of internet transactions, Record of SMS messages, (f) Any other legally verifiable record. 19. What is DMA facility? 1. Direct Market Access (DMA) is a facility which allows brokers to offer clients direct access to the exchange trading system through the broker’s infrastructure without manual intervention by the broker. Some of the advantages offered by DMA are: 2. direct control of clients over orders, faster execution of client orders, reduced risk of errors, 3. associated with manual order entry, greater transparency, increased liquidity, lower impact costs for large orders, better audit trails and better use of hedging and arbitrage opportunities through the use of decision support tools / algorithms for trading. 20. **When did SEBI introduce DMA?** 1. In 2008, SEBI introduced Direct Market Access (DMA) and permitted institutional investors to use DMA facility. 21. **Can brokers provide Direct Market Access (DMA)?** 1. Yes, even SEBI registered brokers can introduce DMA facility to their clients after obtaining permission from exchanges, and fulfilling KYC requirements, documentation and carrying out necessary due diligence, of the clients or investment managers acting on behalf of clients for providing DMA facility, the records of which should be properly maintained. 22. **What is High Frequency Trading (HFT?** 1. High Frequency Trading (HFT) is a subset of algorithmic trading that comprises latency-sensitive trading strategies and deploys technology including high speed networks, colocation, etc. to connect and trade on the trading platform. 2. The growth and success of the high frequency trading (latency sensitive version of algorithmic trading) is largely attributed to their ability to react to trading opportunities that may last only for a very small fraction of a second. Co-location (for brevity, Colo) has provided the vehicle to high frequency traders to capture such trading opportunities. 3. [Dec 9, 2021](https://www.sebi.gov.in/legal/circulars/feb-2025/safer-participation-of-retail-investors-in-algorithmic-trading_91614.html) - SEBI issued Consultation Paper on Algorithmic Trading by Retail Investors 4. [List](https://www.sebi.gov.in/sebiweb/home/HomeAction.do?doListing=yes&sid=1&ssid=7&smid=0) to SEBI circulars on Algorithmic trading 23. **What is the flow of order routing through the exchanges?** 1. Once the order is entered and confirmed by the client/dealer at his trading terminal and verified by the broker software, the order is routed to the exchange for its execution. The Exchange system allots a *unique order number* for all orders received in the system. This is given as order confirmation along with the time stamp to the broker. 24. **What is "Order Book" on the trading screen?** | **No. of Orders** | **Buy Qty (Lots)** | **Buy Price** | **Sell Price** | **Sell Qty (Lots)** | **No. of Orders** | | ----------------- | ------------------ | ------------- | -------------- | ------------------- | ----------------- | | 5 | 120 | 95.7425 | 95.7450 | 65 | 2 | | 3 | 85 | 95.7400 | 95.7475 | 150 | 4 | | 8 | 210 | 95.7375 | 95.7500 | 280 | 9 | | 12 | 340 | 95.7350 | 95.7525 | 110 | 3 | | 6 | 95 | 95.7325 | 95.7550 | 425 | 15 | | **Total Buy** | **850** | | **Total Sell** | **1030** | | - Best Bid (Highest Buyer): 95.7425 - Best Ask (Lowest Seller): 95.7450 - Bid-Ask Spread: 0.0025 (Exactly 1 tick size) - Order is quoted up to 4 decimals 26. ==What is the pip/tick size in currency futures of INR pairs?== 1. It is the minimum value by which prices can move, and is INR 0.0025. So 1 pip = INR 0.0025, and 4 pips = 1 paisa. 27. ==What is the pip/tick size in currency futures of non-INR (cross-currency) pairs?== 1. It is the minimum value by which prices can move, and it is 0.0001 where USD is the quote currency and and 0.01 for USDJPY (where JPY is the quote currency. 2. So 1 pip for GBPUSD, EURUSD = USD 0.0001, and 1 pip for USDJPY is = 0.01 JPY. 28. **If the sell price of USDJPY futures contract is 155.75 and the price fell by 8 pips, what is the profit or loss for the trader for 3 lots?** 1. 1 pip is 0.01 yen. so 8 pips is 0.08 yen, and for 3 lots (3000 USD)and 8 pips, the profit value is 3 $\times$ 1000 $\times$ 0.08 = 240 Japanese Yen. 29. **If the buy price of GBPUSD futures contract is 1.3385 and the price rose to 1.3450 how much is the increase in terms of tick/pip?** 1. 1.3450-13385 = 0.0065/0.0001 = 65 pips 30. **If the sell price of USDINR futures contract is 93.7525 and the price fell by 8 pips, what is the profit or loss for the trader for 3 lots?** 1. As USD has been sold and it has fallen in terms of INR, there is a profit, and the amount is 3 $\times$ 1000 $\times$ 8 $\times$ Rs 0.0025 = Rs 60. 31. **If the buy price of USDINR futures contract is 93.7525 and the price rose to 94.7500, how much is the increase in terms of tick/pip?** 1. 94.7500-93.7525 = 0.9975/0.0025 = 1 Re - 1 pip = 400 pips - 1 pip = 399 pips 32. **If the buy price of USDINR futures contract is 93.7525 and the sell price is 94.7625, how much is the bid-ask spread in terms of pips?** 1. 94.7625-93.7525 = 0.0075+0.24+0.76+0.0025 = 1+0.01 = 1.01/0.0025 = 400+4 = 404 pips 33. **If the best buy price of USDINR futures contract is 95.7425, then can a trader place order for 95.7428 for his trade to become the best buy price (assuming there is no incoming order) ?** 1. No, the order has to be at least 0.0025 greater than the present best buy price as pip size is 0.0025 34. **What is buying of calendar futures spread?** 1. A buy of calendar spread is a contract where you buy a far month’s futures contract and sell near month futures contract. Suppose we are trading the June and July USDINR contracts: Near Month (June) USDINR is 94.0000, and Far Month (July) USDINR is 94.2500. So there is 15-paise spread, and buying of the spread is betting that the gap between the two months will **widen**, say from 25 paise to 30 paise. If it goes to 30 paise, the trader earns Rs 50 per lot. 35. **What is selling of calendar spread?** 1. A sell of calendar spread is a contract where you sell a far month’s futures contract and buy near month futures contract. So asell order on the June-July calendar spread would mean placing the sell order for 30 paise. 36. **Can the buy spread price be negative?** 1. Yes, in case of backwardation. 37. **How can an importer who has bought current month futures but decided to roll it over to next month manage his rollover risk?** 1. Importer will buy spread and lock-in the rollover cost if he expects the difference between current month and next month futures prices to increase. 2. -Buy Futures (current month) - Buy Spread + (Upon expiry $=$ $-$Sell Futures (current month) $+$ Buy next Month Futures $-$ Sell Spread). *Here minus means cost*. The term inside parenthesis cancel out/offset each other on expiry, and the final position is Bough/Long next month futures. If open positions of futures and spread are squared off before expiry, there could be some non-zero value. 3. Here the final futures buy price is Initial Futures $+$ $\sum$ Spread Cost (Sum of cost of buying Spreads). So Total Cost $=$ Initial Price $+$ Spread$_1$ + Spread $_2$ + Spread$_3$.... 38. **Name of few components of an order?** 1. Price *(entered if it is a limit order)* 2. Time *(not manually entered)* 3. Quantity / No. of Contracts *(entered by the user)* 4. Security/Contract (What to buy and what to sell - *entered by the user* 5. Action (Buy / Sell) 6. Client identity (UCC) and Proprietary / Client identifier - *entered by the system* 39. **What are the three conditions used to classify trading orders?** 1. Price-related 2. Time-related 3. Quantity-related 40. **What is 'Best buy' price and 'Best Sell' price?** 1. Best buy' price is the highest buy price amongst all buy orders and similarly best sell price is the lowest price of all sell orders. 41. **When the price of a sell order is equal to or less than highest/best buy price, the sell order remains pending? True or False?** 1. True 42. **When the buy price is equal to more than the lowest selling price/best selling price, the buy order gets executed. True or False?** 1. True 43. **What is a buy limit order?** 1. Here a price is entered, and the order is matched if the buy price is equal to or more than the best sell price. 44. **What is a sell limit order?** 1. Here a price is entered, and the order is matched if the sell price is equal to or less than the best buy price. 45. ==Orders are always matched at the passive order price. True or False?== Answer - True. 1. A Buy or a Sell order(s) which is/are lying unmatched in the order book are known as Passive Orders. 2. Two active orders can never actually match in "mid-air", even if two traders hit the button at the exact same millisecond. Even if two traders click "Buy" and "Sell" at the exact same moment, their orders have to travel through internet cables to reach the NSE matching engine in Mumbai. One order will _always_ beat the other to the exchange engine, even if it is only by a single nanosecond ($0.000000001$ seconds). For a fraction of a millisecond, that order rests in the system at their specified price as a Passive order. 3. All orders come as active orders into the order book. If they get a match, they will be executed immediately; else they will enter the order book according to their price and time as passive orders. 46. **If an order is placed to buy 10 lots of USDINR at Rs 94.5000, and there is an incoming limit sell order at Rs 94.2500 then the trade will take place at 94.5000 or 94.2500?** 1. It will take place at the passive order price, which is Rs 94.2500 47. **After entering the order, the price of the order can be changed any time before order execution? True or false** 1. True 48. **If a limit order is placed to buy 10 lots of USDINR at Rs 94.5000, and the best seller is at USDINR 94.2500 for 5 lots, and the second best seller is for 94.50 for 3 lots, and the third best seller is 94.75. Will order be executed and what will be the buy price for the buyer?** 1. The buy order of 10 lots at Rs. 94.5000 will be matched at Rs. 94.2500 for 5 lots, and then at Rs. 94.5000 for 3 lots. Therefore, 8 lots will be bought and the average trade price will be displayed. 2 lots will remain pending because the next best seller is at 94.7500. As it is a limit order, the buy price is strictly capped at Rs. 94.5000, meaning it will not match against the Rs. 94.7500 seller. 49. **What is a buy market order?** 1. In a buy market order, the order is matched with the best seller and the next ones until the entire ordered quantity is filled. If here is sufficient liquidity available in the order book, pending quantity is cancelled. 50. **What is one advantage and one disadvantage of a market order?** 1. It gets executed immediately, but prices could be lower than the best buy price for selling or lower than the best sell price for buying. 51. **Can there be a price protection for market order?** 1. Yes, there are 2 types of market orders. With and Without protection market orders are offered by many brokers, which does not let buy orders match to prices above *a level*, and does not sell orders to get matched to prices below a level. 2. Protection market order - If orders are not matched, they get converted to limit orders with prices as highest buy price for a buy order, and lowest sell price for a seller, within the range entered as protection. 52. **In the market order there is no need to specify the price at which a trader wants to purchase or sell?** 1. True. 53. **No type of market orders remain pending?** True. 1. Market order 'with protection' gets converted to limit order at the best buy/sell price (based on the range/criteria specified by the user) 2. Market order 'without protection' sweeps all available depth instantly and any unfilled remainder is rejected or cancelled. 54. **If a sell market order is put for 10 lots and best buyer is at 94.2500 for 5 lots, the system will only select the best buy price for the seller to give the seller the best/highest price? True of False** 1. False, it will buy 10 lots at Rs 94.25, and then move to the next best price till 10 lots are sold. 55. **Market order with protection is a combination of market and limit order. True or False?** 1. True. It allows the market order to be executed up to a specified level mentioned by the trader. The risk of an order getting executed at any price is protected by using such order. 56. **If an incoming active sell limit order is put for Rs 94.25 for 10 lots and the best buyer is at Rs 94.75 for 15 lots, will the order will stay pending?** 1. No, the limit order will get executed here, and it will happen at the passive price of Rs 94.75. So here the seller gets a better price. 57. **Will the entire order gets successfully executed if a market buy order is placed for 10 lots, and total quantity in the sell side of the order book is 9 lots?** 1. 9 lots will execute instantly, and the remaining 1 lot will be automatically cancelled by the exchange, leaving no pending order. 58. **In case of market order, be it market 'protection' or market 'without protection' order, there is always the risk of an order getting executed at any price?** 1. False. This risk is not always present, as it can be managed with market protection order. 59. **Order book on retail trading screen means buyers and sellers are at just 5 prices? True or False?** 1. False. The actual order book contains every single outstanding/passive/unmatched limit order placed by every trader in the market, stretching all the way down to the lower circuit limit and all the way up to the upper circuit limit. 2. 5 is shown just for technical convenience in software. If you place a buy limit order for USDINR at a price far below the current market price, your order doesn't vanish. It sits safely in the NSE's matching engine core queue, even if it is invisible on a standard retail broker's top 5 screen. 60. **Can orders be entered in the trading system after market hours?** 1. Yes, some apps allow but trading happens during the market hours. 61. **Is there a pre-trading session for CDS segment?** 1. No 62. **Based on price criteria, what are the two types of orders?** 1. Limit and market orders 63. **Based on time conditions, mention at least 3 different types of orders?** 1. Day Order - All orders are usually 'Day order' and so they get cancelled automatically if they remain pending by the end of the day. 2. IOC (Immediate or cancel) - partial is allowed 3. GTC *(not allowed as of now)* Good Till Cancelled (GTC) order is an order that remains in the system until it is cancelled by the Trading Member. 4. GTD *(not allowed as of now)* - A Good Till Days/Date (GTD) order allows the trading member to specify the days/date up to which the order should stay in the system. 5. COL - If a member/user entered order with COL, all outstanding orders of the user will get cancelled once the user logs out from the TWS. 64. **How is IOC different from market order?** 1. In market order, price is not entered, and the there is no pending quantity if there is sufficient depth in market. 2. In IOC (Immediate or cancel), price is entered, and is matched against multiple opposite orders at that price until its quantity is completely filled, and pending quantity is cancelled. So it is like a limit order with unmatched quantity cancelled immediately. 65. **Based on quantity conditions, the types of orders?** 1. DQ - Disclosed Quantity (DQ), minimum of 10% of the order size has to be disclosed. 2. MF - Minimum Fill (MF) orders require to specify minimum quantity to be matched in each single trade (successful execution). So the order can have 1 or multiple trades. 3. AON - 'All or None orders' match only if entire order qty is matched, in 1 or multiple trades, and so there are no pending/partial execution here. 66. **Is Limit order classified as price-related condition?** 1. Yes. 67. **Is IOC order classified as quantity-related condition?** 1. No, it has time-related condition 68. **An order and trade are same for trading in exchanges?** 1. No. Once the order is executed it turns into a trade, and a single order can have 1 or more trade numbers. 69. **One order will always have one trade? True or False?** 1. False. A single order can result in one or multiple trades if it matches against several smaller opposite orders in the book. 70. **What does "Pro/Cli" mean in the order window?** 1. Pro means that the orders are entered on the trading member's own account. 2. Cli means that the trading member enters the orders on behalf of a client. 71. **If my buy order is of 100 lots, can I put 15 lots in DQ option in order window?** 1. Yes, the minimum DQ value is 10% of order size, which is 10 in this case. 72. **Trading members are not allowed to trade in their own (proprietary) account?** 1. False. The facility of placing orders on proprietary account through trading terminals is extended only at one (default) location of the member as specified / required by the member. Members need prior approval of the exchange for the facility of 'proprietary-account' through trading terminals from more than one location and / or CTCL terminal 73. **Can order be modified?** 1. Yes, price and qty can be modified but only for the portion which has not been executed. 74. **Two orders were put to buy for 10 lots at Rs 95.7500 and again for the same but only 5 lots. But the trader later modified the second order only partially and reduced the qty to 3.** Will both have same timestamp? 1. No. The order which was modified, even though partially, will lose the original time priorty here and get a new timestamp. 75. **Can a TM modify the client or custodian participant code after the order is executed?** 1. Trade modification is allowed for parameters like client code and custodian participant code. However, there are certain strict conditions and timings for such modifications, and they may attract penalties, to ensure these modifications are not misused to transfer profits or losses between accounts. 76. **Can a successful trade be annulled?** 1. Trading members are allowed to submit a request for trade annulment on the trading system, within 30 minutes from the point of trade execution, subject to certain conditions, and a fee is a charged based on value of trade(s) for which annulment is requested, subject to a minimum and a maximum fee is charged as annulment application fee for accepting the request. 2. [SEBI Circular on Annulment of Trades dated (SEBI Circular CIR/MRD/DP/15/2015 dated July 16, 2015)](https://www.sebi.gov.in/web/?file=/sebi_data/attachdocs/1437033678905.pdf) 77. **What is margin in currency futures and options trading?** 1. A margin is an amount that clearing corporations levy on the brokers for maintaining positions on the exchange. 78. **Margin is also applied on buying currency options. True or False?** 1. False. Here the option buyer only pays the premium, which is also the maximum loss that they can incur. 79. **If a client does not fulfill trade obligation, like a payment for securities bought, then who pays the same?** 1. The obligation to settle the trades lies with the broker. If any client commits any trade default, then the same has to be made good by the broker to the clearing corporation. 2. To avoid such situation, brokers generate reports relating to margin requirements, collect margins, payments, and delivery obligations. 80. **What are different trading limits brokers place on client accounts for risk management?** 1. trading limits like order quantity, order price, and also open positions, turnover etc. 81. **Difference between systemic risk and systematic risk?** 1. Systematic (market) risk - unavoidable, inherent risk of the overall market, rather than a single sector 2. Systemic risk (domino effect) - is the threat that the failure of one specific company or financial institution could trigger a catastrophic chain reaction, causing a total breakdown of an industry or global economy 82. **What are the different trading cost for ETCD?** 1. Brokerage - levied by the broker 2. Regulatory charges - SEBI fees, exchange charges 3. Statutory charges - Stamp duty *(only on buy side)*, GST *(is not levied on Stamp duty)*, STT is not applicable on ETCD 83. ==What are the various cost involved in trading currency futures and options on exchanges in India, say NSE/BSE?== 1. Here is the link to the [Cost of trading Calculator](https://docs.google.com/spreadsheets/d/11THiwL-KXnSNQC7T1lNAjLLvV30HVII47EMPf1__Ir0/edit?usp=sharing) 84. **1 crore = $10^7$, 1 million = 10 lakh = 10^(6), 1 lakh is $10^5$, and 3% = 0.03. True or False?** 1. True 85. **Rs 35 per crore in % terms is?** 1. $\displaystyle \frac{35}{10^7} = \displaystyle \frac{0.00035}{100}$ 86. **Rs 10 per crore in % terms is?** 1. $\displaystyle \frac{10}{10^7} = \displaystyle \frac{0.0001}{100}$ 2. Now % means for every 100. So it is 0.0001% 87. **Rs 0.45 per 1 lakh in % terms is?** 1. $\displaystyle \frac{0.45}{10^5} = \displaystyle \frac{0.00045}{100}$ 2. Now % means for every 100. 3. So it is 0.00045% 88. **If IPFT charges by NSE on currency futures contracts is 0.00005%, it Rs 5 per 1 crore. True or False?** 1. $\displaystyle {0.00005\%} = \displaystyle \frac{5\%}{10^5} = \displaystyle \frac{0.05}{10^5}= \displaystyle \frac{5}{10^7}$ 2. So answer is Rs 5 per 1 crore. True. 3. Also, the IPFT fee by NSE for currency options is 0.002% of the premium value, which is Rs 200 per 1 Crore of premium. 89. **IPFT charges by NSE is a component of NSE's transaction charges on currency futures and options. True or False?** 1. True, 90. **What are 3 major types of risks for TMs?** 1. Market risk is the possibility of incurring large losses from adverse changes in financial asset prices such as stock prices. 2. Operational risk is the risk of monetary loss resulting from inadequate or failed internal processes, manual and systems error or external events. 3. Credit risk is the risk of default on a debt that may arise from a borrower failing to make required payments like Loans to Group Companies/ Related Parties, debit balance of clients, funding of clients, short collection of margins, non-confirmation of DVP trade by the custodian etc. 91. **Are regulatory noncompliance and trading error examples of market risk?** 1. No. It is an operational risk 92. **Extreme price movement due to war is an operational risk? True or False?** 1. False. It is a market risk 93. **Is sharp fall in value of stocks provided as collateral for margin due to some sector-specific news an example of market risk?** 1. Yes 94. **Is a limit on total order value by a dealer an example of pre-order check?** 1. True 95. **A limit on quantity for a single order by a user based on limit specified by exchange is an example of post-order check?** 1. False. It is a pre-order check 96. **Which of them is not a pre-order check?** All are pre-order checks 1. Price range check for an order 2. Quantity Freeze for a single order 3. Single order value limit at dealer level 4. Total order value limits at dealer or branch level 5. Cumulative open order value checks for its dealer / branch / trading member level 6. Client Code check - The dealer of the trading member can put this check to ensure that the order is entered for the correct account 7. UCC/PAN check - TMs have to verify that the order is legally mapped to a valid, active Unique Client Code (UCC) and PAN before execution to prevent post-trade settlement failures. 97. **A check which is done before entering the order is a pre-order check and the one done before the order is executed is pre-trade check. True or False?** 1. True 98. **What is post-order and pre-trade check?** 1. A check which is done after entering the order but before the order is executed is pre-trade check? 99. **A user can avail Investor Risk Reduction Access (IRRA) platform in case of trading losses?** 1. False. TMs, upon facing technical glitches which lead to disruption of trading services, can request for enablement of the IRRA service as per the procedures specified by the stock exchanges from time to time and IRRA shall be enabled on receipt of such requests for their clients. 100. **Does 'Cancel All Orders' a kind of pre-trade check?** 1. Yes. If all the open orders are to be cancelled, this feature can be used. 101. **Does placing order with 'COL' and logging out of the system to cancel all open orders a kind of pre-trade check?** 1. Yes. If all the open orders are to be cancelled, this feature can be used. 102. **IRRA stands for Investor Risk Research Agency. True or False?** 1. False. It stands for Investor Risk Reduction Access (IRRA) platform. 2. Refer to circular SEBI circular [Introduction of Investor Risk Reduction Access (IRRA) platform in case of disruption of trading services provided by the Trading Member (TM)](https://www.sebi.gov.in/legal/circulars/dec-2022/introduction-of-investor-risk-reduction-access-irra-platform-in-case-of-disruption-of-trading-services-provided-by-the-trading-member-tm-_66785.html), dated Dec 30, 2022. 103. **Has IRRA platform been discontinued by SEBI?** 1. Yes, SEBI on [May 7, 2026](https://www.sebi.gov.in/legal/circulars/may-2026/discontinuation-of-investor-risk-reduction-access-irra-platform_101300.html) announced its decision to discontinue IRRA 104. **Does "Contingency Pool Trading facility" allows stock brokers to pool money in case of short fall of funds from their clients?** 1. No. It allows brokers to square off outstanding open positions for their clients during business disruptions. 105. **Are TMs required to report technical glitches in their system?** 1. Yes. In order to streamline the reporting process of [technical glitches](https://www.sebi.gov.in/legal/circulars/nov-2022/framework-to-address-the-technical-glitches-in-stock-brokers-electronic-trading-systems_65466.html) across MIIs and creation of centralized repository of technical glitches, SEBI has developed a web-based portal, i.e. Integrated SEBI Portal for Technical Glitches (iSPOT), for submission of preliminary and final RCA reports of technical glitches by the [MIIs (market infrastructure institutions)](https://investor.sebi.gov.in/miis.html). 106. **iSPOT is the platform for trading in USDINR spot. True or False?** 1. False. It a reporting platform for reporting technical glitches by all MIIs. 107. **Exchanges do not have Surveillance team monitors positions, prices, and volumes in real time so as to deter market manipulation, as it is the responsibility of TMs.** 1. False. Exchanges does have surveillance systems of the exchanges to monitor open interest, cost of carry, volatility, closing prices, capture and process client level details, develop databases of trading activity by brokers as well as clients, generate trading patterns by a broker over a period of time or by a client / group of clients over a period of time. 108. **Does trading on currency futures stop if USDINR jumps by 5%?** 1. No, daily price bands (price circuit filters) are not applicable for Currency Futures (involving INR, and otherwise) contracts. However, in order to prevent erroneous order entry by members, operating ranges are kept at +/-3% of the base price for contracts with tenure up to 6 months and +/- 5% of base price for contracts with tenure greater than 6 months. The dynamic price bands are relaxed in increments of 1% as and when a market wide trend is observed. 2. Currency Options - It is based on the delta, volatility of the underlying spot 109. **If JPYINR June-2026 expiry closed at 60 on 4-June-2026, then the operating range for 5-June-2026 is 55 and 65?** 1. False. It is +/-3%, so 58.20-61.80 110. **What is base price in currency futures of USDINR June-month contract on 4-June-2026 if it closed on 94.25 on 3-June-2026?** 1. 94.25. Under exchange rules, the base price of an active currency futures contract on any given day (other than its launch day) is always the *Daily Settlement Price (DSP) or closing price of the previous trading day*. 111. **Open interest reduces when traders square off their positions more than adding new open positions. True or False?** 1. True 112. **SEBI specifies minimum brokerage that brokers should charge for trading in CDS segment?** 1. No, rather there are rules for the maximum brokerage chargeable by TM, which is 2.5% for futures contract value, and 2.5% of the total premium or Rs 100 per lot for options contract, whichever is higher. Discount brokers, however, often charge flat fees like ₹20 per executed order. 113. **Stamp duty is a statutory levy payable only on the buy side of an exchange-traded derivatives transaction. True or False?** 1. True 114. **If an investor sells 10 lots of USDINR futures at Rs 94.2500, the Stamp duty payable is Rs 10 per crore. True or False?** 1. False. 115. **Stamp duty on buy-side transactions in CDS is 0.00001%. True or False?** 1. False. It is Rs 10 per crore, which is 0.0001% 116. **GST is levied on which charges in CDS segment?** 1. It is levied on all the charges except stamp duty 117. **If a trader holds the currency option till expiry and it expires as ITM option, SEBI turnover fees is reduced to 0%**. 1. False. It is then calculated on Strike Price * Lots* 1000 118. **A client calls the broker and says, "I never placed this order, and this was your mistake." Which kind of risk is this for a broker?** 1. It is operational risk. Operational Risk covers losses resulting from inadequate or failed internal processes such as breakdowns in client communication, trade verification, or order-logging systems, as well as from human errors, systems failures, or disruptive external events. ### Ch. 7 - Clearing, Settlement And Risk Management In Exchange Traded Currency Derivatives 1. **Which entity acts as the legal counterparty to all trades in the Currency Derivatives Segment and guarantees their financial settlement?** - A. Stock Exchange - B. Clearing Corporation - C. Clearing Bank - D. Reserve Bank of India Answer - B, like NSECL 2. **What type of netting procedure is adopted by the Clearing Corporation to determine the net settlement obligations of clearing members?** - A. Bilateral Netting - B. Gross Netting - C. Multilateral Netting Answer - C 3. Pay-In is the process where a Clearing Member brings money and/or securities into the Clearing Corporation? True or False 1. True 4. What is the process called where the Clearing Corporation pays money or delivers securities to a Clearing Member? - A. Pay-In - B. Pay-Out - C. Novation - D. Collateral Allocation Answer - B 5. **On "T+2" basis, the daily mark-to-market (MTM) settlement of Exchange-Traded Currency Derivatives (ETCD) is done for all days other than expiry day? True or False** 1. False. It is T+2 for all trading days other than expiry day. For expiry day, it is T+2 6. **When do the funds pay-in and pay-out of daily mark-to-market settlement and premium settlements typically take place?** - A. At the exact close of market hours on the settlement day - B. At 1:00 PM IST on the settlement day - C. Before the start of market hours on the settlement day - D. Exactly during the mid-day trading halt Answer - C. Members with a funds pay-in obligation are required to have clear funds in their primary clearing account on or before 8.30 a.m. on the settlement day. The payout of funds is credited to the primary clearing account of the members thereafter. 7. **"Securitisation" is the legal process through which the Clearing Corporation step into a trade to become the buyer to every seller and the seller to every buyer? True or False?** 1. True. Novation 8. ==Which type of clearing member has trading as well as clearing rights but can clear and settle trades executed SOLELY by themselves (own account or clients) and NOT for custodial participants?== - A. Professional Clearing Member (PCM) - B. Trading Member - Trading Member-cum-Clearing Member (TM-CM) - C. Trading-cum-Self Clearing Member (SCM) - D. Custodial Clearing Member (CCM) Answer - A Trading-cum-Self Clearing Member (SCM) is a type of brokerage membership that allows you to execute trades on the exchange and clear and settle the trades for your own accounts and your clients' accounts. However, an SCM is not permitted to clear or settle the trades of other Trading Members (TMs). [Link to types of membership on NSE](https://www.nseindia.com/static/trade/membership-types): - Professional Clearing Member (PCM) - Cannot trade at all; they _only_ clear and settle trades for independent TMs and institutional clients. - Trading-Clearing Member (TM-CM/TCM) - can trade and clear and settle accounts of himself + others (own client's trades + other TMs' own and their client trades + custodian participants' trades ) with clearing corporations - Trading-cum-Self Clearing Member (SCM/TM-SCM) - Can trade, and can clear and settle only their own trades + their own clients' trades, and not trades of other trading members. - Trading Member (TM) - Can only execute trades, cannot clear and settle anything. Must rely on a clearing member. - Custodians/Custodial Clearing Member (CCM) - They are clearing members but not trading members. They clear and settle trades of their institutional clients (like FPIs, Mutual Funds, Domestic Body Corporates, etc.) that are executed through other trading members. Such clients are alloted [Custodial Participants](https://www.nseclearing.in/clearing-settlement/equity-derivatives/custodial-participant-deals) CP code from NSECL through their clearing member. The client and clearing member are required to enter into an agreement as per specified format. Custodians do not clear and settle for retail TMs. 9. **What are clients called who are eligible to trade through multiple trading members but choose to clear and settle all deals through a single clearing member?** - A. Proprietary participants - B. Custodial participants (CP) - C. Non-resident institutional entities Answer - B 10. **Which type of clearing member can clear and settle their own trades, the trades of other trading members, and the trades of custodial participants?** - A. Trading-cum-Self Clearing Member (SCM) - B. Professional Clearing Member (PCM) - C. Trading member-cum-clearing member (TM-CM) - D. Non-banking Trading Member - Answer - C 11. **Which category of clearing member has ONLY clearing rights and absolutely NO trading rights?** - A. Trading-cum-Self Clearing Member (SCM) - B. Trading member-cum-clearing member (TM-CM) - C. Professional clearing member (PCM) - D. Proprietary Trading Member Answer - C 12. **All trades executed by Custodian Participant (CP) through any TM are required to have the CP code in the relevant field on the F&O trading system at the time of order entry.** Such trades executed on behalf of a CP are required to be confirmed by their CM (and not the CM of the TM through whom the trade was executed). But what happens to trades entered by a trading member with a custodial participant code if they are NOT confirmed by the clearing member of that custodial participant? - A. They are automatically cancelled by the exchange terminal - B. They are treated as trades pertaining to the trading member entering them and fall onto their own clearing member - C. They are frozen and moved to a suspended account for 5 days Answer - B 13. **If an entity is a member of NSECL, what framework by SEBI allows this entity to clear and settle trades executed across multiple exchanges?** 1. The [Interoperability](https://www.nseclearing.in/inter-operability/introduction-to-inter-operability) Framework, established by SEBI in November 2018, allows members of NSE Clearing Limited (NSECL/NCL) to clear and settle trades executed across multiple stock exchanges. But Commodity Derivatives is not included in this framework. Also, Clearing Corporations operating in International Financial Services Centre (IFSC) are excluded from the SEBI domestic interoperability framework 14. **No exposure is granted on the additional capital under the interoperability framework, by a linked Clearing Corporation to another linked Clearing Corporation against the "Additional Capital" component? True or False?** 1. True. Also a linked CC means a Clearing Corporation that is connected to another CC via a network agreement to allow seamless clearing across different exchanges. 15. **How are a Trading Member's proprietary open positions calculated for each contract?** - A. On a net basis (buy minus sell) - B. On a gross added basis across all trading terminals - C. Position is ignored for margin calculation Answer - B. A TM's total open position (own as well as clients) is the sum of proprietary open positions, client open long positions and client open short positions. 16. ==How are client-level open positions calculated and aggregated at the Trading Member level?== - A. Netted across all clients of that broker - B. Netted within each client at the contract level and then summed up (grossed) across different clients - C. Averaged on a rolling 30-day basis - D. Added directly using gross buy quantities only, ignoring sales Answer - B. Example: Open position of Client A in a USDINR May-2026 FUTURES contract is not netted against the open position of client 2 in the same contract. 17. **Netting is allowed between a short position in one currency pair (e.g., EURINR) and a long position in another pair (e.g., USDINR). True or False?** 1. False. Netting is not allowed between different underlying currency pairs, and so they are summed up 18. **What is the standard currency-level position limit for a standard non-bank Trading Member or a Category I & II FPI (Corporate/Institution) in USDINR contracts?** - A. Higher of 15% of total open interest or USD 50 million - B. Higher of 15% of total open interest or USD 100 million - C. Higher of 6% of total open interest or USD 20 million - D. Higher of 15% of total open interest or USD 1 billion Answer - B. It is same for bank trading members (TMs) authorized by the RBI 19. **Clearing members can have either a funds pay-in or funds pay-out for the day. True or False?** 1. True. Funds obligation is generated on a netted basis considering the obligations of a clearing member in the ETCD (Exchange-Traded Currency Derivatives) and ETIRD (Exchange-Traded Interest Rate Derivatives) segments as both are part of the Currency Derivatives Segment of the exchange. 20. **The previous day’s open interest at the respective exchanges is considered for the purpose of computation of position limits. True or False?** 1. True. 21. ==A short note on [Open Position (or simply Position) Limits](https://www.nseclearing.in/risk-management/currency-derivatives/position-limits). Here limits are assigned currency-pair wise, and they are per exchange== 1. Limits on Client Position 2. Proprietary Position Limit for Stock-Broker (other than bank) 3. Proprietary Position Limit for Stock-Broker (bank) - This is decided by the RBI, and it becomes part of the NOPL/NOOPL. 1. "Participation of Authorised Dealers in the exchange traded currency derivative (ETCD) market" in [Master Direction - Risk Management and Inter-Bank Dealings](A. Guidelines for Foreign Exchange Exposure Limits of Authorised Dealers) 2. Authorised Dealers may undertake trading in all permitted exchange traded currency derivatives within their Net Open Position Limit (NOPL) subject to limits stipulated by the exchanges (for the purpose of risk management and preserving market integrity) provided that any synthetic USD-INR position created using a combination of exchange traded FCY- INR and cross-currency contracts shall have to be within the position limit prescribed by the exchange for the USD-INR contract. 4. Trading Member Limit - A TM's total open position (own as well as clients) is the sum of proprietary open positions, client open long positions and client open short positions 5. Position Limits for Foreign Portfolio Investor 22. **What is position limit for a client per exchange and currency-wise in currency derivatives position?** 1. The following limit applies to them, and also Non Resident Indians (NRIs) 2. Limit = Sum of Long (Long Futures, Long Calls; and Short Puts) $+$ Sum of short positions (Short Futures, Short Calls, and Long Puts) | **Currency Pair** | **Position Limit** | | ----------------- | ---------------------------------------------------------- | | USDINR | Higher of 6% of the total open interest or USD 20 million | | EURINR | Higher of 6% of the total open interest or EUR 10 million | | GBPINR | Higher of 6% of the total open interest or GBP 10 million | | JPYINR | Higher of 6% of the total open interest or JPY 400 million | | EURUSD | Higher of 6% of the total open interest or EUR 10 million | | GBPUSD | Higher of 6% of the total open interest or GBP 10 million | | USDJPY | Higher of 6% of the total open interest or USD 10 million | 23. **What is position limit for a TM per exchange and currency-wise in currency derivatives position?** 1. Trading Member (Banks and Non-Banks) (Also applicable to Domestic Institutional Investors (DIIs) as permitted by the respective sectoral regulator and AD-Category I Bank, FPI Category I & II (other than Individual, family office and Corporates) 2. *For Bank trading members as authorized by RBI: Gross open position across all contracts shall not exceed 15% of the total open interest or USD 1 billion, whichever is higher. | **Currency Pair** | **Position Limit** | | ----------------- | ------------------------------------------------------------ | | USDINR | Higher of 15% of the total open interest or USD 100 million* | | EURINR | Higher of 15% of the total open interest or EUR 50 million | | GBPINR | Higher of 15% of the total open interest or GBP 50 million | | JPYINR | Higher of 15% of the total open interest or JPY 2000 million | | EURUSD | Higher of 15% of the total open interest or EUR 100 million | | GBPUSD | Higher of 15% of the total open interest or GBP 100 million | | USDJPY | Higher of 15% of the total open interest or USD 100 million | 24. **Up to what limit, can anyone trade in ETCD (across all currency pairs involving INR, put together, and combined across all exchanges) without having to submit documentary evidence of the underlying exposure?** 1. Users may take long or short positions without having to establish existence of underlying exposure, up to a single limit of USD 100 million equivalent, across all currency pairs involving INR, put together, and combined across all the stock exchanges. 2. While users are not required to establish the existence of underlying exposure, they must ensure the existence of a valid underlying contracted exposure which has been not hedged using any other derivative contract and should be in a position to establish the same, if required 25. If a user intends to take a position beyond USD 100 million equivalent across all exchanges put together, what action must they take? - A. Obtain a physical license directly from the SEBI chairman - B. Mail to Ministry of Finance - C. Designate an Authorized Dealer (AD) / Custodian through the exchange facility Answer - C 26. **RBI only allows stock exchanges to offer foreign exchange derivative contracts in ONLY these permitted currency pairs: USD-INR, EUR-INR, GBP-INR, JPY-INR, EUR-USD, GBP-USD. True or False?** 1. False. There is one name missing which is USDJPY 27. **What happens if a client's open position breaches a limit purely due to a drop in the total market open interest (OI) at the exchange?** - A. The positions must be forcibly unwound within 10 minutes - B. The positions do not need to be unwound immediately, but the client cannot increase positions or create new ones until they comply Answer - B 28. **For the purpose of computing client-level gross open positions, which combination of contracts is grouped as a "LONG" position?** - A. Long futures, long calls, and long puts - B. Long futures, short calls, and long puts - C. Long futures, long calls, and short puts - D. Short futures, short calls, and long puts Answer - C 29. **For the purpose of computing client-level gross open positions, which combination of contracts is grouped as a "SHORT" position?** - A. Short futures, short calls, and short puts - B. Short futures, short calls, and long puts - C. Short futures, long calls, and short puts - D. Long futures, short calls, and long puts Answer - B 30. ==What is the specific position limit prescribed at the level of the Clearing Member itself?== - A. No separate position limit is prescribed at the level of the clearing member - B. 15% of market OI or USD 100 million, whichever is higher - C. 15% of market OI or USD 200 million, whichever is higher Answer - A 31. **How is the Daily Settlement Price for active Currency Futures contracts calculated at the end of a regular trading day, other than the expiry day?** - A. The final trade price executed at 5:00 PM exactly - B. The last half an hour weighted average price across Exchanges of such contract - C. The theoretical forward price derived from the spot rate Answer - B. FBIL reference rate on the last trading day is used for the final settlement of currency futures and options contracts, whether they involve INR or are cross-currency pairs. 32. **Unlike futures contracts, how are mark-to-market daily changes in the premium value of open short options positions handled?** - A. Adjusted against the margin placed and NOT settled in cash - B. Settled in cash every morning before market open - C. Forcibly squared off if the option goes out-of-the-money Answer - A 33. **On the expiry date of a currency options contract, which open contracts are automatically exercised?** - A. All contracts regardless of moneyness - B. Only At-the-money (ATM) contracts - C. All open long In-the-money (ITM) contracts - D. Only deeply Out-of-the-money (OTM) short positions Answer - C 34. **To prevent the misuse of client funds by brokers, SEBI mandates that running accounts of client funds must be settled by the broker on what periodic basis?** - A. Weekly or fortnightly - B. Monthly (if not traded in last 30 days) or monthly/quarterly as per the mandate of the client - C. Daily at 5:30 PM - D. Strictly semi-annually Answer - B. Link to SEBI circular on [Measure for ease of doing business, dated Jan 6, 2025](https://www.sebi.gov.in/legal/circulars/jan-2025/measure-for-ease-of-doing-business-settlement-of-account-of-clients-who-have-not-traded-in-the-last-30-days_90552.html) 35. **If a client has a credit balance with a broker but has NOT done any transaction for a specific period, the entire balance must be returned on the next upcoming monthly cycle. What is this period of inactivity?** - A. 15 calendar days - B. 90 calendar days - C. 60 calendar days - D. 30 calendar days Answer - D 36. **Initial margin requirements under the SPAN system for currency derivatives are based on what Value at Risk (VaR) percentage and over what standard horizon?** - A. 95% VaR over a 5-day horizon - B. 99% VaR over a 2-day horizon - C. 99% VaR over a 1-day horizon Answer - C. However, in the case of futures contracts, where it may not be possible to collect mark to market settlement value, before the commencement of trading on the next day, the initial margin is computed over a two-day time horizon (OPTION-B), applying the appropriate statistical formula. 37. **Along with Initial Margin (SPAN), NSE also levies ELM margin on currency futures, and short positions in options. True or False?** 1. True. So net funds required to short an option is = MTM $+$ Initial Margin $+$ ELM 38. **ELM on long call option is 0%. True or False?** 1. True. It is levied on futures $+$ short positions on calls. 39. **ELM on short put option is greater than 0%. True or False?** 1. True. Extreme Loss Margin (ELM) for selling any option, that is having a short option position like a short call or a short put, is strictly greater than 0%, and is typically [between](https://www.nseclearing.in/risk-management/currency-derivatives/margins#:~:text=Extreme%20loss%20margin%3A) 0.5% - 0.75%. 2. Clearing Corporation collects upfront ELM percentage to protect the system against extreme, sudden tail-risk collapses in the underlying currency pair. A short put option carries the maximum risk equal to strike price if underlying falls to zero. 3. For currency futures, ELM is levied on both long and short futures. 40. **Initial margin requirement for a TM for only all his client positions - is netted at the level of individual client and grossed across all clients. True or False?** 1. True 41. **Initial margin requirement for the proprietary trades of the the Trading Member level is netted for their own trades, with setoffs between client and proprietary positions. True or False?** 1. False. It is netted for their own proprietary trades, without any setoffs between their clients and their own proprietary trades. 42. **Total Initial margin requirement for a Clearing Member = margin is netted (if there is mix of short and long positions) for a client, then the margins are summed up for each client + margin is netted for a given TM's own proprietary trades $+$ then the margin are summed for each TM under the CM. True or False?** 1. True 43. **Initial Margin requirement decreases (netted) if a one-sided position in a given pair is combined with opposite-side positions. True or False?** 1. True. Long positions in a given pair (Long Futures, Long Call, short puts) combined with (Short Futures, Long Put, Short Call). 2. Combining a one-sided position with opposite-side positions in the same currency pair reduces overall portfolio risk *(via offsets)*, which directly decreases your upfront Initial Margin requirement. 44. **What statistical model is used to estimate the standard deviation (volatility estimate) for calculating currency margins?** - A. Exponential Weighted Moving Average (EWMA) - B. Simple 20-day Moving Average - C. Black-Scholes Constant Volatility Answer - A 45. ==SPAN margin for entire portfolio/account = Total SPAN Risk - net value of options, in case of a mix short and long option. True or False?== 1. True. SPAN Margin = -Long value of option (-Risk) + Value of short option (+Risk) = Total SPAN Risk for portfolio - (Long Value - Short Value of Option) 46. **At what times during the day are the SPAN risk parameters updated based on market prices?** A. Hourly at the top of every hour B. [9 times in a day](https://www.nseclearing.in/sites/default/files/2026-01/NCL%20-%20FAQ_RISK_MANAGEMENT.pdf) - 11:00 AM, 12:30 PM, 2:00 PM, 3:30 PM, 5:00 PM, 6:30 PM, EOD, and BOD C. Only twice: at 12:00 PM and at market close D. Continuously every 15 seconds without break Answer -B 47. **The applicable extreme loss margin for futures shall be calculated on the mark to market value of the gross open positions or as may be specified by the relevant authority from time to time. In case of options extreme loss margin shall be calculated on the Notional Value of the open short option position. True or False?** 1. True 48. **What is a futures position in one expiry month hedged by an offsetting position in a different expiry month called?** - A. Cross-currency hedge - B. Delta-neutral layout - C. Calendar spread - D. In-the-money straddle Answer - B 49. **Extreme Loss Margin (ELM) percentage for EURUSD, GBPUSD, and USDJPY contracts (both futures and options) is 0.50%. True or False?** 1. True. 50. **Extreme Loss Margin (ELM) percentage for USDINR Futures and USDINR Options contracts respectively is 0.25% for Futures and 0.75% for Options. True or False?** 1. False. It is 0.5% and 0.75% 51. **ELM for INR options is 0.75% and non-INR pair is 0.5%. True or False?** 1. True. 52. **Liquid assets deposited by clearing members are segregated into which two distinct components?** - A. Equity component and Debt component - B. Domestic currency and Foreign sovereign currency - C. Core fund component and Non-core fund component - D. Cash component and Non-cash component Answer - D 53. **A minimum percentage of 75% a clearing member's total liquid assets must be maintained in the form of the cash component? True or False?** 1. It is 50% 54. **5% is the regulatory haircut applied to Cash and Bank Fixed Deposits when deposited as collateral? True or False?** 1. False. It is 0% 55. **Will a clearing corporation accept Fixed Deposit Receipts (FDRs) as collateral if they are issued by the clearing member itself or its associate bank? Yes or No?** 1. No 56. **Which type of market participant is explicitly permitted to offer foreign sovereign securities with AAA ratings as collateral?** - A. Domestic Retail Clients - B. Domestic Commercial Banks - C. Foreign Portfolio Investors (FPIs) Answer - C 57. **What is the haircut levied on Treasury Bills and liquid Government of India Dated Securities that have a residual maturity of less than 3 years?** - A. 2% - B. 0% - C. 5% - D. 10% Answer - A. But TMs can levy higher haircut. 58. **What is the haircut levied on liquid Government of India Dated Securities that have a residual maturity of MORE than 3 years?** - A. 2% - B. 10% - C. 7.5% - D. 5% Answer - D. But TMs can levy higher haircut. 59. INR 5 million is absolute [minimum liquid net worth](https://www.nseindia.com/static/products-services/currency-derivatives-liquid-assets) required to be maintained by every clearing member in the Currency Derivatives segment at all points of time? True or False? 1. True 60. **At what specific percentage of collateral utilization is a stockbroker/clearing member mandatorily put into Risk-Reduction Mode?** - A. 75% utilization - B. 85% utilization - C. 90% utilization Answer - C 61. **Which specific actions are prohibited for a member while they are flagged under Risk-Reduction Mode?** - A. Placements with a custodial participant code and modification of Client/CP codes - B. Withdrawing clear cash profits from the bank account - C. Viewing real-time data feeds on the terminal - D. Checking client ledger balances Answer - A. When a broker's collateral drops below acceptable thresholds and they are flagged under Risk-Reduction Mode (Gross Exposure Check), the exchange systems immediately restrict high-risk activities and members are prohibited from placing orders using Custodial Participant (CP) codes and from carrying out any Client or CP code modifications. They are typically only allowed to cancel existing orders or reduce their open positions. 62. SEBI's detailed [Cyber Security and Cyber Resilience Framework (CSCRF)](https://www.sebi.gov.in/sebiweb/home/HomeAction.do?doListing=yes&sid=1&ssid=7&smid=0) comes into effect in a phased manner starting from which date? - A. January 1, 2025 - B. April 1, 2024 - C. June 30, 2025 Answer - A 63. **Which of the following entities is NOT classified as a Market Infrastructure Institution (MII) under the CSCRF guidelines?** - A. Stock Exchanges - B. Depositories - C. Clearing Corporations - D. Individual Retail Trading Stockbrokers Answer - D 64. **The Cyber Security and Cyber Resilience Framework is built around how many cyber resiliency goals?** - A. 3 goals (Identify, Protect, Liquidate) - B. 5 goals (Anticipate, Withstand, Contain, Recover, Evolve) - C. 7 goals (Assess, Defend, Monitor, Trace, Report, Fine, Close) - D. 4 goals (Block, Scan, Quarantine, Reboot) Answer - B. It has 5 goals 65. **The primary purpose of the Core Settlement Guarantee Fund (Core SGF) is to guarantee the settlement of trades in the event of a clearing member failing to honor obligations. True or False?** 1. True. 66. **By what date each month must the Clearing Corporation review and determine the Minimum Required Corpus (MRC) of the Core SGF for the next month?** - A. By the 1st of every month - B. By the 7th of every month - C. By the 15th of every month - D. On the last business working day 67. **How is the MRC for the next month calculated during the monthly review?** - A. It is a fixed historical flat rate of Rs. 100 crores - B. It is the higher of the average of all daily worst-case loss numbers from stress tests and the segment MRC from the previous review Answer - B 68. **Clearing Corporation does not put their own funds in CSF? True or False** 1. False. They put at least 50% funds of MRC. 69. **What is the maximum percentage cap on the total primary contribution that can be collected from Clearing Members for the Core SGF of a segment?** - A. Not more than 25% of MRC - B. Not more than 10% of MRC - C. Exactly 50% of MRC Answer - A 70. **What is the minimum required contribution from the Clearing Corporation's OWN funds to the Core SGF Minimum Required Corpus (MRC)?** - A. At least 10 percent of MRC - B. At least 25 percent of MRC - C. At least 50 percent of MRC - D. Exactly 75 percent of MRC Answer - C 71. **What is the minimum required contribution from the Stock Exchange to the Core SGF Minimum Required Corpus (MRC)?** - A. At least 10 percent of MRC - B. At least 50 percent of MRC - C. At least 25 percent of MRC Answer - B 72. **In the Core SGF default waterfall, whose monies are utilized first to cover a settlement default?** - A. The Clearing Corporation's own 5% resource block - B. The insurance coverage pool - C. Monies of the defaulting member - D. Contributions of non-defaulting members pro-rata Answer - C 73. **In the derivatives segment, what is the maximum capped additional contribution that can be demanded from non-defaulting members on the date of a default?** - A. Lower of 2 times their primary contribution to Core SGF or 20% of the Core SGF of the segment - B. Lower of 1 time their primary contribution or 5% of Core SGF - C. Higher of 5 times their contribution or Rs. 50 lakh Answer - A 74. **For margin compliance purposes, how are instances of "non-reporting" of client margin collections treated by the exchange?** - A. Excused for the first 3 violations per month - B. Fined a flat token amount of INR 1,000 - C. Suspended from options trading for a week - D. Regarded as 100% short collection, and the applicable penalty is charged 75. **At the end of day, the consolidated crystallized obligations in derivatives is equal to sum of the following? True or False.** - A. Futures mark to market profit/loss to be settled, on days other than expiry day. Futures mark to market profit/loss to be settled on the expiry day, (also called the futures final settlement for expired contracts) - B. Options premium payable/receivable (Leg 1 of the Options) - C. Options exercise/assignment for expired contracts (Leg 2 of Options) Answer - True. 1. [Crystalized obligation](https://www.nseclearing.in/risk-management/currency-derivatives/margins) means the actual cash that must be paid or received. For futures, this means such as daily MTM, closed-out futures trades, final settlement), for options it means premiums payable/receivable and final exercise/assignment payouts, completely separate from upfront margin requirements like SPAN and ELM. 2. Daily Settlement - It is to be paid on T+ morning (before the market opens), on days other than expiry day. 3. Final settlement - However, in case of final settlement amount shall be collected by T+2 day. 76. **Under the mandatory protection mechanism, client securities used for margin obligations can ONLY be handled via which method in the Depository System?** - A. Title transfer to the broker's proprietary pool account - B. Off-market physical delivery slip movement - C. Margin Pledge / Re-pledge facility - D. General Power of Attorney over client accounts Answer - C 77. **What is the correct order of blocking margins from collateral when a client trade hits the Clearing Corporation?** - A. Client Collateral First - It pulls entirely from the individual client’s allocated funds. TM Proprietary Next - If the client's balance falls short, the broker's (TM's) own corporate/prop collateral is automatically blocked to cover the residue. CM Proprietary Last - If the TM's prop collateral is also completely exhausted, the Clearing Member's proprietary collateral is blocked as the final backstop. - B. First from CM collateral, then TM collateral, then Client collateral - C. Blocked entirely from the Settlement Guarantee Fund directly - D. Blocked from the exchange's pool asset ledger Answer - A ### Ch. 8 - Regulatory Framework For Exchange Traded Currency Derivatives 1. **Which act provides for establishment of SEBI?** 1. The SEBI Act, 1992 provides for establishment of Securities and Exchange Board of India (SEBI) with powers for protecting the interests of investors in securities, promoting the development of the securities market, and regulating the securities market. 2. **RBI regulates the working of stock brokers, authorized person etc. True or False?** 1. It is done by SEBI. SEBI guidelines related to trading, clearing and settlement, risk management, surveillance, investor grievance and protection, fraudulent and unfair trade practices, stock broker regulations, KRA regulations, anti-money laundering etc. are applicable for ETCD. 3. **Any entity wishing to become CM and/or TM have to apply in accordance with which regulations?** 1. They have to apply for membership in accordance with SEBI (Stock Brokers) Regulations, 2026, issued in supersession of SEBI (Stock Brokers) Regulations, 2026 2. [FAQs on stock brokers](https://www.sebi.gov.in/sebi_data/faqfiles/sep-2024/1727418208774.pdf) 4. **After obtaining SEBI’s approval, the Recognized Stock Exchange and its Clearing Corporation / Clearing House also has to obtain RBI's approval** 1. True. They have to seek the approval under FEMA for trading, clearing and settlement of Currency Derivatives. 5. **Name the RBI guidelines/directions on Exchange Traded Currency Derivatives** 1. [Master Direction – Risk Management and Inter-Bank Dealings](https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=10485). 2. They apply on Authorised Dealer Category-I banks and Standalone Primary Dealers authorised as Authorised Dealer Category-III 6. **FEDAI is an association of all derivatives trader. True or false?** 1. False. Established in 1958 as an association of banks dealing in foreign exchange in India (typically called Authorised Dealers - ADs) as a self-regulatory body and is incorporated under Section 25 of The Companies Act, 1956. Its major activities include framing of rules governing the conduct of inter-bank foreign exchange business among banks vis-à-vis public and liaison with RBI for reforms and development of forex market. 7. **What are the 3 different categories of Authorised Dealers (ADs)**? Reserve Bank, currently, issues authorisation under Section 10(1) (sub-section (1) of section 10 of the FEMA) of the FEM Act, 1999 (Act 42 of 1999), to the following *different categories:* ^548b72 1. select banks (as [Authorised Dealers Category-I](https://rbi.org.in/scripts/Category.aspx)) to carry out all permissible current and capital account transactions as per directions issued from time-to-time. They are all scheduled commercial banks, which include Public sector banks, private sector banks and foreign banks operating in India. 2. select entities (as **Authorised Dealers Category-II**) to carry out specified non-trade related current account transactions, all the activities permitted to Full Fledged Money Changers and any other activity as decided by the Reserve Bank. 1. They are all the upgraded full fledged money changers (FFMCs) and select Regional rural banks and cooperative banks. 2. In order to provide adequate foreign exchange facilities and efficient customer service, the Reserve Bank has decided to grant licenses to certain entities by authorising them as Authorised Dealer – Category II to release/remit foreign exchange for the non-trade current account transactions mentioned in [Master Direction - Other Remittance Facilities](https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=10193#C23) 3. select financial and other institutions (as **Authorised Dealers Category-III**), such as EXIM bank, to carry out specific foreign exchange transactions incidental to their business / activities 4. select registered companies as **Full Fledged Money Changers (FFMC)** to undertake purchase of foreign exchange and sale of foreign exchange for specified purposes viz. private and business travel abroad. 5. All of them are collectively called *Authorised Persons (ADs and FFMCs)*. 8. **Are authorised persons of brokers and authorised dealers same?** 1. No. Authorised dealers have been authorised by the RBI under the FEMA Act, 1999 to carry out different kinds of foreign exchange transactions, and authorised persons of brokers are agents of brokers, acting on behalf of the registered broker to assist investors, provide access to trading platforms, and facilitate trades, operating strictly as an intermediary between the broker and the client. 9. **Who are authorised persons under the FEMA Act, 1999?** 1. Authorised Dealers and Full Fledged Money Changers (FFMC) are collectively called Authorised Persons 10. **Can a person resident in India trade in ETCD without the underlying exposure?** 1. False. 11. **As of June 2026, up to what amount does SEBI (based on guidelines by the RBI) allow traders to trade (take positions) in ETCD without submitting documentary evidence of the underlying exposure?** 1. Up to $100 million. 12. **CKYC is managed by which agency?** 1. CERSAI. CKYC refers to Central KYC (Know Your Customer), an initiative of the Government of India which aims to have a system which allows investors to complete their KYC only once before interacting with various entities across the financial sector. CKYC is managed by CERSAI (Central Registry of Securitization Asset Reconstruction and Security Interest of India), which is authorized by Government of India to function as the Central KYC Registry (CKYCR). 13. **Is Income from Futures & Options trading is taxed as "Income from Other Sources", or "business income", or "Others"**? 1. Business Income   ### Ch. 9 -Accounting and Taxation of ETCD 1. **Under what head of income are the gains or losses arising from exchange-traded currency derivatives taxable in India?** - A. Capital Gains - B. Profits and Gains from Business or Profession (PGBP) - C. Income from Other Sources - D. Income from Salaries Answer - C 2. **If a specific regulator like the RBI or IRDAI has not prescribed any accounting treatment for a derivative contract, which recommendations should be followed?** - A. International Financial Reporting Standards (IFRS) - B. Recommendations contained in the ICAI Guidance Note - C. SEBI operational manual Answer - B 3. **According to the ICAI Guidance Note, how should all derivative contracts be recognized and measured on the balance sheet?** - A. At historical cost - B. At lower of cost or market value - C. At fair value - D. At intrinsic value Answer - C 4. **If an entity decides NOT to use hedge accounting, where must changes in the fair value of its derivatives be recognized?** - A. Directly in Equity - B. Other Comprehensive Income (OCI) - C. General Reserve - D. Statement of Profit and Loss Answer - C 5. **In the context of derivative contracts, what does 'fair value' represent?** - A. The historical premium paid - B. The face value of the underlying asset - C. The maximum potential loss of the contract - D. The exit price to transfer a liability or receive an asset Answer - B 6. **Which of the following must be incorporated while arriving at the fair value of a derivative contract?** - A. The effect of credit risk associated with future obligations - B. The original broker commission paid - C. The historical volatility of the past 12 months - D. The statutory liquidity ratio (SLR) Answer - A 7. **When establishing a hedge accounting relationship, when must an entity adequately document its risk management objectives and strategy?** - A. At the end of the financial year - B. When filing the income tax return - C. Only when the hedge becomes ineffective - D. At the inception of the hedge relationship Answer - B 8. **Is an entity legally required to designate a derivative contract as a hedging instrument under the ICAI Guidance Note?** - A. Yes, it is mandatory for all exchange-traded currency derivatives - B. No, it is permitted but not required - C. Yes, but only for currency futures contracts - D. No, it is strictly prohibited for corporate entities Answer - B 9. **When an entity is hedging a future cash flow, what threshold must the cash flows meet to qualify for hedge accounting?** - A. They must be completely risk-free - B. They must be highly probable of occurring Answer - B 10. **Which Accounting Standard was eventually withdrawn and fully replaced by Ind AS 109 in India?** - A. Accounting Standard (AS) 11 - B. Accounting Standard (AS) 30 - D. Accounting Standard (AS) 25 Answer - B 11. **For entities in India that do NOT follow the Indian Accounting Standards (Ind AS) framework, what serves as the guiding document for derivatives not covered by AS 11?** - A. IFRS 9 - B. FEMA Regulations - C. SEBI Clause 49 - D. The ICAI Guidance Note on Accounting for Derivative Contracts Answer - D 12. **Indian Accounting Standard (Ind AS) 109 is closely based on which international framework?** - A. US GAAP - B. IFRS 9 - D. Basel III Answer - B 13. **What are derivative components embedded in non-derivative contracts called under Ind AS 109?** - A. Overlay derivatives - B. Synthetic derivatives - C. Embedded derivatives - D. Standalone options Answer - C 14. **Under Ind AS 109, "Fair Value Through Profit or Loss (FVTPL)" is the default measurement category for a derivative instrument that is NOT part of a designated hedging relationship? True or False?** 1. True 15. **Under Ind AS 109, if an embedded derivative cannot be measured reliably on a standalone basis, It must be designated as Fair Value Through Profit or Loss (FVTPL). True or False?** 1. True 16. **Hedging a firm commitment that is NOT yet recognized in the balance sheet can be accounted for using which model?** - A. Fair value hedge accounting model - B. Speculative accounting model - C. Amortized cost model - D. Net equity investment model Answer - A 17. **The cash flow hedge accounting model is specifically applied when hedging the variability of cash flows related to which of the following?** - A. Fixed-rate bonds already recorded at par - B. Highly probable forecast transactions or a firm commitment in a foreign currency Answer - B 18. **Under a cash flow hedge, where is the gain or loss determined to be an "effective hedge" initially recognized?** - A. Directly in the Statement of Profit and Loss - B. In Equity (e.g., cash flow hedge reserves) Answer - B. the effective portion of a cash flow hedge is initially recognized in Other Comprehensive Income and accumulated in equity under the Cash Flow Hedge Reserve. 19. **What is the primary purpose of recognizing the effective portion of a cash flow hedge in equity/reserves rather than the income statement?** - A. To minimize corporate income tax liability - B. To avoid artificial volatility in the statement of profit and loss Answer - B 20. **An investor holding a stake in a non-integral foreign operation is primarily exposed to value changes arising from what risk?** - A. Translation of net assets into the reporting currency of the investor - B. Changes in corporate governance laws Answer - B 21. **When are any net deferred foreign currency gains and losses arising from a net investment hedge transferred to the profit and loss statement?** - A. At the end of every quarter - B. Upon the disposal of the foreign operation Answer - B. Fair value hedges mitigate exposure to changes in the market value of a specific asset, liability, or firm commitment. In contrast, net investment hedges protect the value of a parent company's equity investment in a foreign subsidiary against foreign currency exchange fluctuations. A cash flow hedge is a financial strategy used to protect against the risk of variability in future cash flows, such as those caused by fluctuating interest rates, foreign exchange rates, or commodity prices. It locks in predictable cash flows by using derivatives like forward contracts or swaps. 22. **On a net investment hedge in a non-integral foreign operation, how are the effective foreign exchange gains and losses treated?** - A. Recognized in the profit and loss account immediately - B. Recognized directly in equity through consolidation translation Answer - B. 23. **Where is the INEFFECTIVE portion of the gains or losses on a net investment hedging instrument recognized?** - A. In the Statement of Profit and Loss immediately - B. Charged to Other Comprehensive Income (OCI) Answer - B 24. **When are any net deferred foreign currency gains and losses arising from a net investment hedge transferred to the profit and loss statement?** - A. At the end of every quarter - B. Upon the disposal of the foreign operation Answer - B 25. **Which of the following is given as an explicit example of a Fair Value Hedge in the ICAI guidance?** - A. Hedging a highly probable future sales order - B. Hedging a fixed-rate bond with an interest rate swap to make it floating - C. Buying a plain vanilla USDINR monthly call option for speculation Answer - B 26. **How should derivative assets and liabilities intended for trading or speculative purposes be classified on the balance sheet?** - A. Non-current assets and liabilities - B. Intangible assets Answer - C 27. **Derivatives that serve as hedges of recognized assets or liabilities are classified as current or non-current based on what factor?** - A. The preference of the statutory auditor - B. The contractual lot size of the derivative - C. The classification of the underlying hedged item Answer - B 28. **For derivatives hedging forecasted transactions and firm commitments, the settlement/maturity dates of the derivative contracts determines their current or non-current classification. True or False?** 1. True. 29. **How should derivatives with periodic or multiple settlements (such as interest rate swaps) be classified?** - A. They are always classified exclusively as non-current assets - B. They should not be bifurcated; classification is based on when the predominant portion of cash flows is due Answer - B 30. **Does the ICAI Guidance Note generally permit the netting of derivative assets and liabilities on the balance sheet?** - A. Yes, netting is mandatory for all derivative types - B. No, it does not permit netting except where basis adjustment applies under cash flow hedges Answer - B 31. **Amounts presented in financial statements for derivatives designated as hedges must be reported as:** - A. Net amounts - B. Gross amounts Answer - B 32. **For derivatives NOT designated as hedges, gains and losses recognized in the statement of profit and loss may be presented on what basis?** - A. Gross basis only - B. Net basis Answer - B. It is measured measured at fair value and changes in fair value is recognised in the statement of profit and los 33. **Besides numbers, its overall financial risk management objectives and approach towards managing risks are the qualitative information that an entity must disclose regarding its risk profile?** - A. Its overall financial risk management objectives and approach towards managing risks - B. The names of individual trading desks Answer - B 34. **In relation to foreign currency risks, what must the disclosure format explicitly capture besides hedged items?** - A. All foreign exchange assets and liabilities, including both hedged and unhedged balances - B. Future speculative targets Answer - B. The rule requires disclosing unhedged balances too, so investors can see exactly how much total foreign currency exposure is left completely unprotected 35. **What is "hedge effectiveness"?** - A. The degree to which changes in the fair value or cash flows of the hedged item are offset by the hedging instrument - B. The total net profit generated from speculative currency positions Answer - A 36. **Does the ICAI Guidance Note prescribe a single, mandatory method for conducting hedge effectiveness testing?** - A. Yes, the Dollar Offset method is legally mandatory for all - B. Yes, the Regression method must be used universally - C. No, it does not prescribe one single method; it depends on facts, circumstances, and objectives - D. No, testing is entirely optional and not recommended Answer - C 37. **Which of the following is mentioned as a commonly used measure that entities may apply to assess hedge effectiveness?** - A. Critical terms match, dollar offset, or regression methods - B. Monte Carlo pricing loops Answer - A. Critical Terms Match (CTM) is a qualitative method. If the essential terms of the hedging instrument (e.g., derivative) exactly match the hedged item (e.g., notional amount, maturity date, currency, and index), the hedge is assumed to be 100% effective. A dollar offset method/quantitative ratio test that compares the change in the fair value or cash flows of the hedging instrument to the change in the hedged item. A statistical approach (like linear regression) used to analyze the historical or prospective correlation and offset level between changes in the hedging instrument and the hedged item. 38. ==Under the Income-tax Act, how is business income classified for tax purposes?== - A. Capital and Non-capital - B. Speculative and Non-speculative 39. **A transaction periodically or ultimately settled otherwise than through actual delivery or transfer, is how a transaction is legally defined as "speculative" under general income tax principles?** - A. Any trade that results in a net financial loss - B. A transaction periodically or ultimately settled otherwise than through actual delivery or transfer - C. Any transaction executed on an automated screen-based stock exchange Answer - B 40. **Section 42(5) of the Income-tax Act excludes certain derivative transactions from being deemed "speculative transactions". True or False?** 1. True 41. **Eligible derivative transactions carried out on a recognized stock exchange are treated as:** - A. Speculative business income - B. Non-speculative business income (normal business income) Answer - B 42. **Because exchange-traded currency derivatives are treated as non-speculative business, any loss arising from them can be set off against:** - A. Any normal business income - B. Salary income only Answer - A 43. **How are securities held by Foreign Portfolio Investors (FPIs) always treated under the Income-tax Act?** - A. As stock-in-trade - B. As capital asset - C. As deferred current assets - D. As fully exempt sovereign wealth assets Answer - B 44. **Any profits and gains arising to an FPI from derivative transactions are always taxable under which head?** - A. Profits and Gains from Business or Profession (PGBP) - B. Capital Gains - C. Income from Other Sources - D. Speculative Business Income Answer - B 45. **If an FPI holds derivative positions for less than 12 months, the gains are chargeable to tax as:** - A. Short-term capital gains - B. Long-term capital gains - C. Normal business income - D. Exempted from tax Answer - B 46. **How does the Income-tax Act explicitly define the method for calculating trading turnover for exchange-traded derivatives?** - A. It does not contain any direct provision or guidance for computing derivative turnover - B. It contains a detailed, dedicated section under Section 43 Answer - A 47. **According to the Guidance Note on Tax Audit issued by the ICAI, how is turnover determined for derivatives?** - A. The total of favorable and unfavorable differences (absolute profits plus absolute losses) - B. The grand total of all long contract purchases Answer: B. According to the ICAI's **Guidance Note on Tax Audit under Section 44AB**, F&O turnover is strictly calculated using the absolute sum of positive (profits) and negative (losses) differences, never the notional contract value. 48. ==When computing derivative turnover for tax audit purposes, how is the premium received on the sale of options treated?== - A. It is excluded from turnover, if the same has already been considered in calculating profit and loss. - B. It is always included in the turnover computation, even if it has already been considered in calculating profit and loss. Answer - A 49. **Why is the accurate computation of trading turnover highly critical for an exchange-traded derivatives trader as it determines the applicability of a mandatory tax audit. True or False?** 1. True 50. **Under Section 44AD, what is the standard presumptive taxation profit rate for digital/cheque receipts if the turnover fits the limits?** - A. 8% of the turnover - B. 6% of the turnover Answer - B. if a taxpayer receives payments via cash, then presumptive rate is 8%. 51. **Under the presumptive taxation scheme (Section 44AD), if a taxpayer receives payments via cash, what is the prescribed rate of profit?** - A. 6% of turnover - B. 8% of turnover Answer - B 52. **As per the latest rules mentioned in the text (reflecting the Union Budget FY 2024-25 adjustments), what is the increased turnover limit ( up to) for presumptive taxation, provided 95% of receipts are online?** - A. Rs. 1 crore - B. Rs. 2 crore Answer: C. Before this, it was Rs 2 crore. 53. **If a trader opts for the presumptive taxation scheme under Section 44AD, are they required to maintain detailed books of accounts under Section 44AA?** - A. Yes, they must maintain full books and get a tax audit done - B. No, they are exempt from maintaining prescribed books of accounts and getting them audited Answer - B 54. **What is the advance tax payment requirement for an eligible individual opting for the presumptive taxation scheme?** - A. They must pay advance tax in 4 equal quarterly instalments - B. They are completely exempt from paying any advance tax - C. They can pay 100% of the advance tax in a single instalment up to 15th March Answer - B 55. **Can normal business losses from exchange-traded currency derivatives be set off against income from the head 'Salaries'?** - A. Yes, without any limitation - B. No, business losses cannot be set off against salary income - C. Yes, up to a maximum cap of Rs. 1,00,000 per year Answer - B 56. **For how many subsequent Assessment Years can unabsorbed currency derivatives business losses be carried forward?** - A. 4 Assessment Years - B. 8 Assessment Years - C. 3 Assessment Years Answer - B 57. ==Once a non-speculative derivatives business loss is carried forward to subsequent years, what income can it be set off against?== - A. Salary income - B. Income from house property - C. Profits and Gains of Business or Profession (PGBP) - D. Dividend income Answer - C. For the current financial year - All Business losses, other than speculative losses, can be set off against _any_ head of income except Salary. In case of carry forward, it can be carried forward for 8 assessment years but it loses its ability to offset other heads of income and can only be set off against business profits/business income. 58. ==For the current financial year, non-speculative derivatives business loss can be offset against speculative gains from intraday equity trading. True or False?== 1. True 59. ==What is the strict prerequisite condition for a taxpayer to be eligible to carry forward business losses to future years?== - A. The return of income must be filed on or before the prescribed due date - B. The total turnover must be verified by SEBI Answer - A 60. ==What happens to a trader's right to carry forward and set off losses if they file their income tax return AFTER the prescribed due date?== - A. The right is preserved but limited to 2 years - B. The right is completely lost Answer - A ### Ch. 10 - Code Of Conduct And Investor Protection Measures 1. **Which regulations prescribe code of conduct for brokers/TMs?** 1. The primary legislation that prescribes the code of conduct for Trading Members (TMs) is the Chapter VIII of [Securities and Exchange Board of India (Stock Brokers) Regulations, 2026](https://www.sebi.gov.in/legal/regulations/jan-2026/securities-and-exchange-board-of-india-stock-brokers-regulations-2026_98974.html) (Chapter VIII), and they outline the ethical standards, operating principles, and professional expectations for brokers and trading members. 2. **A stock broker is not required to cooperate with other stock brokers as this is the responsibility of clearing members. True or False?** 1. False. This is one of the duty towards other stock-brokers 3. **A stock broker can promise high returns based on their trading skills.** 1. False 4. **SCORES is an online grievance redressal facilitation platform provided by SEBI. True or False?** 1. True 5. **What is the first step an investor should take when seeking redressal for a grievance related to trading in the Currency Derivatives Segment (CDS)?** 1. Approach the listed company or registered intermediary (market participant) against whom the grievance is held. 2. If the grievance is not resolved satisfactorily, the investor or client may escalate the same directly to MIIs (Exchanges or Depositories) or through the SCORES portal of SEBI. 6. **What are Market Infrastructure Institutions (MIIs)?** Stock exchanges, Clearing Corporations and Depositories together constitute MIIs. 1. Stock exchange- Stock exchange is an institution which assists, regulates or controls the business of buying, selling or dealing in securities. 2. Clearing Corporation - Clearing Corporation is an institution which handles the activity of clearing and settlement of trades executed on the stock exchange platforms. 3. Depository- Depository is an institution which holds securities of investors in dematerialized form through a registered depository participant. 7. **How are complaints handled on SCORES?** 1. Submission of the Complaint and handling of the Complaint by the Entity: 1. The Complaints lodged on SCORES against any Entity will be automatically forwarded to the concerned Entity through SCORES for resolution and submission of Action Taken Report (“ATR”). Entities shall resolve the Complaint and upload the ATR on SCORES within 21 calendar days of receipt of the Complaint. The ATR of the entity will be automatically routed to the complainant. 2. The Complaint will also be simultaneously forwarded through SCORES to the relevant Designated Body. The Designated Body will have to ensure that the concerned Entity submits the ATR within the stipulated time of 21 calendar days. 2. First review of the Complaint: 1. If the complainant is not satisfied with the ATR submitted by the entity, the complainant can request for a review of the resolution provided by the entity within 15 calendar days from the date of the ATR. The complaint will be kept pending for 15 calendar days’ post submission of ATR awaiting review from the complainant, if any. 2. In case the complainant has requested for a review of the resolution provided by the entity or the entity has not submitted the ATR within the stipulated time of 21 calendar days, the Designated Body will take up the first review with the concerned Entity, wherever required and submit the ATR to the complainant within 10 Calendar days. 3. Second Review of the Complaint: 1. If the complainant is not satisfied with the resolution provided during first level review by the Designated Body, the complainant can request for a review of the resolution provided by the Designated Body within 15 calendar days from the date of the ATR. The complaint will be kept pending for 15 calendar days awaiting review from the complainant, if any 2. In case the complainant has requested for a review of the resolution provided by the Designated Body or the concerned Designated Body has not submitted the ATR within 10 calendar days, SEBI will take up the second review with the Designated Body or/and the concerned entity. 4. [FAQs on SCORES](https://scores.sebi.gov.in/faqs) 8. **What is the next step for an investor who remains unsatisfied with the redressal provided by the FINAL SEBI review on the SCORES platform?** 1. If complainants are not satisfied with the disposal of their complaints on SCORES, that is after the final SEBI review, they can approach Online Dispute Resolution (ODR) mechanism through the [SMART ODR](https://smartodr.in/login) portal , consumer courts or other appropriate civil remedies as they deem fit. 9. **What is SMART ODR portal?** 1. It is centralized digital platform established collectively by Indian Market Infrastructure Institutions (MIIs), under the guidance of the Securities and Exchange Board of India (SEBI). 2. So References to ODR Institutions shall be made after a review of such complaint/dispute by the relevant MII with the aim of amicable resolution and such review shall be concluded within 21 calendar days of lodging complaint on SCORES portal. 10. **Registered Investment Advisors (RIA) are not covered under the SEBI SMART ODR process?** 1. False. They are covered, along with [several other intermediaries and regulated entities](https://investor.sebi.gov.in/smart_orr.html). 11. **Dispute resolution on SEBI's SMART ODR portal is undertaken by an independent SEBI committee?** False 1. When a dispute is logged directly on the SMART ODR portal, it first goes to the relevant MII where the trading happened. 2. The 21-Day MII Review - The MII is given exactly 21 calendar days to review the case. During this timeframe, they act as a facilitator to try and achieve an amicable resolution (a friendly, informal settlement) between the investor and the market participant (like your broker). 3. If the MII cannot get both parties to agree to a solution within those 21 days, their review period ends, and the dispute gets referred to an independent, empaneled ODR Institution for an online conciliation, (and if required, arbitration), using a round-robin system to ensure fair, unbiased allocation of a dispute. Each MII has identify and empanel one independent ODR Institutions which are capable of undertaking time-bound online conciliation and/or online arbitration (in accordance with the Arbitration and Conciliation Act, 1996). 12. **How many days can a conciliator take for a resolution?** 1. The conciliator shall conduct one or more meeting/s for the disputing parties to reach an amicable and consensual resolution within 21 calendar days (unless extended for a maximum period of 10 calendar days by written or electronic consent of the disputing parties) from the date of appointment of conciliator by the ODR Institution, which shall do so within 5 days of receipt of reference of the complaint/dispute by the ODR Institution. 13. **Every ODR institution empaneled by each MIIs shall have a sole independent and neutral conciliator from its panel of conciliators. True or False?** 1. True, MIIs have to ensure that appropriate measures are put in place regarding appointment of a sole independent and neutral conciliators by the ODR Institutions, who is not connected with or linked to any disputing party. 14. **What is an ODR institution in ODR process?** 1. ODR Institution is an independent, empaneled agency (or private entity) appointed by the MIIs to actually administer the conciliation and arbitration process. Each MII has identify and empanel one independent ODR Institutions which are capable of undertaking time-bound online conciliation and/or online arbitration (in accordance with the Arbitration and Conciliation Act, 1996). 15. **If conciliation through the SMART ODR fails, arbitration can be initiated?** 1. No, it is the final step in redressal process of ODR. 2. Yes. If _conciliation_ fails, _arbitration_ can be initiated. *(Right)* 1. In the SMART ODR (Online Dispute Resolution) portal, conciliation is the first formal, neutral phase of dispute resolution. It is a voluntary, online mediation process where an impartial third party helps you and the opposing financial entity (like a broker or listed company) reach a mutually agreeable settlement. 16. **If conciliation has failed, arbitration has to be conducted by another ODR institution. True or False?** 1. False. An investor/client may pursue online arbitration (which will be administered by the ODR Institution which also facilitated the conduct of conciliation) on or after the conclusion of a conciliation process. 17. **Resolution through Conciliation on ODR portal takes minimum 6 weeks. True or false?** 1. False. It is 21 days 18. **A conciliator has to be appointed by the ODR institution within 1 week of receipt of complaint. True or False?** 1. False. The ODR institution handling a dispute should appoint a conciliator within 2 weeks of receipt of reference of the complaint/dispute by them. 19. **If the market participant (say a broker) is unhappy with conciliation, and wishes to pursue arbitration, what is the fee for them?** 1. In case the Market Participant wishes to pursue online arbitration, then the Market Participant must deposit 100% of the admissible claim value with the relevant MII prior to initiation of the online arbitration. If they fail to deposits, then MII upon receipt of an application from investor/client, release such amount from the deposits of the market participants. At the same time, investor has to submit an undertaking that they would return the amount if the arbitration proceedings is not in their favour. 20. **Conciliation and arbitration by ODR requires physical presence of all the concerned parties in the SEBI's office. True or False** 1. False. The ODR Institutions shall conduct conciliation and arbitration in the online mode, enabling online/audio-video participation by the investor/client, the Market Participant and the conciliator or the arbitrator as the case may be. 21. Are all Market Infrastructure Institutions (MIIs) required to disclose data regarding complaints received against them and their respective members or participants? 1. True. All the Stock Exchanges/Depositories/Clearing Corporations have to disclose on their websites, the data on complaints received against them, and against market participants, by [7th of the next month](https://www.sebi.gov.in/legal/circulars/oct-2021/disclosure-of-complaints-against-the-stock-exchanges-and-the-clearing-corporations_53112.html). 22. **What is Investor Protection Fund (IPF) of stock exchanges?** 1. On August 22, 1985, the Central Government had for the first time stipulated the setting up of the Investor Protection Fund (IPF) by Stock Exchanges. 2. As of now, every stock exchange (and depositories) is required to establish an Investor Protection Fund (IPF), and with the objective of compensating investors in the event of defaulters' assets not being sufficient to meet the admitted claims of investors, promoting investor education, awareness, and research. The IPF is administered by way of registered trust created for the purpose. 3. The IPF Trust endeavors to make good claims for compensation which may be submitted by a stock broker’s investor who suffers any loss arising from the said stock broker declared as a defaulter by the stock exchange 23. **Is Investor Protection Fund (IPF) established by each stock-broker (market participants)?** 1. False. It is set up by stock exchanges and depositories (MIIs), and administered through trusts created for the purpose. 2. [FAQs on IPF by NSE](https://www.nseindia.com/static/complaints/investor-protection-fund-trust) 3. [SEBI circular on IPF, dated May 30, 2023](https://www.sebi.gov.in/legal/circulars/may-2023/comprehensive-guidelines-for-investor-protection-fund-and-investor-services-fund-at-stock-exchanges-and-depositories_71925.html) 24. **Penalties collected by stock exchanges from their listed companies for noncompliance** with various requirements of the SEBI (Listing Obligation and Disclosure Requirements) Regulations 2015 pursuant to [SEBI Circular no. SEBI/HO/CFD/CMD/CIR/P/2020/12 dated January 22, 2020](https://www.sebi.gov.in/legal/circulars/jan-2020/non-compliance-with-certain-provisions-of-the-sebi-listing-obligations-and-disclosure-requirements-regulations-2015-and-the-standard-operating-procedure-for-suspension-and-revocation-of-trading-of-_45752.html) are utilised by them for their administrative costs? True or False 1. False. They are credited to IPF. 25. **Can an investor execute POA (Power of Attorney) in favour of the stock broker/DP?** 1. Yes, this allows stock brokers to fetch stocks from the demat accounts of the clients in case of selling of securities by the them (but not for off-market transfer), pledging / re-pledging of securities, or tendering of shares in IPOs. 26. **What is DDPI?** 1. Demat Debit and Pledge Instruction (DDPI) is a limited-purpose Power of Attorney (POA) under which the clients explicitly agree to authorize the stock brokers and depository participants to access their BO (demat) account for only two purposes: 1. meeting pay-in obligations for settlement of trades executed by them, and 2. for pledging / re-pledging of securities in favour of trading member (TM)/clearing member (CM) for the purpose of meeting margin requirements of the clients in connection with the trades executed by the clients 2. It cannot be used for other purposes of POA, 27. **Can a client transfer his CDS position to any demat account?** 1. No. Derivatives are not credited in Demat Accounts 28. **Is POA compulsory for every client?** 1. No it is optional_and should not be insisted upon by the stock broker / stock broker. 29. **If a Power of Attorney (POA) is not executed by the client, how can they transfer securities to fulfill their settlement (pay-in) obligations upon selling them in the market?** 1. The client must submit a physically signed Delivery Instruction Slip (DIS) or e-DIS to the broker. 30. **An investor should know about the risks and stock brokers are not required to disclose it at time of account opening. True or False?** 1. False. It is true that an investor must be aware of risks of trading, but a document stating the Rights & Obligations of stock broker and client for trading on exchanges (including additional rights & obligations in case of internet/wireless technology based trading) should be part of the account opening kit. 31. **KYC stands for "know your charges", and is booklet of charges provided by stock brokers. True or False?** 1. KYC is an acronym for “Know your Client”, a term commonly used for Customer Identification Process. 2. The KYC process requires every SEBI registered intermediary to collect and verify the Proof of Identity (PoI) and Proof of Address (PoA), financial status, occupation and such other personal information as may be prescribed by guidelines, rules and regulation. 3. The provisions as laid down under the Prevention of Money-Laundering Act, 2002, Prevention of Money-Laundering (Maintenance of Records) Rules, 2005, SEBI Master Circular on Anti Money Laundering (AML) dated October 15, 2019, and relevant KYC / AML circulars issued from time to time shall continue to remain applicable 32. **Does SEBI allow e-KYC?** 1. Yes, brokers can accept e-KYC service provided by UIDAI as a valid process for KYC verification. 33. **All SEBI registered intermediaries should use SEBI's official KYC app. True or False?** 1. False. SEBI has allowed to implement their own Application (App) for undertaking online KYC of investors 34. **What is KRA?** 1. KRA stands for KYC Registration Agency. It is a centralized repository system regulated by the Securities and Exchange Board of India (SEBI) that safely stores the "Know Your Client" (KYC) records of all investors across the Indian capital markets 35. **KYC and KRA are same. True or false?** 1. False. KYC is the process of "Knowing" the client, whereas KYC Registration Agency (KRA), set up in 2011, is an agency registered with and authorised by SEBI to store the KYC documents. As of June 2026, NSE _KRA_ is one of the 6 KYC Registration Agencies (KRA) in India. 2. They do not cover KYCs of clients of financial institutions regulated by other regulators. 36. **All SEBI registered intermediaries have to be registered with any one or more KRAs registered by SEBI as per the SEBI KRA Regulations 2011. True or False?** 1. True. 37. **CKYC stands for Client KYC. True or False** False. 1. CKYC stands for Central Know Your Client 2. Government of India has authorized the Central Registry of Securitization and Asset Reconstruction and Security interest of India (CERSAI), set up under subsection (1) of Section 20 of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, to act as, and to perform the functions of, the Central KYC Records Registry under the PML Rules 2005, including receiving, storing, safeguarding and retrieving the KYC records in digital form of a “client”, as defined in clause (ha) sub-section (1) of Section 2 of the Prevention of Money Laundering Act, 2002 . 3. in other words, CKYC is managed by CERSAI , which is authorized by Government of India to function as the Central KYC Registry (CKYCR), and is also the only CKYCR in India. 4. CKYC is regulator-agnostic, a verified CKYC record is accepted across all four major financial regulators in India (RBI, SEBI, IRDAI, and PFRDA). Once your KYC is completed by any registered financial institution (including your bank), you are assigned a unique 14-digit CKYC Identifier. KRAs, on the other hand, use PAN as the identifier for all client Know Your Customer (KYC) records. 38. **CKYCR, just like SEBI registered KRAs, use PAN as the identifier for all KYC records. True or False?** 1. False. They use 14-digit ID, and also require additional information to be collected and submitted to CERSAI for completion of the CKYC formalities of an investor. 39. **SEBI allows regulated entities and their agents to not disclose their registration number and registered name on social media applications for their privacy and security. True or False?** 1. False. Regulated entities and their agents shall prominently [disclose](https://www.sebi.gov.in/legal/circulars/feb-2026/ease-of-doing-investment-eodi-disclosure-of-registered-name-and-registration-number-by-sebi-regulated-entities-and-their-agents-on-social-media-platforms-smps-_100005.html) their registered name and registration number on the home page of their social media handles as well as at the beginning of each of the videos/content (which relate to the securities market) uploaded by them 40. **All clients of brokers are assigned 14-digit ID generated by CKYCR as identifier for the clients of brokers?** 1. False. Brokers assign UCC (or simply client code) which used in the trading orders, along with PAN. 41. **"Risk in short positions in options" is a type of risk which brokers have to include in their Risk Disclosure document. True or False?** 1. True. 42. **Mention few types of risk faced in trading currency derivatives.** > [!important] These Risks are: > 1. Execution Risk: There is risk that the buy or sell order placed in ETCD may not get executed at the desired price due to higher price volatility or due to type of order place. This may result in slippages. > 2. Market Risk: Market risk is the risk of losses on financial investments caused by adverse movement of currency prices. > 3. Liquidity Risk: Liquidity refers to the ability of market participants to buy and/or sell securities / derivatives contracts expeditiously at a competitive price and with minimal price difference. There may be a risk of lower liquidity in some derivatives contracts as a result, client order may only be partially executed, or may be executed with relatively greater price difference or may not be executed at all. > 4. Leverage Risk: In Exchange Traded Currency Derivatives (ETCD), the amount of margin is small relative to the value of the derivatives contract, so the transactions are 'leveraged'. ETCD, which is conducted with a relatively small amount of margin, provides the possibility of great profit or loss in comparison with the margin amount. Due to which transactions in derivatives carry a high degree of risk. > 5. Basis risk: Basis risk is the potential risk that arises from mismatches in a hedged position. Basis risk occurs when a hedge is imperfect, so that losses are not exactly offset by the hedge. Basis risk can arise from standardization of derivatives contract for amount, expiry date, and price. > 1. For example, you need to hedge an exposure of USD 9500, which requires the futures contracts of 9500 / 1000 = 9.5. Since we can buy or sell only in integral multiples, we need to buy or sell either nine or ten contracts. The former leads to under-hedging and the latter, to over-hedging. > 2. Second, the derivatives contract expires on every Friday day of the week or two working days prior to the last business day of the expiry month. If the exposure to be hedged has maturity of some other day in the month, there will be mismatch in the maturity. The discrepancy in the amount and maturity of exposure and the derivatives contract leaves a residual risk called basis risk. > 3. The basis risk may also arise in case the price movement in derivatives contract is not in proportionate to price movement in underlying asset. > 4. Risk due to cash settlement: Current ETCD contracts are cash settled, leads to imperfect hedging or arbitrage. > 5. **It is defined as (Spot Price - Futures Price), which is ALWAYS NEGATIVE for USDINR pair as USD trades at a forward/futures premium to the spot price in terms of INR** > 6. For importer who has hedged using futures, Net Cost = Futures Buy Price + (Spot Buy Price - Futures Sell price), so basis (a negative value) decreases the net cost. > 7. For exporter who has hedged using futures, Net Receipts = Futures Sell Price + (Spot Sell Price - Futures Buy Price), so basis (a negative value) decreases the net receipts. 43. **A short note on basis risk, explaining type, with an example and way to manage it:** | Risk Category | Cause | Example | How it can be managed | | ---------------------------- | ------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | | Price Basis Risk | Mismatch in Price Movement between spot and derivative. | You hedge a physical asset, but the futures price and spot price do not match at expiry | Changing the hedging tool or adjusting the hedge ratio. | | ==Maturity Mismatch Risk== | ==Mismatch in Time/Expiry.== | ==Your invoice is due on March 20, 2026, but the contract expires on March 26, 2026.<br><br>Your invoice is due on Dec 2026, but the futures contract is illiquid, or not available, and hence we take position in current month and keep rolling it over<br>== | ==The futures contract will be squared off on March 20, 2026<br><br>Rolling the futures contract over and hedge rollover risk using calendar spread futures or using custom OTC forwards. A widening or rise in spread increases the premium for the importer to roll their futures ahead, and narrowing reduces the premium that exporters can capture while rolling theirs.== | | Indivisibility / Sizing Risk | Mismatch in Quantity standardisation. | You have an odd-lot exposure of $45,250, but contracts only trade in $1,000 blocks. | Banks can hedging the residual $250 odd-lot via a customized forward in the inter-bank market. | 45. **If an exporter in India expects to receive payments in a foreign currency, what specific market movement exposes them to currency risk?** - A. A sudden expansion of the exchange contract lot size on futures markets - B. The weakening of the Indian Rupee (INR) against other currencies - C. The central bank's choice to execute a clean float exchange rate policy - D. The risk of the rupee strengthening against other currencies Answer - D. An exporter who expects to receive money in a foreign currency faces the risk of the rupee strengthening, and so the exporter will hedge against the strengthening of INR by, for example, buy selling futures or buying put options. 46. **A corporate treasurer attempts to liquidate a large position in a far-month EURINR futures contract.** Due to a thin order book and wide bid-ask spreads, they are forced to execute the trade at a much worse price than anticipated. What type of risk does this illustrate? - A. Leverage Risk - B. Execution Risk - C. Liquidity Risk - D. Basis Risk Correct Answer - C. Liquidity Risk arises when market participants cannot buy or sell contracts expeditiously at a competitive price with minimal price difference due to a lack of market depth. 47. **Which of the following is a structural limitation of a currency futures contract?** - A. High counterparty credit risk - B. Low public price transparency - C. May lead to an imperfect hedge due to standardized contract sizes, settlement dates Answer - C. Basis risk in hedging is primarily caused by mismatches in 3 main areas, which are quantity, time, and asset (or quality). 48. **In Exchange Traded Currency Derivatives (ETCD), a trader is required to deposit only a small initial margin, say 3% of the contract value.** So a 4% adverse movement in the currency pair completely wipes out their capital and results in a deficit. This scenario highlights which of the following risks? - A. Basis Risk - B. Leverage Risk - C. Operational Risk - D. Risk due to cash settlement Correct Answer - B. Leverage Risk, because the initial margin required is small relative to the total contract value, derivatives transactions are highly leveraged. This amplifies both potential profits and potential losses relative to the margin amount. 49. **During a high-volatility economic news release, a trader places a market order to buy GBPINR futures.** Due to rapid price spikes, the order is filled at a price significantly higher than the last traded price visible on the screen. What is the technical term for this specific risk? - A. Execution Risk - B. Counterparty Risk - C. Regulatory Risk - D. Basis Risk Correct Answer - A. Execution risk is the risk that an order may not be executed at the desired price due to sudden market volatility or the specific type of order placed, resulting in slippages. 50. **An exporter needs to hedge an exact exposure (receivables) of USD 14,350.** Because USDINR futures contracts are standardized at USD 1,000 per contract, the exporter must choose between buying 14 contracts (under-hedging) or 15 contracts (over-hedging). The residual risk caused by this mismatch is a form of: - A. Liquidity Risk - B. Basis Risk - C. Market Risk - D. Leverage Risk Correct Answer - B. Basis risk occurs when a hedge is imperfect because standardized derivatives contracts constrain the amount or quantity, making it impossible to perfectly offset the underlying exposure. 51. **A firm has an underlying financial exposure maturing on a Tuesday in the middle of the month.** However, the exchange-traded currency futures contract they use to hedge expires two working days prior to the last business day of the month. What type of risk does this maturity date gap create? - A. Basis Risk - B. Operational Risk - C. Execution Risk - D. Liquidity Risk Correct Answer - A. Basis risk can arise from the standardization of derivatives contract expiry dates. A discrepancy between the exact maturity date of the underlying exposure and the contract's fixed expiry date leaves a residual risk. 52. **Because exchange-traded currency derivatives in India are cash-settled, an importer cannot demand physical delivery of foreign currency upon contract expiry to pay an international supplier.** They must buy physical cash separately in the OTC bank market, exposing themselves to transaction price differences. This describes: - A. Leverage Risk - B. Execution Risk - C. Risk due to cash settlement - D. Credit Risk Correct Answer - C. Risk due to cash settlement. Current ETCD contracts are cash-settled, which means physical exchange of the underlying currencies does not take place. This can lead to imperfect hedging or terminal arbitrage differences when physical delivery is needed. 53. **A client calls their stockbroker at the end of the trading day and completely denies authorizing a matched order that was executed in their account.** The broker must temporarily absorb this trade into an 'Error Account' and square it off at a loss. What category of risk does this represent for the broker? - A. Market Risk - B. Operational Risk - C. Basis Risk - D. Leverage Risk Correct Answer - B. Operational risk covers losses resulting from inadequate or failed internal processes, client communication breakdowns, trade repudiation/disputes, or human and system errors. 54. **A corporate hedger observes that while the spot exchange rate for USDINR shifted upwards by 20 paise, the corresponding near-month futures contract only moved up by 14 paise due to shifting domestic interest rate outlooks.** This disproportionate price movement between the two instruments creates: - A. Basis Risk - B. Liquidity Risk - C. Systemic Risk - D. Leverage Risk Correct Answer - A. Basis risk also arises when the price movement of a derivatives contract is not perfectly proportionate to the price movement in the underlying cash asset, leaving the hedge out of sync. 55. **A high-frequency trader attempts to execute a limit order to sell 1,000 contracts of JPYINR futures.** Because trading activity in this specific cross-currency pair is low at that time, only 40 contracts are matched, leaving 960 contracts unexecuted. This highlights the threat of: - A. Settlement Risk - B. Liquidity Risk - C. Operational Risk - D. Basis Risk Correct Answer - B. Lower market liquidity can prevent an order from being fully filled. As a result, client orders might only be partially executed, executed with significant price differences, or not executed at all. 56. **An importer buys USDINR futures contracts to hedge an upcoming payment, expecting the USD to appreciate. Instead, the Dollar depreciates sharply, causing a substantial Mark-to-Market (MTM) loss on the futures position. What type of risk has primarily materialized here?** - A. Market Risk - B. Liquidity Risk - C. Operational Risk - D. Basis Risk Correct Answer - A. Market risk is the risk of direct financial losses on investments driven entirely by adverse and unfavorable movements in underlying currency prices 57. **Under whose jurisdiction does the Financial Intelligence Unit (FIU-IND) operate as a separate intelligence arm?** - A. Securities and Exchange Board of India (SEBI) - B. Ministry of Finance - C. Reserve Bank of India (RBI) - D. Enforcement Directorate (ED) Correct Answer- B. The Financial Intelligence Unit (FIU) is a separate, specialized intelligence arm functioning directly under the Ministry of Finance. 58. **If an exchange's surveillance mechanism flags a client's trading activity as unusual, what is the regulatory obligation of the concerned stockbroker?** - A. The broker can automatically pass the exchange’s alert directly to the FIU without further review. - B. The broker must stop the client from trading immediately without checking the data. - C. The broker cannot solely rely on the exchange and must maintain their own robust internal controls to independently identify and report suspicious transactions. - D. The broker is completely absolved of responsibility once the exchange handles the surveillance. Correct Answer - C. Even though the exchange's surveillance mechanism may raise alerts, market intermediaries are required to have their own internal controls and procedures. They cannot depend solely on the exchange to identify suspicious activity. 59. **Which of the following trading practices are explicitly highlighted in the regulations as examples of suspicious trades from a money laundering or tax evasion standpoint?** - A. Delivery-based blue-chip investing and value investing - B. Intraday short-selling in highly liquid index options - C. Reversal trades/profit transfer trades, or trades associated with dabba trading - D. Hedging physical commodity exposure via currency derivatives Correct Answer - C. Reversal trades, profit transfer trades, and any transactions linked with unauthorized/dabba trading networks are standard examples of trades that indicate potential tax evasion or money laundering. 60. **A compliance team concludes that a series of interconnected derivative transactions executed by a client are suspicious in nature.** Within how many days must the Suspicious Transaction Report (STR) be submitted to FIU-IND? - A Within 7 days of the transaction execution date - B Within 7 days of arriving at the conclusion that the transaction is suspicious - C By the 7th day of the succeeding month - D Within 15 days of the trade settlement date Correct Answer - B. Within 7 days of arriving at the conclusion that the transaction is suspicious Explanation: The Suspicious Transaction Report (STR) must be submitted to FIU-IND within 7 days of arriving at a definitive conclusion that a transaction (or a series of integrally connected transactions) is suspicious. 61. **Whose specific responsibility is it to officially record the reasons for treating a transaction or a series of transactions as suspicious?** - A The Chief Executive Officer (CEO) - B The Compliance Officer of the Stock Exchange - C The Principal Officer of the Intermediary - D The Investigating Officer of SEBI Correct Answer - C. The regulatory text explicitly mandates that the Principal Officer of the intermediary must record their formal reasons for treating any transaction or group of transactions as suspicious. 62. **While reviewing accounts, a broker notices an unusual pattern.** Before submitting an STR to the FIU, the relationship manager informs the client to explain why their account is being flagged. This action by the broker is: - A. Legal, as it follows fair natural justice principles by letting the client clarify. - B. Compulsory, because brokers must confirm suspicions with clients before filing reports. - C. Illegal, because it leads to "tipping-off" information to the client, which is strictly prohibited. - D. Allowed only if the trade value exceeds a certain threshold. Correct Answer- C. Brokers and intermediaries are strictly prohibited from informing clients about suspicious transaction reporting. Doing so constitutes "tipping-off," which is illegal under anti-money laundering frameworks. 63. **Suspicious Transaction Reporting (STR) frameworks apply to which of the following asset or transaction types?** - A. Cash transactions only - B. Non-cash digital derivative trades only - C. Both cash and non-cash transactions, including an integrally connected series of transactions - D. Only physical cross-border fund transfers Correct Answer - C. Both cash and non-cash transactions, including an integrally connected series of transactions. An STR must be submitted regardless of whether the transaction is cash or non-cash, provided that the single transaction or an integrally connected series of transactions is found to be suspicious. 64. **What is the regulatory deadline for filing Non-Profit Organization Transaction Reports (NTRs) with FIU-IND?** - A. Within 7 days of the close of each week - B. By the 15th day of the succeeding month - C. By the 7th day of the succeeding month - D. Concluded quarterly within 30 days Correct Answer - B. Non-Profit Organization Transaction Reports (NTRs) must be compiled for each calendar month and submitted to FIU-IND by the 15th day of the following (succeeding) month. ## Need Help? If you need help with any topic, or want to discuss further, or report some mistakes, please reach out to me: ==Email - [email protected] WhatsApp - 9004584169== ## Related Notes 1. [Currency Futures & Options - Part 1](Currency%20Futures%20&%20Options%20-%20Part%201.md)