nism 13-nism 4 mock test mcqs 4.7.1
NISM Series IV: Interest Rate Derivatives
Mock Test 4.7 (Part 1): Solved MCQs 1 to 35
📌 EXAM PREPARATION FOCUS:
This section covers questions 1 to 35 of the NISM 4.7 module. Key topics include Option Strategies, Settlement Methods, Term Structure of Interest Rates, and Regulatory Guidelines. Click on each question to expand the answer and explanation.
Q 1. The purpose of a stop-loss sell order is to limit losses if the price moves _________.
A) Up
B) Down
C) No change in price
D) become volatile
View Answer & Explanation
CORRECT ANSWER: Down
Explanation: A stop-loss sell order is placed to limit losses when the price of a security falls below a certain level. It automatically triggers a sell when the price drops to or below the trigger price. This helps protect the investor from further downside.
Q 2. Which of the following statements correctly describes 'position limit'?
A) Position limit is the maximum daily volume at clearing member level
B) Position limit is the maximum daily volume at client level
C) Position limit is the maximum daily volume at trading member level
D) Position limit is the maximum exposure level for market, trading member and clients
View Answer & Explanation
CORRECT ANSWER: Position limit is the maximum exposure level for market, trading member and clients
Explanation: In order to avoid building up of huge open positions, the regulator has specified the maximum allowable open position limit at client level, member level etc. Position limits are the maximum exposure levels which the entire market can go up to and each trading member or investor can go up to.
Q 3. What is the key distinguishing factor between interest rate options traded over-the-counter (OTC) and those traded on an exchange?
A) Customised contract versus Standardised contract
B) Bilateral trading versus Centralized trading
C) Both of the above
D) None of the above
View Answer & Explanation
CORRECT ANSWER: Both of the above
Explanation: The main differences between OTC (Over-the-Counter) and exchange-traded interest rate options are: Bilateral vs. Centralized Trading (OTC is bilateral, Exchange is centralized with a clearinghouse). Customised vs. Standardised Contracts (OTC is customized, Exchange is standardized).
Q 4. Under what conditions would a put option buyer choose to exercise their right?
A) The current price of the asset is more than the specified strike price
B) The current price of the asset is less than the specified strike price
C) The current price of the asset is the same as the specified strike price
D) In all the above circumstances
View Answer & Explanation
CORRECT ANSWER: The current price of the asset is less than the specified strike price
Explanation: A put option gives the buyer the right to sell the underlying asset at the strike price. The put option buyer wants the price of the underlying asset to go down. If the market price is lower than the strike price, they can buy the asset in the market at the lower price and then exercise their put option to sell it at the higher strike price.
Q 5. What are the implications of having a housing loan with a fixed interest rate? Which of the following statements is correct?
A) There is exposure to interest rate risk
B) There is no exposure to interest rate risk
C) There is exposure to bank risk
D) There is exposure to credit risk
View Answer & Explanation
CORRECT ANSWER: There is no exposure to interest rate risk
Explanation: Interest rate risk refers to the potential for financial loss due to changes in market interest rates. Fixed-rate loan means your interest rate does not change with market fluctuations. Since the rate is locked, there is no interest rate risk.
Q 6. The expiry date for exchange traded interest rate options is ________.
A) Last Thursday of the month
B) Last working day of the month
C) Last Friday of the month
D) Last Wednesday of the month
View Answer & Explanation
CORRECT ANSWER: Last Thursday of the month
Explanation: For exchange-traded interest rate options in India, the expiry date is typically set as the last Thursday of the month. If that Thursday is a trading holiday, the contract expires on the previous trading day.
Q 7. Which of the following types of claimants are eligible to receive compensation from the investor protection fund?
A) The clients of stock brokers
B) Stock brokers
C) Stock brokers association
D) All of the above
View Answer & Explanation
CORRECT ANSWER: The clients of stock brokers
Explanation: The Investor Protection Fund (IPF) is set up by stock exchanges to protect retail investors in the event of default by a stock broker. It is specifically meant for clients who suffer financial losses due to default or bankruptcy of a stock broker.
Q 8. The contract amount i.e. 'market lot' for treasury bill futures (in terms of face value) is ________.
A) Rs. 20,000
B) Rs. 50,000
C) Rs. 2,00,000
D) Rs. 5,00,000
View Answer & Explanation
CORRECT ANSWER: Rs. 2,00,000
Explanation: In India, the contract size (also known as market lot) for 91-day T-Bill futures is Rs. 2,00,000 face value per contract.
Q 9. When buying or selling government bond futures, which of the following quantity of face value can be traded?
A) Rs. 2 lakhs
B) Rs. 8 lakhs
C) Rs. 16 lakhs
D) All of the above
View Answer & Explanation
CORRECT ANSWER: All of the above
Explanation: The permitted quantities for trading are multiples of Rs. 2 lakhs. Therefore 2 lakhs (1 lot), 8 lakhs (4 lots) and 16 lakhs (8 lots) are valid quantities.
Q 10. Which of the following options presents a true description?
A) The price in a forward rate agreement is primarily determined through direct negotiation between the involved parties.
B) Interest rate futures contracts derive their prices from the collective bids and offers of market participants on a centralized exchange.
A) Only statement 'A' is true
B) Only statement 'B' is true
C) Both statements 'A' and 'B' are true
D) Both statements 'A' and 'B' are false
View Answer & Explanation
CORRECT ANSWER: Both statements 'A' and 'B' are true
Explanation: Forward Rate Agreements are OTC contracts negotiated bilaterally. Interest Rate Futures are traded on centralized exchanges where prices are discovered through free market interaction.
Q 11. The clearing corporation in India functions as the ________ for exchange-traded interest rate derivatives, providing a trade guarantee by becoming a party to each transaction.
A) Central counterparty
B) Custodian
C) Depository
D) Broker
View Answer & Explanation
CORRECT ANSWER: Central counterparty
Explanation: The Clearing Corporation acts as a central counterparty. It acts as a legal counterparty to all trades through the process called novation.
Q 12. According to the Securities Contracts (Regulation) Act (SCRA), which of the options below is excluded from the definition of 'securities'?
A) Derivatives
B) Government Securities
C) Unit Linked Insurance Policy (ULIP)
D) Rights of interest in securities
View Answer & Explanation
CORRECT ANSWER: Unit Linked Insurance Policy (ULIP)
Explanation: ULIPs are insurance products with an investment component, regulated by IRDAI, not by SEBI or under SCRA.
Q 13. RBI guideline on Rupee Interest Rate Derivatives (Reserve Bank) Directions, 2019 permit ________ to participate in interest rate derivatives contract.
A) Non-Residents
B) Retail
C) Non-Retail
D) All of the above
View Answer
CORRECT ANSWER: All of the above
Q 14. Daily Mark to market settlement of Exchange traded interest rate future contract is ________ .
A) Adjusted to liquid asset
B) Cash settled
C) Both of the above
D) None of the above
View Answer & Explanation
CORRECT ANSWER: Cash settled
Explanation: Daily Mark-to-Market Settlement involves adjusting the futures contract position to reflect the current market price, and the gains or losses are settled in cash.
Q 15. Which of the following is the role of derivatives?
A) Risk management
B) Financing
C) Cash or liquidity management
D) All of the above
View Answer & Explanation
CORRECT ANSWER: Risk management
Explanation: The primary role of derivatives is risk management (hedging against price fluctuations, interest rates, etc.).
Q 16. In Bullish vertical spread using put strategy, trader ________.
A) buy call with lower strike and sell a put option with higher strike
B) buy put option with lower strike and sell a put option with higher strike
C) buy put option with higher strike and sell a put option with lower strike
D) None of the above
View Answer & Explanation
CORRECT ANSWER: buy put option with lower strike and sell a put option with higher strike
Explanation: A bullish vertical spread using puts is also known as a bull put spread. The trader sells a put option with a higher strike price (receiving premium) and buys a put option with a lower strike price (paying less premium).
Q 17. The difference between option premium and intrinsic value is ________.
A) Expiry Value
B) Strike Price
C) Option Value
D) Time Value
View Answer & Explanation
CORRECT ANSWER: Time Value
Explanation: The Time Value of an option is the difference between the option premium and its intrinsic value.
Q 18. If the coupon of the bond increases, its Modified Duration will ________ (Other things remaining constant).
A) Remain constant
B) Increase
C) Decrease
D) May increase or decrease
View Answer & Explanation
CORRECT ANSWER: Decrease
Explanation: As the coupon increases, the bond's cash flows become more front-loaded. With higher coupons, the bond's price becomes less sensitive to interest rate changes, leading to a decrease in Modified Duration.
Q 19. Mr. X has done the following futures trades in a day : 6 Long positions and 9 short positions in the same underlying. What is his net position at the end of day?
A) 6 long and 9 short
B) 15 net position
C) 9 short
D) 3 short
View Answer & Explanation
CORRECT ANSWER: 3 short
Explanation: 6 Long - 9 Short = -3 (i.e. 3 short contracts).
Q 20. When there is a short-delivery on the settlement day, the shortage is auctioned on the same day and this is called "Auction-in" - State True or False?
A) False
B) True
View Answer & Explanation
CORRECT ANSWER: False
Explanation: When there is a short-delivery on the settlement day, the shortage is auctioned on the same day and this is called "BUY - IN".
Q 21. In ________ bonds, the issuer can prematurely redeem the bonds.
A) Puttable
B) Callable
C) Zero coupon
D) Deep discount
View Answer & Explanation
CORRECT ANSWER: Callable
Explanation: In a Callable bond, the issuer has the right to prepay the bond on specified dates before maturity.
Q 22. What will be the shape of term structure if the long term rate is 10% and the short term rate is also 10%?
A) Inverted
B) Circular
C) Flat
D) Normal
View Answer & Explanation
CORRECT ANSWER: Flat
Explanation: If the rate is the same for all terms then the shape of the term structure will be Flat.
Q 23. A Normal shape of term structure means that rate is the same for all terms - True or False?
A) True
B) False
View Answer & Explanation
CORRECT ANSWER: False
Explanation: A 'Normal' shape of term structure implies that - Longer the term, the higher is the rate. A 'Flat' shape implies that rate is the same for all terms.
Q 24. There is no possibility of yield curve spread risk when the term structure shift is ________.
A) steepening
B) parallel
C) flattening
D) None of the above
View Answer & Explanation
CORRECT ANSWER: parallel
Explanation: Yield curve spread risk arises when the term structure shifts are not parallel but steepening or flattening.
Q 25. ________ is/are secured money market instrument(s).
A) Certificate of deposits
B) Commercial paper
C) Both 1 and 2
D) None of the above
View Answer & Explanation
CORRECT ANSWER: None of the above
Explanation: Both Certificate of deposit and Commercial paper are unsecured negotiable instruments.
Q 26. ________ is a demat account for Govt. securities which is maintained with Public Debt Office of RBI by the Primary dealers for its own holdings.
A) Subsidiary General Ledger (SGL) Account
B) Constituent Subsidiary General Ledger (CSGL) Account
C) Both 1 and 2
D) None of the above
View Answer & Explanation
CORRECT ANSWER: Subsidiary General Ledger (SGL) Account
Explanation: The depository for government securities is the Public Debt Office (PDO) of RBI. PDO holds accounts only for Schedule Commercial Banks (SCB), Primary Dealers (PD) and few select institutions. This security account is called Subsidiary General Ledger (SGL) Account.
Q 27. What is the underlying for 6-Year cash settled Interest Rate Futures contracts?
A) Actual
B) Notional
C) Actual or Notional
D) None of the above
View Answer & Explanation
CORRECT ANSWER: Notional
Explanation: Cash settled Interest Rate Futures (IRFs) do not involve delivery of an actual bond. Instead, they are based on a notional government security with defined characteristics.
Q 28. What shift in the term structure called if the long term minus short term rate moves from - 2% to - 1.5%?
A) Steepening
B) Flattening
C) Parallel
D) Vertical
View Answer & Explanation
CORRECT ANSWER: Steepening
Explanation: If the difference between Long term Rates and Short term Rates rises or widens (from positive to more positive or from negative to less negative), then the term structure of rates shifts is called Steepening.
Q 29. A Professional Clearing Member can settle trades ________.
A) which have been executed by other trading members
B) which have been executed by him
C) Both 1 and 2
D) None of the above
View Answer & Explanation
CORRECT ANSWER: which have been executed by other trading members
Explanation: A Professional Clearing Member cannot execute any trades. He can only settle trades which have been executed by other trading members.
Q 30. The maximum contract months available for Treasury Bill futures is ________.
A) 2
B) 4
C) 6
D) 9
View Answer & Explanation
CORRECT ANSWER: 6
Explanation: For the 91-day bill futures - Three nearest "serial" months and three nearest "quarterly" months are available ie. 6 months.
Q 31. What is the use of 'Quantity Freeze'?
A) it is a check to ensure that the order entry is not erroneous
B) it is a circuit filter for the day
C) Both 1 and 2
D) None of the above
View Answer & Explanation
CORRECT ANSWER: it is a check to ensure that the order entry is not erroneous
Explanation: Quantity freeze is not a limit on the trade size. It is a check to ensure that the order entry is not erroneous.
Q 32. A trader expects the interest rate change to happen in the short term, so he should use ________.
A) Govt. bond futures with short expiry date
B) Govt. bond futures with long expiry date
C) Treasury Bill futures with short expiry date
D) Treasury Bill futures with long expiry date
View Answer
CORRECT ANSWER: Treasury Bill futures with short expiry date
Q 33. Exchange traded Interest Rate Derivatives are always settled in ________.
A) Cash
B) Physical Delivery
C) May be physical or cash
D) None of the above
View Answer & Explanation
CORRECT ANSWER: Cash
Explanation: There is compulsory cash settlement for interest rate derivatives. Bond derivatives may be physical or cash settled.
Q 34. When we trade, we ________.
A) minimise risk
B) assume risk
C) hedge the risk
D) eliminate the risk
View Answer
CORRECT ANSWER: assume risk
Q 35. The 'Quarterly' month for the purpose of expiry of interest rate derivative is ________.
A) June
B) September
C) March
D) All of the above
View Answer & Explanation
CORRECT ANSWER: All of the above
Explanation: Trading Cycle: Three serial monthly contracts and Three serial quarterly contracts of the cycle March / June / September / December.
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