NISM Series IV | Interest Rate Derivatives | Mock Test 4.8 | MCQs 1-50 Solved

Q 1. What action will an arbitrageur take in a Reverse arbitrage strategy involving single bond interest rate futures?

• Sell the Government of India (GOI) bond in the underlying market and simultaneously purchase futures contracts for the same GOI bond
• Purchase the underlying bond in the cash market and simultaneously purchase futures contracts for the same bond
• Purchase the underlying bond in the cash market and simultaneously sell futures contracts for the same bond
• Sell the Government of India (GOI) bond in the underlying market and simultaneously sell futures contracts for the same GOI bond

CORRECT ANSWER: Sell the Government of India (GOI) bond in the underlying market and simultaneously purchase futures contracts for the same GOI bond 

Explanation: In Reverse arbitrage with single bond interest rate futures, the arbitrageur takes advantage of a situation where the futures price is lower than the fair price (i.e., the futures are underpriced). To profit from this:

• The arbitrageur sells the GOI bond in the spot (underlying) market
• And buys the futures contract of the same GOI bond At expiry, the arbitrageur delivers the bond bought via futures (at a cheaper rate) and benefits from the price difference. This is the reverse of a standard arbitrage (cash-and-carry), where the futures are overpriced.

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Q 2. Which of the following actions can a Professional clearing member undertake?

• Execution of trades
• Clearing and settlement of trades
• Both of the above
• None of the above

CORRECT ANSWER: Clearing and settlement of trades Explanation: A Professional Clearing Member (PCM) is a type of member in a clearing corporation whose main role is to clear and settle trades on behalf of trading members and clients. They do not engage in trade execution themselves.

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Q 3. What is the underlying for cash-settled 6-year Bond futures as per the current regulations?

• Actual
• Notional
• Actual or Notional
• None of these

CORRECT ANSWER: Notional Explanation: Under current regulations in India, cash-settled interest rate futures (IRFs), including those on 6-year Government of India (GoI) bonds, are based on a notional underlying.

• A notional bond is a hypothetical or standardized bond with specified features (e.g., coupon, maturity) used for trading futures.
• This allows for standardization and liquidity in the futures market, even if no single actual bond matches the characteristics perfectly.

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Q 4. Identify from the following options a measure that reflects the PRICE RISK inherent in a bond.

• Yield-to-Maturity
• Current yield
• Credit rating
• Modified duration

CORRECT ANSWER: Modified duration Explanation: Modified Duration is a key measure of price risk (also known as interest rate risk) in a bond. It tells you how much the price of a bond is expected to change for a 1% change in interest rates.

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Q 5. Which of the following describes the trades involved in a Short Strangle strategy?

• Takes a long call position at a lower strike price and a short call position at a higher strike price
• Enters a long call position at a lower strike price and a short put position at a higher strike price
• Enters a long call position at a higher strike price and a short call position at a lower strike price
• Simultaneously sells a call option and a put option with different strike prices, typically out-of-the-money (OTM)

CORRECT ANSWER: Simultaneously sells a call option and a put option with different strike prices, typically out-of-the-money (OTM) Explanation: A short strangle strategy involves:

• Selling an out-of-the-money (OTM) call
• Selling an out-of-the-money (OTM) put Both options have the same expiration date but different strike prices. The trader profits if the underlying asset stays within the range defined by these strike prices, as both options expire worthless. It's a neutral strategy used to earn premium from time decay, ideal when the trader expects low volatility.

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Q 6. Identify the correct statement with respect to Quantity freeze.

• Quantity freeze involves a limit on the total quantity during a day at a clearing member level
• Quantity freeze involves a limit on the total quantity during a day by a single client
• Quantity freeze involves a limit on the total quantity during a day by a single trading member
• Quantity freeze involves a limit on the total quantity during a day by all trading members

CORRECT ANSWER: Quantity freeze involves a limit on the total quantity during a day by a single trading member Explanation: Quantity freeze is a mechanism used by exchanges to control excessive order sizes, particularly in volatile market conditions. It sets a maximum limit on the number of contracts or shares that can be traded in a single order or within a specific timeframe by a single trading member or trading ID. This helps to prevent large, disruptive orders from causing market instability.

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Q 7. Which of the following instruments offers a return that can be accurately determined in advance i.e. for which of the following investments is the real or exact return predictable beforehand?

• Zero Coupon Bond
• Consols
• Annuity
• Coupon Bond

CORRECT ANSWER: Zero Coupon Bond Explanation: Zero Coupon Bond: The return (yield) is fixed and known in advance because it is purchased at a discount and redeemed at face value. There is no intermediate cash flows. The difference represents the pre-determined return. Other Instruments:

• Consols (Perpetual Bonds): No maturity date, so return depends on future interest rates.
• Annuity: Payments are fixed, but the true return depends on lifespan/duration.
• Coupon Bond: Return varies if sold before maturity (due to changing yields). Therefore, only zero coupon bonds guarantee a pre-computable return if held to maturity.

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Q 8. Which of these constitute an 'Operational Risk' for a broker?

• Non-Delivery of scrips
• Trading errors
• Both of the above
• None of the above

CORRECT ANSWER: Both of the above Explanation: Operational risk is the risk of monetary loss resulting from inadequate or failed internal processes, manual and systems error or external events. For the stock broker, operations risks are essentially risk arises on account of handling of client assets, regulatory non-compliance, trading error, non payment for buying or selling a scrip, non delivery of scrip(s), denial of matched order by clients, sudden closure of banks where funds are deposited etc.

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Q 9. Which SEBI regulations prescribe a code of conduct for securities brokers?

• SEBI (KYC Registration Agency) Regulations
• SEBI (Prohibition of Insider Trading) Regulations
• SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations
• SEBI (Stock Brokers) Regulations

CORRECT ANSWER: SEBI (Stock Brokers) Regulations Explanation: Schedule II of the SEBI (Stock Brokers) Regulations, 1992 prescribes a code of conduct for securities brokers. This includes general code of conduct of stock brokers, Duty towards the Investor, Duty towards Other Stock Brokers etc.

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Q 10. If all other factors are held constant, an increase in the strike price leads to a _____ in the call option premium.

• Increase
• Decrease
• Nil effect
• Insufficient data

CORRECT ANSWER: Decrease Explanation: For a call option, the strike price is the price at which the holder can buy the underlying asset. When the strike price increases, the likelihood of the option ending in-the-money decreases, and therefore:

• The intrinsic value becomes lower (or zero)
• The overall premium (price of the option) decreases.

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Q 11. A call option with a strike price lower than the spot price is considered _____ option.

• At-The-Money (ATM)
• Out of the Money (OTM)
• In-The-Money (ITM)
• Positive Delta

CORRECT ANSWER: In-The-Money (ITM) Explanation: For a Call Option:

• In the Money (ITM): When Strike Price < Spot Price. The option has intrinsic value (you can buy below market price).
• At the Money (ATM): When Strike Price = Spot Price.
• Out of the Money (OTM): When Strike Price > Spot Price. The option has no intrinsic value.

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Q 12. Which of the following entities provides support for trade settlement to the Clearing Corporation?

• Depositories
• Clearing Banks
• Clearing Members
• All of the above

CORRECT ANSWER: All of the above Explanation: The settlement of trades by the Clearing Corporation involves coordination with:

• Depositories – Handle the securities settlement (debiting/crediting securities to/from accounts
• Clearing Banks – Facilitate the funds settlement (pay in and pay-out of money).
• Clearing Members - They are responsible for settling obligations on behalf of trading members or themselves.

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Q 13. What is the limit of net long position for Foreign Portfolio Investors (FPIs) to collectively can transact in Interest Rate Futures (IRF) ?

• Rs. 5 billion
• Rs. 25 billion
• Rs. 50 billion
• Rs. 100 billion

CORRECT ANSWER: Rs. 50 billion Explanation: As per RBI circular , Foreign Portfolio Investors (FPIs), collectively, may also transact in interest rate futures (IRF) up to a limit of net long position of INR 50 billion.

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Q 14. How is the closing price for cash-settled GOI bond futures contracts determined for a trading day? It's based on _____.

• The weighted average of all transaction prices for that contract in the last half hour of the trading day, calculated across all relevant exchanges
• The weighted average of all transaction prices for that contract in the last one hour of the trading day, calculated across all relevant exchanges
• The weighted average of all transaction prices for that contract in the last one and half hour of the trading day, calculated across all relevant exchanges
• None of these

CORRECT ANSWER: The weighted average of all transaction prices for that contract in the last half hour of the trading day, calculated across all relevant exchanges Explanation: For cash-settled GOI bond futures contracts, the closing price is calculated based on the weighted average price of the contract during the last half-hour of trading on the respective exchanges. This methodology helps ensure that the closing price reflects the most recent trading activity and is not unduly influenced by short-term price fluctuations that may occur just before the market closes.

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Q 15. The permissible price movement for overnight MIBOR futures is _____ of the base rate.

• +/- 2%
• +/- 5%
• +/- 7.5%
• +/- 10%

CORRECT ANSWER: +/- 5% Explanation: The operating range for overnight MIBOR (Mumbai Inter-Bank Offered Rate) futures is +/- 5% of the base rate. This range is set to limit extreme price fluctuations and manage volatility in the futures market. It ensures that the contract trades within a reasonable band around the reference (base) rate, providing stability and reducing risk for participants.

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Q 16. Subsequent to KYC, broker has to upload the KYC information in ______ system.

• KRA
• Depository
• Clearing Bank
• SEBI

CORRECT ANSWER: KRA Explanation: KRA - KYC Registration Agency After completing the KYC process, the broker must upload the KYC information to the KRA system, which centralizes and standardizes KYC records across intermediaries.

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Q 17. Participants buy a put option with strike price of 98.50 at a premium of Rs. 0.20. On Expiry the bond price is Rs. 98.50. What is his net pay-off?

• Loss of Rs. 0.20
• Profit of Rs. 0.20
• Profit of Rs. 0.25
• No profit & no loss

CORRECT ANSWER: Loss of Rs. 0.20 Explanation: For a put option, the holder has the right to sell the underlying asset at the strike price. However, since the bond price (Rs 98.50) is equal to the strike price (Rs 98.50), the option will not be exercised because there's no benefit to selling at Rs. 98.50 when the market price is also Rs. 98.50. The premium paid (Rs. 0.20) is a loss in this case, as the option expires worthless.

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Q 18. Arbitration is a _______ judicial process.

• Fully
• Non
• Quasi
• None of the above

CORRECT ANSWER: Quasi Explanation: Arbitration is considered a quasi-judicial process because: It involves a third party (arbitrator) who makes decisions, similar to a judge. However, arbitration is not part of the formal judiciary system. It is an alternative dispute resolution (ADR) mechanism where parties agree to resolve their disputes outside of court. The decisions made in arbitration are legally binding, but the process itself is less formal than a court trial and does not involve a full judicial system.

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Q 19. If the base rate of Overnight MIBOR futures is 5, then its operating range will be _______.

• 5.50 & 4.50
• 5.05 & 4.95
• 5.25 & 4.75
• 5.10 & 4.90

CORRECT ANSWER: 5.25 & 4.75 Explanation: For Overnight MIBOR futures, the operating range is typically ± 5% from the base rate. So, if the base rate is 5.00, the upper and lower limits are:

• Upper limit = 5.00 + 5% = 5 + 0.25 = 5.25
• Lower limit = 5.00 - 5% = 5 - 0.25 = 4.75

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Q 20. Total number of derivatives contracts outstanding is called _______

• Open interest
• Long position
• Short position
• Neutral position

CORRECT ANSWER: Open interest Explanation: Open interest refers to the total number of outstanding derivative contracts (futures or options) that have not been settled or closed. It represents the total number of active positions (long and short) in the market at a given time. It increases when new contracts are created (a buyer and a seller enter a new contract). It decreases when contracts are closed (positions are squared off or expire).

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Q 21. Option buyer faces _______ risk and option seller faces _______ risk.

• Limited, Limited
• Limited, Unlimited
• Unlimited, Limited
• Unlimited, Unlimited

CORRECT ANSWER: Limited, Unlimited Explanation: An option buyer (whether it's a call or put) pays a premium to acquire the right, but not the obligation, to buy or sell the underlying asset.

• The maximum loss for the buyer is the premium paid -> Limited Risk An option seller (writer) receives the premium but has the obligation to fulfill the contract if exercised.
• The seller of a call option can face unlimited loss if the price of the underlying asset rises sharply.
• The seller of a put option can face substantial (but not technically unlimited) losses if the price falls significantly.

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Q 22. In India the last trading day and expiry day are one and the same for interest rate futures contract - State True or False ?

• True
• False

CORRECT ANSWER: True (No explanation provided)

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Q 23. _______ is the account between investors and primary dealers for holding Govt. Securities.

• PDO Account
• Constituent Subsidiary General Ledger Account
• Subsidiary General Ledger Account
• Gilt Account

CORRECT ANSWER: Gilt Account Explanation: Gilt A/c is an account between Schedule Commercial Banks (SCB) and Primary Dealers (PDs) and investors. Entities other than Schedule Commercial Banks (SCB) and Primary Dealers (PDs) that want to hold government securities must open an account with a designated SCB or PD and this account is called Gilt Account.

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Q 24. The FAIR VALUE for derivatives in accounting standards is its Book Value - State True or False ?

• True
• False

CORRECT ANSWER: False Explanation: The FAIR VALUE for derivatives in accounting standards is its current mark to market (or liquidation) value.

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Q 25. Which of the following is interest rate risk ?

• Price Risk
• Reinvestment Risk
• Both 1 and 2
• None of the above

CORRECT ANSWER: Both 1 and 2 Explanation: Interest rate risk refers to the potential impact of changes in interest rates on the value of investments, especially fixed income securities like bonds. It includes:

• Price Risk: When interest rates rise, the market value of existing bonds falls because newer bonds offer higher returns. This affects investors who want to sell bonds before maturity.
• Reinvestment Risk: When interest rates fall, the proceeds from a bond (like coupon payments or maturity proceeds) may have to be reinvested at lower rates, reducing overall returns. Together, these two components form the broader concept of interest rate risk.

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Q 26. Among the following options, which is the most liquid tenor in Bond markets ?

• 10 Year
• 15 Year
• 25 Year
• 30 Year

CORRECT ANSWER: 10 Year Explanation: The Bond Market tenors 2Y, 5Y, 7Y, 10Y, 15Y, 20Y, 25Y and 30Y. Of these, 2Y and 10Y are more liquid. (The Money market tenors consists of overnight (ON), 1-week (1W), 2-week (2W), 1-month (1M) to 1-year (1Y) at the interval of a month. Of these, ON, 1M and 3M are more liquid than others).

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Q 27. Basis Risk arises mainly due to _______ .

• standardization of futures contract
• regulation differences between RBI and SEBI
• different tenors of interest rates
• different regulations for Cash and futures market

CORRECT ANSWER: standardization of futures contract Explanation: Basis risk arises from standardization of futures contract for amount and expiry date. Since futures contract can be bought or sold only in multiples of 200,000 notional, any amount that needs to be hedged but is not a multiple of contract amount leaves a mismatch between exposure amount and hedged amount.

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Q 28. Amongst the below given options, who requires a prior permission from SEBI to short sell Govt. Bond futures ?

• Individual
• High Networth Individuals
• Primary Dealers
• None of the above

CORRECT ANSWER: None of the above Explanation: Short selling in Government Bond Futures is permitted in the derivatives segment.

• Individuals - No prior SEBI permission required
• HNIs - No prior SEBI permission required
• Primary Dealers - Also do not require prior SEBI permission SEBI has already allowed eligible market participants to trade in G-Sec futures (including short positions) subject to exchange rules and margin requirements. There is no separate prior permission requirement from SEBI for short selling G-Bond futures.

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Q 29. If the bond is a zero-coupon bond, there will be no reinvestment risk - State True or False ?

• True
• False

CORRECT ANSWER: True Explanation: Reinvestment risk is the uncertainty of reinvestment rate for cash flows received before maturity. If the bond is a zero-coupon bond, there will be no reinvestment risk because there are no interim cash flows to be reinvested until maturity.

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Q 30. Mr. Kiran is a Non Resident and he sees a drop in interest rates in India. To make a speculative profit, he wishes to short sell interest rate derivatives. Can he do it ?

• Yes
• No

CORRECT ANSWER: No Explanation: For Non residents and Foreign Institutional Investors (FII) - short position can be maintained only for hedging (and not for speculation).

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Q 31. The highest risk a bank or financial institution faces is that of Currency Risk - State True or False ?

• True
• False

CORRECT ANSWER: False Explanation: For banks, financial institutions and businesses, the exposure to interest rate risk is much more severe than that to currency risk and equity risk.

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Q 32. Which risk does one face when the changes in prices of spot Treasury Bill and Treasury Bill futures are not same ?

• Yield curve spread risk
• Basis Risk
• Market liquidity risk
• None of the above

CORRECT ANSWER: Basis Risk Explanation: Basis risk is the risk that the value of a futures contract (or an over the counter (OTC) hedge) will not move in line with that of the underlying exposure.

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Q 33. The members of Exchange are called _______ .

• Trading Members
• Clearing Members
• Both 1 and 2
• None of the above

CORRECT ANSWER: Trading Members Explanation: The members of Exchange are called Trading Members and those of Clearing Corporation are called Clearing Members.

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Q 34. When the original period of borrowing / lending is less than one year, it is known as _______ .

• Bond Market
• Currency Market
• Money Market
• Equity Market

CORRECT ANSWER: Money Market Explanation: In money market, the period is less than one year; and in bond market, it is one year or more.

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Q 35. A company issues two bonds having the same maturity but different coupon. An investor will choose one bond over the other for investment because of _______ .

• Yield to Maturity difference
• Coupon difference
• Both 1 and 2
• None of the above

CORRECT ANSWER: Yield to Maturity difference Explanation: Coupon is not a return measure because it ignores: (1) the premium/discount in bond price; (2) capital gain or loss at redemption; and (3) reinvestment rate of periodic cash flows. Yield To Maturity considers the premium/discount in bond price and capital gain/loss at redemption and even handles the reinvestment in a rough way. Thus the investor will prefer the bond which offers better YTM.

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Q 36. Which of the following is a "risk-free" security ?

• Bank deposit
• Certificate of deposit
• Commercial paper
• None of the above

CORRECT ANSWER: None of the above Explanation: Only Sovereign bonds issued by the government are considered "risk-free" securities in terms of credit risk.

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Q 37. The settlement guarantee for exchange traded derivatives is provided by _______ .

• SEBI
• Clearing Corporation
• Exchange
• RBI

CORRECT ANSWER: Clearing Corporation Explanation: In the case of exchange-traded derivatives, the Clearing Corporation (or Clearing House) acts as the central counterparty to all trades. Its key responsibilities include:

• Guaranteeing the settlement of trades
• Managing counterparty risk
• Ensuring that even if one party defaults, the trade is honoured

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Q 38. _______ are quarterly months for the purpose of expiry of interest rate derivatives.

• January , February and March
• July, August and September
• Both 1 and 2
• None of the above

CORRECT ANSWER: None 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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Q 39. Investors can hold Government Securities _______ .

• Only in electronic book entry form
• Only in physical form
• Both 1 and 2
• None of the above

CORRECT ANSWER: Both 1 and 2 Explanation: For Government Securities (G-Secs) in India, the holding format is important to remember:

• Earlier, they could be held in physical form (stock certificates).
• Now, under the dematerialized system (RBI's SGL/CSGL accounts and demat accounts with depositories), investors hold them only in electronic book entry form.

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Q 40. Among the following options, which quantity of face value can be bought or sold for Govt. bond futures ?

• Rs 1 lakh
• Rs 5 lakh
• Rs 7 lakh
• Rs 8 lakh

CORRECT ANSWER: Rs 8 lakh Explanation: Contract Amount (or Market Lot) is the minimum and multiple of trade size. It is Rs 200,000 of face value. Because the face value will always be an integral multiple of Rs 2 lakhs, we cannot buy or sell for amounts like Rs 3 lakh, Rs 5 lakh, etc. ie. odd amounts. Only even amounts can be traded.

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Q 41. An investor can open _______ Gilt Account(s).

• Only one
• One per primary dealer
• Maximum two
• Maximum five

CORRECT ANSWER: Only one Explanation: A Gilt Account Holder maintains only one Gilt Account. A suitable declaration to this effect must be made from the Gilt Account Holder before the account is opened.

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Q 42. 'Day Order' is also known as _______ .

• Stop-Loss Order
• Good Till Day order
• Immediate or Cancel order
• Limit Order

CORRECT ANSWER: Good Till Day order Explanation: Good Till Day order is also known as "day order". It is a limit order that is kept in the market until the close of trading hours, at which any unexecuted portion will be automatically cancelled.

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Q 43. What is Term Structure ?

• Its the change of rates over a period of time
• Its a snapshot of rates at a point of time
• Both 1 and 2
• None of the above

CORRECT ANSWER: Its a snapshot of rates at a point of time Explanation: Term structure is a snapshot of rates at a point of time. How the term structure changes over time, is called "shifts".

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Q 44. Inter-commodity spread consists of two trades with _______ .

• different market side and same underlying
• same market side and different expiry
• different market side and different expiry
• None of the above

CORRECT ANSWER: None of the above Explanation: Inter-commodity spread consists of buying futures on one underlying and selling futures on another for the same expiry month and for the same quantity. For example, "buy 10 contracts March-2015 T bill futures and sell 10 contracts of March-2015 bond futures".

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Q 45. When is the auction conducted for short delivery of securities ?

• first business day after the Day of Intention
• second business day after the Day of Intention
• third business day after the Day of Intention
• settlement day

CORRECT ANSWER: settlement day Explanation: When there is a short-delivery on the settlement day, the shortage is auctioned on the same day. When there is a failure to notify the Intent to Deliver, the auction is conducted on the first business day after the Day of Intention.

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Q 46. The seller must deliver _______ , in the physical settlement of Government bond futures.

• any bond which the seller has
• the bond which is exactly matching the coupon
• any specified deliverable bond
• any bond of Govt. of India

CORRECT ANSWER: any specified deliverable bond Explanation: The futures seller can deliver any of the Deliverable Bonds. In theory, the introduction of Conversion Factor for each Deliverable Bond should make the seller indifferent to any preference for particular bond.

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Q 47. Which of the following is the settlement day of the 91 day bill futures contract ?

• Next working day following Last Trading Day
• Two days after the last business day of the Contract Month
• Last business day of Contract Month
• None of the above

CORRECT ANSWER: Next working day following Last Trading Day Explanation: For the 91-day Treasury Bill (T-Bill) Futures contract, settlement is cash settled, and the final settlement takes place on the next working day after the Last Trading Day.

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Q 48. Delivery margin is collected on the _______ .

• Day of Intent
• Day of Delivery
• Day of Settlement
• None of the above

CORRECT ANSWER: Day of Intent Explanation: Delivery margin is collected on the Day of Intent (which is the Last Trading Day) after the intention to deliver and allocations are completed.

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Q 49. If the shape of term structure is INVERTED, this means that _______ .

• Rate rises first and then falls with the term
• Rate rises with the term
• Rate is same through out the term
• None of the above

CORRECT ANSWER: Rate rises first and then falls with the term Explanation: In an inverted curve, there is demand for short-term money (i.e. working capital) and not for long-term money (i.e. capital expenditure). So the rate is higher at first and then falls. This means that borrowers are not going for capital expenditure possibly because they expect no economic growth in the future, which explains why inverted yield curve may indicate recession in near future.

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Q 50. Which of the following is true with respect to the regulations on buying and selling of T Bill and T Bond futures for Non-residents and Foreign Institutional Investors ?

• They can short sell only with prior permission of SEBI
• They cannot short sell
• None of the above

CORRECT ANSWER: They cannot short sell Explanation: For Non-residents and Foreign Institutional Investors, short position can be maintained only for hedging (and not for speculation).

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Dhaval Visariya

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