Derivatives Markets for NISM certification
Derivatives let people fix prices in advance, protect portfolios and take views on markets with limited money. This chapter introduces forwards, futures, options and swaps, how exchange-traded contracts are traded and settled, and how risk is controlled.
Operations & MarketsSeries XII63 MCQs4 lessons22 flashcards4 memory tricks
Practise Derivatives Markets free
What you'll learn
- What a derivative does
Explain derivatives and their three uses. - Forwards, futures, options and swaps
Compare the four main types of derivatives. - How exchange-traded derivatives work
Describe contract specifications, settlement and margins. - Using derivatives and reading the market
Apply derivatives to hedging and read open interest, PCR and volatility.
Concepts explained
Call and put options
An option gives its buyer the right, not the obligation, to buy (call) or sell (put) at the strike price; the buyer pays a premium.
What it means
- Buyer's maximum loss: the premium.
- Seller's maximum gain: the premium.
- Call is ITM when price > strike; put is ITM when price < strike.
- Strike 10,000, premium 100
- Expiry 10,200: payoff 200
- Net gain 200 − 100 = 100
Answer: Buyer gains 100
- Strike 500, premium 15
- Expiry 470: payoff 30
- Net gain 30 − 15 = 15
Answer: Buyer gains 15
Related terms
- Moneyness: whether exercising an option would pay
Exam tip: Calls profit when prices rise, puts when prices fall.
Forwards versus futures
A future is a standardised, exchange-traded forward with daily settlement and a clearing guarantee.
What it means
- Forwards: customised, OTC, counterparty risk, settled at the end.
- Futures: standardised lots and expiries, exchange-traded, daily MTM, margins.
- Jeweller agrees privately with a supplier: forward
- Jeweller buys gold futures on an exchange: future
Answer: Same idea, different structure
Related terms
- Counterparty risk: risk the other side doesn't pay
Mark-to-market and margins
Gains and losses on futures are settled every day, and margins are collected upfront to cover potential losses.
What it means
- Daily MTM settled in cash on T+1.
- Initial margin covers a two-day risk estimate.
- Exposure margin is a percentage of notional value.
- Option sellers pay margins; buyers pay premium.
- Buy at 10,000, lot 75
- Day 1: 9,950, loss ₹3,750
- Day 2: 10,040, gain ₹6,750
Answer: Net gain ₹3,000 over two days
Related terms
- Notional value: price × lot size
Open interest and sentiment indicators
Open interest, the put–call ratio and implied volatility help read activity and sentiment in derivative markets.
What it means
- Open interest counts outstanding contracts on one side.
- PCR compares puts with calls.
- India VIX reflects expected Nifty volatility.
- A buys 1 contract from B (new for both): OI = 1
- C buys 1 contract from A (A closes): OI still 1
Answer: OI counts open positions, not trades
Related terms
- Implied volatility: volatility implied by option prices
Memory tricks
Call = right to buy; put = right to sell.
Uses of derivatives.
Final settlement rules.
Option buyer's maximum loss.
Try 3 NISM-style questions
Q1. A call option gives the right to
- Sell the underlying at the strike price
- Receive interest
- Vote at the AGM
- Buy the underlying at the strike price
Show answer
Answer: (4) Buy the underlying at the strike price
Call = right to buy.
Q2. An investor holding ₹10 lakh of shares buys puts for ₹15,000. The market falls 10% and the puts pay ₹1,00,000. Her net loss is about
- ₹1,00,000
- ₹1,15,000
- Zero
- ₹15,000
Show answer
Answer: (4) ₹15,000
Share loss ₹1 lakh offset by put gain ₹1 lakh; cost is the premium.
Q3. Since October 2019, stock futures and options open at expiry are settled
- In cash only
- By rolling over automatically
- By physical delivery of the shares
- By SEBI auction
Show answer
Answer: (3) By physical delivery of the shares
SEBI mandated physical settlement for stock derivatives.
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