Equity Derivatives

Syllabus and chapter weightage

Weightages are taken from the official syllabus table published in the NISM workbook, so you can see exactly where the marks are.

Every chapter can be read free, no account needed — tap a chapter to open its plain-English Foundation lesson.

Sample questions

5 questions from the chapter tests, one per chapter. Pick your answer before you open the explanation.

1. Question 1 · Chapter 1: Basics of Derivatives

   An index option is a __________________.

   1. A.Debt instrument
   2. B.Derivative product
   3. C.Cash market product
   4. D.Money market instrument
   Show the answer

   Answer: B. Derivative product

   An index option is a derivative product. Its value is derived from the value of some other asset known as the underlying — in this case, the index.

   A debt instrument represents borrowing, with the holder as a lender. A cash market product is one bought and settled in the spot market, such as the shares themselves. A money market instrument is a short-term debt instrument. An index option is none of these — it is a contract about the index, not a claim on anything.

   This is a workbook sample question, and it is testing the most basic idea in the chapter: a derivative has no independent value; it borrows its value from the underlying.

2. Question 2 · Chapter 2: Understanding Index

   In the context of financial markets, an index is best described as:

   1. A.A single security whose price represents the whole market
   2. B.A portfolio of securities that represent a particular market or a portion of a market
   3. C.A list of the companies permitted to trade on an exchange
   4. D.The average brokerage charged across all trades in a day
   Show the answer

   Answer: B. A portfolio of securities that represent a particular market or a portion of a market

   The workbook gives two definitions in sequence. Generally, an index is a statistical indicator that measures changes in the economy in general or specific areas. In financial markets specifically, an index is a portfolio of securities that represent a particular market or a portion of a market.

   Each index has its own calculation methodology and is usually expressed in terms of a change from a base value.

   Option A misses the whole point — an index is a portfolio, not one security; that is what lets it represent average behaviour. Option C confuses an index with a listing or eligibility register; the Sensex contains 30 companies out of thousands listed. Option D invents something unrelated.

   One extra line worth carrying: the percentage change is more important than the actual numeric value. The number itself is only meaningful against the base.

3. Question 3 · Chapter 3: Introduction to Forwards and Futures

   Which of the following best describes a forward contract?

   1. A.A standardised contract traded on a recognised stock exchange with settlement guaranteed by a clearing corporation
   2. B.A bilateral over-the-counter agreement between two parties to buy or sell an asset on a future date at terms decided today
   3. C.An agreement that gives the buyer a right but not an obligation to purchase an asset later
   4. D.A contract in which only the seller is obliged to perform
   Show the answer

   Answer: B. A bilateral over-the-counter agreement between two parties to buy or sell an asset on a future date at terms decided today

   A forward is a bilateral OTC contract. All its terms — price, quantity, quality, place, settlement procedure — are fixed on the day of entering the contract, and altering any of them requires both parties to agree.

   Option A describes a futures contract, which is the standardised, exchange-traded version. Option C describes an option, where only one side has a right. Option D is wrong on the most important point about forwards: both parties are obliged to go through with the contract, whatever the underlying is worth on the delivery date.

4. Question 4 · Chapter 4: Introduction to Options

   Which statement correctly describes the rights and obligations in an option contract?

   1. A.Both the buyer and the seller have the obligation to buy or sell the underlying asset
   2. B.The buyer has the right but no obligation; the writer has the obligation but no right
   3. C.The writer has the right but no obligation; the buyer has the obligation
   4. D.Neither party has any obligation until the option moves in-the-money
   Show the answer

   Answer: B. The buyer has the right but no obligation; the writer has the obligation but no right

   This asymmetry is the whole point of an option. The option buyer or holder has the right but no obligation with regard to buying or selling the underlying, while the option writer has the obligation in the contract.

   Two consequences flow from it. The buyer exercises only when the situation is favourable to him, and the writer is legally bound to honour the contract whenever the buyer decides to exercise.

   Option A describes a futures contract, where both sides are committed. Option C reverses the roles. Option D invents a condition — the writer's obligation exists from the moment he sells the option, whether or not it is currently in-the-money.

5. Question 5 · Chapter 5: Strategies using Equity Futures and Equity Options

   If an investor buys a call option with a lower strike price and sells another call option with a higher strike price, both on the same underlying share and same expiration date, the strategy is called ___________.

   1. A.Bullish spread
   2. B.Bearish spread
   3. C.Butterfly spread
   4. D.Calendar spread
   Show the answer

   Answer: A. Bullish spread

   This is a bull call spread, a bullish vertical spread using calls. The trader is positive on the market but wants to reduce the cost of his position, so he sells a higher strike call to part-fund the lower strike call he buys.

   Option B reverses the sides — a bear call spread shorts the lower strike and buys the higher strike, starting with a net inflow rather than a net outflow.

   Option C is wrong because a butterfly needs four options at three strikes in a 1:2:1 structure, not two options.

   Option D is wrong on the defining feature: a calendar (horizontal) spread uses the same strike with different expiry dates, whereas here the expiry is the same and the strikes differ.

Frequently asked questions

What is the passing mark for NISM Series VIII?

You need 60% to pass NISM-Series-VIII: Equity Derivatives. On a 100-mark paper that is 60 marks.

Is there negative marking in NISM Series VIII?

There is negative marking of 25% of the marks for that question, so a wrong answer costs you 0.25 marks on a 1-mark question. Guess only when you can eliminate at least two options.

How long is the NISM Series VIII exam?

The exam runs for 120 minutes and carries 100 marks in total.

How long is the NISM Series VIII certificate valid?

NISM certifications are generally valid for 3 years from the date of passing, after which they must be renewed. Confirm the current position on nism.ac.in before your certificate lapses.