Common Derivatives

Syllabus and chapter weightage

Weightages are taken from the official syllabus table in each part's own 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.

NISM publishes no workbook for Series XIII. It sets the paper from 3 other syllabuses, listed below, and states the total — 150 questions in 180 minutes — but not how the questions divide between them. We assume an even split; the weightages inside each part are the official ones from that paper’s own workbook.

Sample questions

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

1. Question 1 · Chapter 1: Introduction to Currency Markets

   Which term best describes the EUR currency?

   1. A.Free floating
   2. B.Managed float
   3. C.Pegged to USD
   4. D.Pegged to gold
   Show the answer

   Answer: A. Free floating

   The most traded currency pairs in the world are called the Majors. The list includes following currencies: Euro (EUR), US Dollar (USD), Japanese Yen (JPY), Pound Sterling (GBP), Australian Dollar (AUD), Canadian Dollar (CAD), and the Swiss Franc (CHF). These currencies follow free floating method of valuation.

   A clean float, also known as a pure exchange rate, occurs when the value of a currency, or its exchange rate, is determined purely by supply and demand in the market.

   Option B describes India's position, not the euro's. The currency regime in place for the Indian rupee with respect to the US dollar is a de facto controlled exchange rate. This is sometimes called a "managed float". A dirty float (managed float) is an exchange rate regime in which the exchange rate is neither entirely free (or floating) nor fixed.

   Option C is wrong — pegging is what developing countries did: developed countries gradually moved to a market determined exchange rate (For e.g. USD, EUR, JPY etc.) and developing countries adopted either a system of pegged currency or a system of managed exchange rates.

   Option D belongs to a system that no longer exists anywhere. The gold standard is not currently used by any government. Britain stopped using the gold standard in 1931 and the U.S. followed suit in 1933 and abandoned the remnants of the system in 1973.

   The euro is managed by the Frankfurt-based European Central Bank (ECB) and the Eurosystem, and is the second-largest and second-most traded currency in the international markets... after the United States dollar — with a 30.5% share of global daily turnover.

2. Question 2 · 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.

3. Question 3 · Chapter 1: Introduction to Interest Rate, Interest Rate Instruments and Fixed Income Markets

   Ramesh borrows Rs 1,00,000 from Suresh for 3 months at 6% p.a. and instead of a loan agreement gives a written Note that can be sold to a third person. In market vocabulary, what has Ramesh created?

   1. A.A debt instrument or debt security, which is tradable
   2. B.A loan, which is generally non-tradable
   3. C.An equity security, since a Note confers ownership
   4. D.A derivative, since its value depends on the interest rate
   Show the answer

   Answer: A. A debt instrument or debt security, which is tradable

   A written promise that can be assigned to somebody else for a payment is a debt instrument / debt security — and its defining feature is tradability. A loan, by contrast, is generally non-tradable, and the lender carries the borrower's risk right up to repayment. This single difference is why a debt market exists at all: with a bond, the holder can transfer the risk to another risk-taker through pricing; with a loan, they cannot. Ramesh becomes the Issuer, Suresh the Investor, and 6% is the yield on the date of transaction.

4. Question 4 · Chapter 2: Foreign Exchange Derivatives

   Which of the following is the role of derivatives?

   1. A.Risk management
   2. B.Financing
   3. C.Cash or liquidity management
   4. D.All of the above
   Show the answer

   Answer: A. Risk management

   Derivatives are tools to manage price risk.

   And the workbook is explicit that this is the primary function: while the primary function of derivatives is risk management, the derivatives market also performs the following functions...

   Those other functions are not financing or liquidity management. They are price discovery, market efficiency, access to unavailable assets or markets, price stability, deeper cash markets, speculation, and shifting speculative trades from unorganized market to organized market.

   Options B and C describe things a company does with cash and credit, not with derivatives. A derivative satisfies on trade date, there should be no full cash outlay — it is not a way of raising money.

   How risk management works through them: since the value of the derivatives is linked to the value of the underlying asset, the contracts are primarily used for hedging risks. For example, an investor may purchase a derivative contract whose value moves in the opposite direction to the value of an asset the investor owns. In this way, profits in the derivative contract may offset losses in the underlying asset.

   And the framework of approaches: if you want to take risk, you will trade in derivatives which is called speculation. When you want to avoid risk, you manage it one of the three ways: elimination (called hedging); insurance and minimization (called diversification).

   One caution the chapter is careful to add about the speculative use: this is not the only use, and probably not the most important use, of financial derivatives. Financial derivatives are considered to be risky. If not used properly, these can lead to financial destruction in an organization.

5. Question 5 · 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.

6. Question 6 · Chapter 2: Interest Rate Derivatives

   Which of the following best captures the workbook's general definition of a derivative?

   1. A.The underlying is independent, and the derivative is dependent on and derived from the underlying; the derivative cannot exist without the underlying
   2. B.The derivative is independent, and its price is set by demand and supply for the derivative itself
   3. C.A derivative is any contract that settles on the same day as its underlying asset
   4. D.A derivative is any contract requiring full payment of the contract value on the trade date
   Show the answer

   Answer: A. The underlying is independent, and the derivative is dependent on and derived from the underlying; the derivative cannot exist without the underlying

   The workbook's wording is precise: "the underlying is independent, and the derivative is dependent on and derived from the underlying. The derivative cannot exist without the underlying." Option (b) inverts the causation — the first accounting criterion implies that the price of a derivative is determined by the price of the underlying, and not by demand-supply for the derivative. Option (c) contradicts the second criterion, which requires the derivative to settle later than the underlying. Option (d) contradicts the third criterion — no full cash outlay on the trade date — which is exactly what provides leverage.

Frequently asked questions

Which workbook should I study for NISM Series XIII?

NISM does not publish a workbook for NISM-Series-XIII: Common Derivatives. It sets the paper from 3 other syllabuses — Currency Derivatives (Series I), Interest Rate Derivatives (Series IV), Equity Derivatives (Series VIII) — so those are the workbooks to study, and all of them are free to download from nism.ac.in.

What is the passing mark for NISM Series XIII?

You need 60% to pass NISM-Series-XIII: Common Derivatives. On a 150-mark paper that is 90 marks.

Is there negative marking in NISM Series XIII?

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 XIII exam?

The exam runs for 180 minutes and carries 150 marks in total.

How long is the NISM Series XIII 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.