Foreign exchange derivatives: NISM Series I notes and practice questions

Q1. Which statement best describes “Currency options OTC”?

1. Short option legs require margin, and strategies must be assessed on net risk and capital needs.
2. Currency futures are settled in cash in rupees; there is no delivery of foreign currency.
3. A bull call spread buys a lower strike call and sells a higher strike call, limiting both cost and profit.
4. Banks also offer OTC currency options that are customised for corporates.

Q2. Which statement best describes “Interest rate parity”?

1. Regimes range from fixed to floating; India follows a managed float where the central bank may intervene to curb volatility.
2. The contract size of USD-INR futures is 1,000 US dollars per lot.
3. A strangle buys an out-of-the-money call and put, cheaper than a straddle but requiring a bigger move to profit.
4. Interest rate parity links the forward rate to spot and the interest rate differential, so the currency with higher interest rate trades at a forward discount.

Q3. Which statement best describes “Forward premium and discount”?

1. If prices move beyond set limits, trading can be paused to calm the market.
2. A currency appreciates when it buys more foreign currency and depreciates when it buys less.
3. In a bull call spread, maximum profit equals the difference in strikes less the net premium.
4. A currency trades at a forward premium if the forward rate is above spot and at a discount if below.

Q4. Which term is described here? A forward contract is a customised agreement to buy or sell a currency at a fixed rate on a future date, traded over the counter.

1. Volatility and premium
2. Forward contract
3. Settlement guarantee fund
4. Speculation

Q5. Which statement best describes “Currency swap”?

1. Rolling over means closing a near-month position and opening a similar one in a later month to maintain exposure.
2. Orders are matched on price-time priority in an electronic order book.
3. A currency swap exchanges principal and interest in one currency for another over a period.
4. Residents may hold positions in some pairs freely, while in others positions beyond limits require proof of underlying exposure.

Q6. Which statement best describes “Forward rate formula”?

1. Orders are matched on price-time priority in an electronic order book.
2. Forward rate is approximately spot x (1 + rupee rate x t) / (1 + dollar rate x t).
3. Options let a hedger fix a worst-case rate while keeping the benefit of favourable moves, at the cost of the premium.
4. Exchanges also offer futures on EUR-INR, GBP-INR and JPY-INR and cross-currency pairs.