NISM Series I · Unit 3 of 10 · about 20% of the paper
Exchange traded currency futures: NISM Series I notes and practice questions
The core of the exam. Contract specifications, pricing, profit and loss, and hedging with futures.
What to know in Unit 3
- Contract specs.
- Futures pricing.
- Daily profit and loss.
- Hedging and speculation.
Key terms, examples and exam traps
Currency futures
A currency future is a standardised exchange-traded contract to buy or sell a currency pair at a fixed price on a future date.
Example. An investor buys USD-INR futures to bet on rupee depreciation.
Exam trap. This statement is false: A currency future is a customised OTC contract.
Contract size
The contract size of USD-INR futures is 1,000 US dollars per lot.
Example. One lot represents $1,000.
Exam trap. This statement is false: The standard lot is $100,000.
Tick size and value
The tick is 0.0025 rupee, so one tick on a lot of 1,000 dollars is worth ₹2.50.
Example. A move of 10 ticks equals ₹25 per lot.
Exam trap. This statement is false: The tick size is one rupee.
Quotation
Futures on USD-INR are quoted in rupees per dollar.
Example. A price of 83.2500 means ₹83.25 per dollar.
Exam trap. This statement is false: The quote shows dollars per rupee.
Expiry and cycle
Contracts expire on the last working day of the month, with 12 monthly contracts available.
Example. A contract for next month is available to trade.
Exam trap. This statement is false: Contracts expire on the first working day.
Cash settlement
Currency futures are settled in cash in rupees; there is no delivery of foreign currency.
Example. At expiry, gains or losses are paid in rupees.
Exam trap. This statement is false: Physical dollars are delivered on expiry.
Final settlement price
The final settlement price is the RBI reference rate on the expiry day, used to settle open positions.
Example. Open positions settle at the RBI reference rate.
Exam trap. This statement is false: The final price is the previous day's close.
Long and short futures
A long futures position gains if the currency pair rises, and a short position gains if it falls.
Example. A buyer of USD-INR futures gains if the dollar rises against the rupee.
Exam trap. This statement is false: A long position gains when the price falls.
Futures profit and loss
Profit or loss equals the price change multiplied by the lot size and number of lots.
Example. Buying at 83.00 and selling at 83.20 on one lot gives ₹200.
Exam trap. This statement is false: Profit is the price change multiplied by the margin.
Daily mark-to-market
Positions are marked to market each day, with gains credited and losses debited to the margin account.
Example. A client whose position has fallen sees her margin reduced that evening.
Exam trap. This statement is false: Profit or loss arises only at expiry.
Cost of carry
The futures price is based on spot plus the cost of carry, which reflects the interest rate differential.
Example. With higher rupee rates, the futures trade above spot.
Exam trap. This statement is false: Futures prices are unrelated to spot.
Basis
Basis is the difference between spot and futures price, which narrows to zero as expiry nears.
Example. Futures converge to spot at expiry.
Exam trap. This statement is false: The basis widens at expiry.
Convergence
As expiry approaches, the futures price converges to the spot price.
Example. The gap between spot and futures shrinks daily.
Exam trap. This statement is false: Futures diverge from spot near expiry.
Hedging with futures
A hedger takes a position in futures opposite to the exposure; an importer with dollar payables buys futures, and an exporter sells.
Example. An importer buys USD-INR futures to lock in cost.
Exam trap. This statement is false: An importer hedges by selling dollar futures.
Speculation
Speculators take positions in futures to profit from price moves, using leverage through margin.
Example. A trader buys a lot expecting the dollar to strengthen.
Exam trap. This statement is false: Speculators remove risk from the market.
Spread trading
A calendar spread involves buying one expiry and selling another, profiting from changes in the price gap.
Example. A trader buys the near month and sells the far month.
Exam trap. This statement is false: A spread involves two different currency pairs only.
Open interest
Open interest is the total number of outstanding contracts not yet closed or settled.
Example. Open interest rises when new positions are created.
Exam trap. This statement is false: Open interest is the number of trades in a day.
Leverage
Futures allow control of a large value with a small margin, magnifying gains and losses.
Example. Margin of 3% allows exposure of about 33 times.
Exam trap. This statement is false: Leverage reduces risk.
Other pairs
Exchanges also offer futures on EUR-INR, GBP-INR and JPY-INR and cross-currency pairs.
Example. A trader takes a view on the euro against the rupee.
Exam trap. This statement is false: Only USD-INR futures exist.
Contract value
The value of a contract is price multiplied by lot size.
Example. At 83.00, one lot has a value of ₹83,000.
Exam trap. This statement is false: The contract value equals the margin.
Hedge ratio
The hedge ratio is the number of futures contracts required to cover an exposure, found by dividing the exposure by the lot size.
Example. A $50,000 exposure needs 50 lots of $1,000.
Exam trap. This statement is false: A $50,000 exposure needs one lot.
Position limits
Exchanges and SEBI set limits on positions to prevent excessive speculation, with higher limits for hedgers under conditions.
Example. A trader's position cannot exceed the stated cap.
Exam trap. This statement is false: There are no limits on positions.
Rolling over
Rolling over means closing a near-month position and opening a similar one in a later month to maintain exposure.
Example. A hedger rolls her short position into next month.
Exam trap. This statement is false: Rolling over means taking delivery.
Futures versus forwards
Futures are standardised, exchange traded, daily settled and guaranteed by the clearing corporation, while forwards are customised and carry counterparty risk.
Example. Futures are marked to market daily, forwards are not.
Exam trap. This statement is false: Forwards are settled daily.
6 practice questions
Read each question and choose your answer before opening the free mock, which shows the correct answer and the reason.
Q1. Which term is described here? A calendar spread involves buying one expiry and selling another, profiting from changes in the price gap.
- Spread trading
- Currency swap
- RBI role
- Margin call
Q2. Which term is described here? Speculators take positions in futures to profit from price moves, using leverage through margin.
- Accounting at settlement
- Final settlement
- Speculation
- Price bands and circuit breakers
Q3. Which statement best describes “Hedging with futures”?
- A hedger takes a position in futures opposite to the exposure; an importer with dollar payables buys futures, and an exporter sells.
- A currency swap exchanges principal and interest in one currency for another over a period.
- Options let a hedger fix a worst-case rate while keeping the benefit of favourable moves, at the cost of the premium.
- Brokers must follow KYC, risk disclosure and record-keeping rules under SEBI and exchange regulations.
Q4. Which term is described here? Open interest is the total number of outstanding contracts not yet closed or settled.
- Open interest
- Eligible pairs
- Order types
- Hedging a payable
Q5. Which term is described here? Futures on USD-INR are quoted in rupees per dollar.
- Quotation
- Protective put
- Rho
- Currency futures
Q6. Which statement best describes “Currency futures”?
- Residents may hold positions in some pairs freely, while in others positions beyond limits require proof of underlying exposure.
- A currency future is a standardised exchange-traded contract to buy or sell a currency pair at a fixed price on a future date.
- A short put has limited profit equal to the premium received and substantial loss if the price falls.
- The clearing corporation acts as the counterparty to every trade, guaranteeing its performance.
Frequently asked questions
How much of NISM Series I comes from Unit 3?
Unit 3 (Exchange traded currency futures) usually carries about 20% of the questions. The whole exam has 100 questions and the pass mark is 60%.
What should I study in NISM Series I Unit 3?
Contract specs. Futures pricing. Daily profit and loss. Hedging and speculation.
Are these NISM Series I practice questions free?
Yes. Take the full free mocks to see the correct answer and the reason for every question.
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