NISM Series I · Unit 5 of 10 · about 10% of the paper
Strategies using exchange traded currency derivatives: NISM Series I notes and practice questions
Combining futures and options to hedge or speculate.
What to know in Unit 5
- Spreads and straddles.
- Covered positions.
- Hedging strategies.
Key terms, examples and exam traps
Bull call spread
A bull call spread buys a lower strike call and sells a higher strike call, limiting both cost and profit.
Example. A trader expects a moderate rise in the dollar.
Exam trap. This statement is false: A bull call spread has unlimited profit.
Bear put spread
A bear put spread buys a higher strike put and sells a lower strike put to profit from a moderate fall.
Example. A trader expects a moderate fall in the dollar.
Exam trap. This statement is false: A bear put spread profits when prices rise.
Long straddle
A long straddle buys a call and a put at the same strike and expiry and profits from a large move in either direction.
Example. A trader expects a big move after an event but is unsure of direction.
Exam trap. This statement is false: A straddle profits when the market stays flat.
Short straddle
A short straddle sells a call and a put at the same strike, earning premium if the price stays near the strike, but with unlimited risk.
Example. A trader expects a quiet market.
Exam trap. This statement is false: A short straddle has limited risk.
Long strangle
A strangle buys an out-of-the-money call and put, cheaper than a straddle but requiring a bigger move to profit.
Example. A trader buys a 84 call and a 82 put.
Exam trap. This statement is false: A strangle is more expensive than a straddle.
Covered position
Combining an option with an underlying position, such as a short call against a long futures position, can enhance income but caps gains.
Example. A holder of futures writes a call for premium.
Exam trap. This statement is false: A covered position removes all risk.
Protective put
Buying a put against a long exposure sets a floor on losses while keeping the upside.
Example. An exporter holding dollars buys a put to protect against a fall.
Exam trap. This statement is false: A protective put caps the upside.
Maximum profit in a spread
In a bull call spread, maximum profit equals the difference in strikes less the net premium.
Example. Strikes 83 and 84 with net premium 0.30 give a maximum profit of 0.70.
Exam trap. This statement is false: Maximum profit equals the net premium.
Hedging a payable
An importer with a dollar payable can buy futures or a call option to protect against dollar appreciation.
Example. A firm buys a call to cap the cost of dollars.
Exam trap. This statement is false: An importer protects herself by selling dollar futures.
Hedging a receivable
An exporter with a dollar receivable can sell futures or buy a put to protect against dollar depreciation.
Example. A firm buys a put to set a floor on rupee proceeds.
Exam trap. This statement is false: An exporter protects herself by buying dollar futures.
Choosing between futures and options
Futures lock the rate but remove favourable moves; options keep favourable moves at the cost of premium.
Example. A hedger who wants upside buys an option.
Exam trap. This statement is false: Options cost nothing.
Margin and strategy risk
Short option legs require margin, and strategies must be assessed on net risk and capital needs.
Example. A short straddle needs substantial margin.
Exam trap. This statement is false: Spread positions need no margin.
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? In a bull call spread, maximum profit equals the difference in strikes less the net premium.
- Short put risk
- Drivers of exchange rates
- Cost of carry
- Maximum profit in a spread
Q2. Which statement best describes “Protective put”?
- Trades are confirmed through contract notes issued by the broker.
- Buying a put against a long exposure sets a floor on losses while keeping the upside.
- Exchanges set daily price bands to restrict extreme movements in contract prices.
- Short option legs require margin, and strategies must be assessed on net risk and capital needs.
Q3. Which term is described here? An importer with a dollar payable can buy futures or a call option to protect against dollar appreciation.
- Hedging a payable
- Client code modification
- Risk disclosure
- Hedging with forwards
Q4. Which statement best describes “Covered position”?
- Combining an option with an underlying position, such as a short call against a long futures position, can enhance income but caps gains.
- Different currency pairs and expiry months are available, with near-month contracts typically being most liquid.
- Rates move with interest rate differentials, inflation, trade and capital flows, growth and sentiment.
- If margin falls below the requirement, the member must top it up promptly or face position closure.
Q5. Which statement best describes “Long strangle”?
- Turnover from derivatives is computed on the basis of the absolute sum of profits and losses, with audit rules based on thresholds.
- A strangle buys an out-of-the-money call and put, cheaper than a straddle but requiring a bigger move to profit.
- Profit or loss equals the price change multiplied by the lot size and number of lots.
- Hedgers use derivatives to reduce existing currency risk; speculators take risk hoping to profit from price moves.
Q6. Which statement best describes “Short straddle”?
- If margin falls below the requirement, the member must top it up promptly or face position closure.
- Brokerage, exchange charges, GST and stamp duty apply to currency derivative trades.
- Short option legs require margin, and strategies must be assessed on net risk and capital needs.
- A short straddle sells a call and a put at the same strike, earning premium if the price stays near the strike, but with unlimited risk.
Frequently asked questions
How much of NISM Series I comes from Unit 5?
Unit 5 (Strategies using exchange traded currency derivatives) usually carries about 10% of the questions. The whole exam has 100 questions and the pass mark is 60%.
What should I study in NISM Series I Unit 5?
Spreads and straddles. Covered positions. Hedging strategies.
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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