Accounting and taxation: NISM Series I notes and practice questions

Q1. Which statement best describes “Record maintenance”?

1. A long put's payoff is the greater of zero and strike minus spot, less premium paid.
2. The premium is the price paid by the buyer to the seller of the option, and is the buyer's maximum loss.
3. Traders should maintain contract notes, margin statements and ledgers to substantiate returns.
4. Turnover from derivatives is computed on the basis of the absolute sum of profits and losses, with audit rules based on thresholds.

Q2. Which statement best describes “Transaction costs”?

1. A long call's payoff is the greater of zero and spot minus strike, less premium paid.
2. Brokerage, exchange charges, GST and stamp duty apply to currency derivative trades.
3. A bull call spread buys a lower strike call and sells a higher strike call, limiting both cost and profit.
4. USD-INR options have a lot size of 1,000 dollars, a tick of 0.0025 and expiry on the last working day of the month with cash settlement.

Q3. Which statement best describes “Business income”?

1. Profits and losses from exchange traded currency derivatives are generally treated as non-speculative business income.
2. Currency derivatives trade on weekdays from 9:00 am to 5:00 pm, subject to exchange schedule.
3. Futures lock the rate but remove favourable moves; options keep favourable moves at the cost of premium.
4. The spread is the difference between ask and bid and is the dealer's margin and a measure of liquidity.

Q4. Which term is described here? Daily mark-to-market gains and losses are recognised in accounts on settlement or at the balance sheet date for open positions.

1. Bear put spread
2. Client code modification
3. Accounting at settlement
4. Turnover for audit

Q5. Which statement best describes “Turnover for audit”?

1. Daily mark-to-market gains and losses are recognised in accounts on settlement or at the balance sheet date for open positions.
2. A hedger takes a position in futures opposite to the exposure; an importer with dollar payables buys futures, and an exporter sells.
3. Turnover from derivatives is computed on the basis of the absolute sum of profits and losses, with audit rules based on thresholds.
4. The bid is the price at which a dealer buys the base currency and the ask is the price at which the dealer sells it, with the ask higher than the bid.

Q6. Which term is described here? Traders should maintain contract notes, margin statements and ledgers to substantiate returns.

1. Non-deliverable forward
2. Record maintenance
3. Code of conduct
4. Short call risk