NISM Series V-D · Unit 7 of 12 · about 10% of the paper
Forwards and futures: NISM Series V-D notes and practice questions
Futures contracts, pricing, margins, mark-to-market and settlement.
What to know in Unit 7
- Forward vs future.
- Cost of carry.
- Margins and MTM.
- Settlement.
Key terms, examples and exam traps
Forward contract
A forward is a customised OTC agreement to buy or sell an asset at a fixed price on a future date.
Example. Two parties agree today on the price of an asset for delivery in three months.
Exam trap. This statement is false: A forward is traded on the exchange with fixed terms.
Futures contract
A futures contract is a standardised exchange-traded agreement to buy or sell an underlying at a set price on a future date.
Example. An investor buys the near-month index future.
Exam trap. This statement is false: Futures contracts are customised for each buyer.
Long and short futures
A long position gains when the price rises, and a short position gains when the price falls.
Example. An investor who sells a future profits if the index falls.
Exam trap. This statement is false: A short futures position gains when the price rises.
Lot size
Futures and options trade in fixed lots, so the contract value is the price multiplied by the lot size.
Example. A future at 20,000 with lot size 50 has a contract value of ₹10 lakh.
Exam trap. This statement is false: One can trade a single unit of a futures contract.
Cost of carry
A futures price is the spot price plus the cost of carrying the asset to the future date, so futures normally trade above spot in the usual case.
Example. A one-month future trades above spot due to financing cost.
Exam trap. This statement is false: Futures always trade below the spot price.
Basis
Basis is the difference between the spot price and the futures price, and it narrows to zero at expiry.
Example. The gap between spot and futures falls as expiry nears.
Exam trap. This statement is false: Basis widens as expiry nears.
Initial margin
Initial margin is the deposit a trader must put up to open a futures position, to cover potential losses.
Example. A trader deposits margin before buying an index future.
Exam trap. This statement is false: Initial margin is the full contract value.
Mark-to-market
Futures positions are marked to market daily, with gains and losses settled each day through the margin account.
Example. A fall in price leads to a daily debit to the long holder.
Exam trap. This statement is false: Gains and losses are settled only at expiry.
Margin call
If the margin balance falls below the maintenance level, the trader gets a margin call to top it up.
Example. A client gets a call to add funds after a loss.
Exam trap. This statement is false: A margin call returns excess margin to the trader.
Cash settlement of index futures
Index futures are settled in cash at expiry, as the index cannot be delivered.
Example. On expiry, the difference is paid in cash.
Exam trap. This statement is false: Index futures are settled by delivering all index shares.
Hedging with index futures
A fund can protect a diversified equity portfolio by selling index futures, reducing market risk while keeping the portfolio.
Example. A fund sells Nifty futures to hedge a fall.
Exam trap. This statement is false: Selling index futures increases exposure to a market fall.
Futures P&L
The profit on a long futures trade is the exit price minus entry price multiplied by lot size and lots.
Example. Buy at 100 and sell at 110 with a lot of 100 gives ₹1,000.
Exam trap. This statement is false: The profit on a long trade is the entry minus exit price.
Clearing corporation
A clearing corporation becomes the counterparty to both sides of every exchange-traded contract, reducing counterparty risk.
Example. A trader need not worry about the other side defaulting.
Exam trap. This statement is false: Each trader faces the counterparty's default risk directly.
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 statement best describes “Futures contract”?
- Stamp duty is charged at 0.005% on purchase of units, including switches and SIP instalments.
- Distributors must not promise or imply guaranteed returns on mutual funds or SIFs.
- A futures contract is a standardised exchange-traded agreement to buy or sell an underlying at a set price on a future date.
- The futures price moves inversely to yield, so a rise in yields lowers the futures price.
Q2. Which term is described here? A futures price is the spot price plus the cost of carrying the asset to the future date, so futures normally trade above spot in the usual case.
- Long-short use
- SEBI as regulator
- T-bill futures
- Cost of carry
Q3. Which statement best describes “Basis”?
- A SIP invests a fixed amount at regular intervals, averaging cost across market ups and downs.
- A direct plan has no distributor commission and a lower TER, while a regular plan includes distributor commission in its expenses.
- SIFs must keep branding and marketing distinct from the mutual fund, with the MF brand shown only as the offeror and not more prominently than the SIF brand.
- Basis is the difference between the spot price and the futures price, and it narrows to zero at expiry.
Q4. Which statement best describes “Mark-to-market”?
- Standard deviation measures how much returns vary around their average, so a higher value means a more volatile fund.
- Interest rate futures on bonds use a notional security, so settlement is in cash and no actual bond is delivered.
- The profit on a long futures trade is the exit price minus entry price multiplied by lot size and lots.
- Futures positions are marked to market daily, with gains and losses settled each day through the margin account.
Q5. Which term is described here? A futures contract is a standardised exchange-traded agreement to buy or sell an underlying at a set price on a future date.
- T-bill futures
- Futures P&L
- Systematic withdrawal plan
- Futures contract
Q6. Which term is described here? Index futures are settled in cash at expiry, as the index cannot be delivered.
- Long and short futures
- Bond price and yield
- Derivative and short limits
- Cash settlement of index futures
Frequently asked questions
How much of NISM Series V-D comes from Unit 7?
Unit 7 (Forwards and futures) usually carries about 10% of the questions. The whole exam has 150 questions and the pass mark is 60%.
What should I study in NISM Series V-D Unit 7?
Forward vs future. Cost of carry. Margins and MTM. Settlement.
Are these NISM Series V-D practice questions free?
Yes. Take the full free mocks to see the correct answer and the reason for every question.
Next
UpperCrust Academy is independent study material from UpperCrust Wealth. It is not affiliated with NISM, SEBI or AMFI. For education only. Not investment advice. Always confirm the latest syllabus and rules on the official NISM website.