NISM Series V-D · Unit 9 of 12 · about 6% of the paper
Strategies using equity futures and options: NISM Series V-D notes and practice questions
Hedging, spreads, straddles and how funds and SIFs use equity derivatives.
What to know in Unit 9
- Hedges.
- Covered call and protective put.
- Straddle and spreads.
Key terms, examples and exam traps
Protective put
A protective put is buying a put against shares held, which limits the downside while keeping the upside.
Example. An investor holds shares and buys a put at a lower strike.
Exam trap. This statement is false: A protective put involves selling a put.
Covered call
A covered call is holding shares and selling a call, earning premium but capping the upside.
Example. A fund sells a call on shares it holds.
Exam trap. This statement is false: A covered call has no limit to the loss.
Long straddle
A long straddle buys a call and a put at the same strike and expiry, gaining from a big move in either direction.
Example. A trader expects a large move after results.
Exam trap. This statement is false: A long straddle gains when the price stays still.
Bull call spread
A bull call spread buys a lower strike call and sells a higher strike call, giving limited profit and limited loss.
Example. A trader mildly expects a rise.
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 mildly expects a fall.
Exam trap. This statement is false: A bear put spread profits from a rise.
Long-short use
A long-short equity fund buys stocks expected to rise and uses futures or options to short those expected to fall, reducing market exposure.
Example. A SIF is long on strong stocks and short on index futures.
Exam trap. This statement is false: A long-short strategy is always fully long.
Short futures to hedge
Selling futures against a stock portfolio offsets losses on the portfolio if the market falls, though it gives up gains on a rise.
Example. A fund sells futures before an uncertain event.
Exam trap. This statement is false: Short futures add to losses when the market falls.
Arbitrage use
Equity arbitrage funds exploit price differences between cash and futures markets, with the futures sold against the shares bought.
Example. A fund buys shares and sells futures to lock the spread.
Exam trap. This statement is false: Arbitrage funds take full directional equity risk.
Derivative risk
Leverage in derivatives magnifies both gains and losses, so position limits and margins matter.
Example. A small market move causes a large margin loss.
Exam trap. This statement is false: Derivatives lower risk in every use.
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 “Derivative risk”?
- Standard deviation measures how much returns vary around their average, so a higher value means a more volatile fund.
- A distributor needs an AMFI Registration Number to sell funds, and an EUIN identifies the employee or sales person who gave advice.
- A clearing corporation becomes the counterparty to both sides of every exchange-traded contract, reducing counterparty risk.
- Leverage in derivatives magnifies both gains and losses, so position limits and margins matter.
Q2. Which term is described here? A bear put spread buys a higher strike put and sells a lower strike put to profit from a moderate fall.
- Sharpe ratio
- Distributor commission
- Bear put spread
- Mutual fund
Q3. Which term is described here? A protective put is buying a put against shares held, which limits the downside while keeping the upside.
- Sectoral Debt Long-Short
- Protective put
- ARN and EUIN
- SIP, SWP and STP in SIFs
Q4. Which statement best describes “Arbitrage use”?
- A speculator takes a view on price movements and accepts risk in hope of profit.
- SIFs suit investors who understand complex strategies, can bear higher risk, accept lower liquidity and have a higher net worth, so suitability must be checked before sale.
- Index weights are commonly based on free-float market capitalisation, which counts only the shares available for public trading.
- Equity arbitrage funds exploit price differences between cash and futures markets, with the futures sold against the shares bought.
Q5. Which term is described here? A long-short equity fund buys stocks expected to rise and uses futures or options to short those expected to fall, reducing market exposure.
- Long-short use
- Beta
- Position between MF and PMS
- Moneyness
Q6. Which statement best describes “Bull call spread”?
- The main types are forwards, futures, options and swaps.
- The SAI has details about the mutual fund such as constitution, trustees and legal matters, and is common to all its schemes.
- A bull call spread buys a lower strike call and sells a higher strike call, giving limited profit and limited loss.
- An interest rate derivative is a contract whose value depends on an interest rate or a bond price, and it is used to hedge or take a view on rates.
Frequently asked questions
How much of NISM Series V-D comes from Unit 9?
Unit 9 (Strategies using equity futures and options) usually carries about 6% 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 9?
Hedges. Covered call and protective put. Straddle and spreads.
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.
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