Accounting and taxation: NISM Series VIII notes and practice questions

Q1. Which term is described here? For tax audit purposes, turnover of futures and options is computed using specified methods, such as the absolute profit and loss and premium on sale of options.

1. Price discovery
2. Turnover for derivatives
3. Settlement guarantee fund
4. Order matching

Q2. Which term is described here? Profits or losses from index and stock futures and options are generally treated as non-speculative business income under income tax law.

1. Market-wide position limit
2. Order types
3. Call option seller
4. Non-speculative business income

Q3. Which statement best describes “Securities transaction tax on derivatives”?

1. The clearing corporation becomes the counterparty to every trade through novation, guaranteeing settlement and managing risk.
2. STT is charged on derivatives transactions, for example on the sale of options on the premium and on futures sale, at rates set by law.
3. A long strangle buys an out-of-the-money call and an out-of-the-money put, costing less than a straddle but needing a bigger move.
4. A pair trade buys one related security and sells another, profiting from relative price movement rather than market direction.

Q4. Which statement about “Mark-to-market accounting” is correct?

1. Open positions are ignored at year end.
2. Novation cancels the trade.
3. Hedging requires buying index futures.
4. Open futures positions are marked to market at year end for accounting, and unrealised losses may be recognised.

Q5. Which statement best describes “Tax audit”?

1. STT is charged on derivatives transactions, for example on the sale of options on the premium and on futures sale, at rates set by law.
2. The daily settlement price of futures is generally the closing price (average of the last half hour), and positions are marked against it.
3. SEBI prescribes a minimum value for a derivatives contract at the time of its introduction, reviewed periodically, so that lot sizes are meaningful.
4. A person whose derivatives turnover or losses cross specified thresholds may need to get accounts audited under the tax law.

Q6. Which term is described here? Non-speculative business losses from derivatives can be set off against other business income and carried forward for eight years if returns are filed on time.

1. Single-stock futures
2. Option premium determinants
3. Trading hours of derivatives
4. Carry forward of business losses