Top 100+ Currency Derivatives Interview Questions And Answers
Question 1. What Are Derivatives?
Derivatives, which include futures or alternatives, are economic contracts which derive their value from a gap charge, that is referred to as the “underlying”. For example, wheat farmers may additionally wish to go into right into a contract to promote their harvest at a future date to take away the threat of a change in prices by that date. Such a transaction would take place through a forward or futures market. This market is the “derivatives marketplace”, and the fees of this marketplace could be pushed with the aid of the spot market price of wheat that is the “underlying”. The term “contracts” is regularly implemented to denote the particular traded instrument, whether or not it's miles a derivative contract in wheat, gold or fairness shares. The international over, derivatives are a key a part of the fi nancial system. The maximum important contract types are futures and options, and the maximum important underlying markets are fairness, treasury payments, commodities, forex, real property and so forth.
Question 2. What Is A Forward Contract?
In a forward agreement, two parties comply with do a trade at some destiny date, at a stated price and amount. No money adjustments arms on the time the deal is signed.
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Question three. Why Is Forward Contracting Useful?
Forward contracting is very valuable in hedging and speculation. The traditional hedging application could be that of a wheat farmer forward -selling his harvest at a recognised rate a good way to remove price risk. Conversely, a bread factory may additionally need to buy bread forward so as to help manufacturing planning with out the hazard of fee fl uctuations. If a speculator has facts or evaluation which forecasts an upturn in a price, then he can go long on the ahead market in place of the cash market. The speculator could move lengthy at the ahead, await the rate to upward thrust, after which take a reversing transaction making a earnings.
Question four. What Are The Problems Of Forward Markets?
Forward markets international are affl icted by using numerous issues:
lack of centralisation of trading,
In the fi rst two of those, the simple problem is that of an excessive amount of fl exibility and generality. The forward market is like the real estate marketplace in that any two folks can shape contracts against each different. This often makes them layout phrases of the deal which can be very convenient in that specifi c state of affairs for the specifi c parties, however makes the contracts nontradeable if extra participants are concerned. Also the “cellphone market” right here is unlike the centralisation of fee discovery that is obtained on an trade, ensuing in an illiquid market region for forward markets. Counterparty threat in forward markets is a easy idea: when one of the two sides of the transaction chooses to declare bankruptcy, the alternative suffers. Forward markets have one primary trouble: the bigger the term over which the forward settlement is open, the bigger are the capacity rate movements, and consequently the bigger is the counter- birthday party threat. Even while forward markets exchange standardized contracts, and for this reason avoid the trouble of illiquidity, the counterparty chance remains a very actual trouble.
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Question 5. What Is A Futures Contract?
Futures markets had been designed to remedy all the three troubles (listed in Question 4) of ahead markets. Futures markets are exactly like forward markets in terms of simple economics. However, contracts are standardised and buying and selling is centralized (on a stock change). There is not any counterparty threat (thanks to the institution of a clearing enterprise which will become counterparty to each facets of every transaction and ensures the exchange). In futures markets, not like in forward markets, increasing the time to expiration does not growth the counter party danger. Futures markets are highly liquid as compared to the ahead markets.
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Question 6. What Are Various Types Of Derivative Instruments Traded At Nse?
There are sorts of derivatives contraptions traded on NSE; namely Futures and Options :
Futures : A futures contract is an settlement among two events to buy or sell an asset at a positive time inside the future at a sure rate. All the futures contracts are settled in coins at NSE.
Options : An Option is a agreement which gives the right, but now not an duty, to shop for or promote the underlying at a stated date and at a said rate. While a client of an choice will pay the top rate and buys the proper to workout his option, the author of an alternative is the one who gets the choice top rate and consequently obliged to sell/purchase the asset if the buyer physical games it on him. Options are of types - Calls and Puts options : “Calls” deliver the customer the proper however no longer the obligation to shop for a given amount of the underlying asset, at a given rate on or before a given destiny date. “Puts” deliver the purchaser the right, but now not the responsibility to promote a given quantity of underlying asset at a given charge on or earlier than a given destiny date. All the options contracts are settled in coins. Further the Options are classifi ed primarily based on sort of workout. At present the Exercise fashion may be European or American. American Option - American alternatives are alternatives contracts that may be exercised at any time upto the expiration date. Options on man or woman securities to be had at NSE are American type of options.
European Options - European alternatives are options that may be exercised handiest on the expiration date. All index alternatives traded at NSE are European Options. Options contracts like futures are Cash settled at NSE
Question 7. What Are Various Products Available For Trading In Futures And Options Segment At Nse?
Futures and alternatives contracts are traded on Indices and on Single stocks. The derivatives buying and selling at NSE began with futures on the Nifty 50 in June 2000. Subsequently, diverse different merchandise have been introduced and presently futures and options contracts on the subsequent products are available at NSE: 1. Indices : Nifty 50, CNX IT Index, Bank Nifty Index, CNX Nifty Junior, CNX 100 , Nifty Midcap 50, Mini Nifty and Long dated Options contracts on Nifty 50. 2. Single shares - 228
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Question eight. Why Should I Trade In Derivatives?
Futures buying and selling may be of hobby to folks that want to:
Invest - take a view in the marketplace and buy or promote consequently.
Price Risk Transfer- Hedging - Hedging is buying and promoting futures contracts to offset the risks of converting underlying market prices. Thus it facilitates in lowering the risk related to exposures in underlying market by means of taking a counter- positions in the futures market. For instance, an investor who has purchased a portfolio of shares can also have a worry of unfavorable marketplace situations in future which can also lessen the fee of his portfolio. He can hedge in opposition to this danger by means of shorting the index that is correlated along with his portfolio, say the Nifty 50. In case the markets fall, he might make a profi t via squaring off his quick Nifty 50 position. This profi t might compensate for the loss he suffers in his portfolio as a result of the autumn within the markets.
Leverage- Since the investor is required to pay a small fraction of the price of the entire agreement as margins, buying and selling in Futures is a leveraged activity for the reason that investor is capable of manipulate the whole value of the contract with a distinctly small quantity of margin. Thus the Leverage enables the traders to make a larger profi t (or loss) with a relatively small amount of capital.
Options buying and selling can be of interest to those who desire to :
Participate within the market without trading or keeping a huge quantity of inventory.
Protect their portfolio through paying small premium amount.
Benefi ts of trading in Futures and Options :
Able to switch the danger to the person that is willing to just accept them
Incentive to make profi ts with minimal quantity of danger capital
Lower transaction costs
Provides liquidity, enables charge discovery in underlying marketplace
Derivatives market are lead financial indicators
Question nine. What Are The Benefi Ts Of Trading In Index Futures Compared To Any Other Security?
An investor can change the ‘complete inventory market’ by buying index futures instead of buying person securities with the effi ciency of a mutual fund.
The benefits of trading in Index Futures are:
The contracts are exceptionally liquid.
Index Futures provide better leverage than any other shares.
It requires low preliminary capital requirement.
It has lower hazard than shopping for and conserving shares.
It is simply as clean to exchange the short aspect as the lengthy facet.
Only should look at one index rather than 100s of shares
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Question 10. How Do I Start Trading In The Derivatives Market At Nse?
Futures/ Options contracts in both index in addition to shares can be sold and sold thru the buying and selling contributors of NSE. Some of the buying and selling individuals also offer the net facility to change within the futures and alternatives marketplace. You are required to open an account with one of the trading members and entire the related formalities which consist of signing of member-constituent agreement, Know Your Client (KYC) shape and danger disclosure document. The trading member will allot to you an unique patron identifi cation variety. To begin trading, you should deposit coins and/or different collaterals along with your buying and selling member as may be stipulated by means of him
Question 11. What Is The Expiration Day?
It is the closing day on which the contracts expire. Futures and Options contracts expire on the remaining Thursday of the expiry month. If the ultimate Thursday is a trading holiday, the contracts expire at the previous trading day. For E.G. The January 2008 contracts mature on January 31, 2008.
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Question 12. What Is The Contract Cycle For Equity Based Products In Nse ?
Futures and Options contracts have a maximum of 3-month buying and selling cycle -the near month (one), the following month (two) and the a long way month (three), except for the Long dated Options contracts. New contracts are added on the trading day following the expiry of the close to month contracts. The new contracts are introduced for a three month period. This way, at any point in time, there can be three contracts to be had for buying and selling within the market (for each security) i.E., one close to month, one mid month and one some distance month period respectively. For example on January 26,2008 there would be 3 month contracts i.E. Contracts expiring on January 31,2008, February 28, 2008 and March 27, 2008. On expiration date i.E January 31,2008, new contracts having maturity of April 24,2008 might be introduced for trading.
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Question thirteen. What Is The Concept Of In The Money, At The Money And Out Of The Money In Respect Of Options?
In- the- cash options (ITM): An in-the-money alternative is an option that could cause effective coins fl ow to the holder if it were exercised right now. A Call option is stated to be in-the-cash when the contemporary rate stands at a stage higher than the strike price. If the Spot price is tons better than the strike fee, a Call is stated to be deep in-the-cash choice. In the case of a Put, the placed is in-the-cash if the Spot charge is under the strike price.
At-the-cash-choice (ATM):An at-the money alternative is an choice that could cause 0 cash fl ow if it had been exercised without delay. An option on the index is said to be “at-the-money” while the current charge equals the strike charge.
Out-of-the-money-option (OTM):An out-of- the-money Option is an alternative that might lead to negative cash fl ow if it had been exercised right now. A Call choice is out-of-the-money whilst the cutting-edge charge stands at a level which is less than the strike price. If the modern price is an awful lot decrease than the strike charge the decision is stated to be deep out-of-the money. In case of a Put, the Put is stated to be out-of-cash if modern rate is above the strike rate.
Question 14. Is There Any Margin Payable?
Yes. Margins are computed and collected on-line, actual time on a portfolio basis at the purchaser stage. Members are required to gather the margin upfront from the customer & file the same to the Exchange.
Question 15. How Are The Contracts Settled?
All the Futures and Options contracts are settled in cash on a daily basis and at the expiry or workout of the respective contracts because the case can be. Clients/Trading Members are not required to maintain any inventory of the underlying for dealing in the Futures / Options market. All out of the cash and at the cash choice contracts of the near month maturity expire worthless at the expiration date.
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