NISM V-D Forwards and Futures — Practice Questions

1. A Clearing member has to deposit liquid assets with the Clearing Corporation but these liquid assets cannot comprise entirely of _________ .

Answer: A — Equity Shares

Why: Clearing member is required to provide liquid assets which adequately cover various margins and liquid Net-worth requirements. The total liquid assets comprise of at least 50% of the cash component and the rest is non-cash component – This means 50% to 100% can be the cash component. Non-cash component cannot be more than 50%. All collateral deposits are segregated into cash component and non-cash component. Cash component means cash, bank guarantee, fixed deposit receipts, T-bills and dated government securities. Non-cash component means all other forms of collateral deposits like deposit of approved demat equity securities.

💡 Collateral: non-cash (equity shares) capped at 50% -> liquid assets can't be ENTIRELY equity shares.

2. A Trading-cum-clearing member has a client X who has purchased and sold 1000 and 2000 contracts respectively in the June series of ABC futures (contract multiplier 50). The Trading-cum-clearing member has purchased and sold 2200 and 1500 contracts respectively on his own account in the same June series of ABC futures (contract multiplier 50). What is the outstanding liability (open position) of the member towards clearing corporation in the number of contracts?

Answer: A — 1700

Why: The open position of a client and the clearing member cannot be netted off with each other. Open position of client X is 1000 - 2000 = 1000 sale contracts Open position of Clearing member is 2200 - 1500 = 700 purchase contracts Total outstanding position of the clearing member towards the Clearing Corporation is 1000 + 700 = 1700 contracts

💡 Client & member positions NOT netted: |1000-2000| + |2200-1500| = 1000 + 700 = 1700 contracts.

3. The facility for lending and borrowing securities is usually necessary for smooth execution of ________ .

Answer: B — Reverse cash-and-carry arbitrage

Why: Usually the futures prices are higher than cash market prices. The reverse cash-and-carry arbitrage is done when the futures contract are lower than the cash market price. For eg. Reliance Industries Ltd. is trading at Rs 2050 in the cash market and Rs. 2000 in futures market. The arbitrageur will sell in the cash market at Rs 2050 and buy in the future market at Rs 2000, thus making a profit of Rs 50 (less expenses). The arbitrageur should have the stock to deliver in the cash market, which will be bought back at the time of reversing the position. If stock is not available, arbitrageur needs to borrow the stock to implement the arbitrage. Therefore, existence of a facility for lending and borrowing securities is required for smooth execution Reverse cash-and-carry arbitrage.

💡 Reverse cash-and-carry (sell spot, buy futures) needs securities LENDING/BORROWING to short the spot.

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