NISM V-D Strategies Using Interest Rate Derivatives — Practice Questions
Practise how a fund hedges, speculates and arbitrages with interest rate derivatives — hedging a bond portfolio's duration, trading a view on rates, and the strategies open to a SIF.
32 questions on Interest Rate Strategies in the ScoreSetu bank — each with a detailed explanation and, where useful, a memory hook.
What this topic covers
- Hedging a bond portfolio
- Duration hedging
- Trading a view on rates
- Strategies open to a SIF
Free sample questions
1. An investor holds 6.10% G-Secs 2031 worth Rs. 4 crore and fears a rise in yields after the coming monetary policy review. She sells futures on the same bond at Rs. 100.20 (one contract has a notional value of Rs. 2,00,000; 1 lot = 2,000 units). On expiry the futures settle at Rs. 99.40. How many lots did she sell, and what is the profit on the futures leg?
- A. 200 lots; Rs. 1,60,000
- B. 200 lots; Rs. 3,20,000 ✅
- C. 400 lots; Rs. 3,20,000
- D. 2,000 lots; Rs. 16,00,000
Answer: B — 200 lots; Rs. 3,20,000
Why: Number of lots = Rs. 4 crore / Rs. 2 lakh notional per contract = 200 lots. Profit on the short hedge = (100.20 - 99.40) x 200 lots x 2,000 units = 0.80 x 4,00,000 = Rs. 3,20,000, which offsets the fall in the cash price of the bond she holds.
💡 Short hedge: Lots = Exposure / Rs. 2 lakh notional; Profit = (Sell price - Expiry price) x lots x 2000.
2. Mr. Sunny takes two positions: buying a call option (strike Rs. 40.25, premium Rs. 0.20) and selling a call option (strike Rs. 39.50, premium Rs. 0.60). Determine his net profit or loss if the underlying asset's price at expiry is Rs. 39.50
- A. Rs. -0.60
- B. Rs. 0.20
- C. Rs. 0.40 ✅
- D. 0
Answer: C — Rs. 0.40
Why: Mr. Sunny has paid a premium of Rs 0.20 and received a premium of Rs 0.60. Net Premium received = 0.60 - 0.20 = 0.40 Now, lets evaluate the payoff of each position: Long Call (Strike 40.25) : Since spot price < strike, the option expires worthless. Payoff = 0 Short Call (Strike 39.50) : Since spot price = strike, this call also expires worthless. Payoff = 0 Thus the payoff on the two positions = 0 The Net Premium received is 0.40 and that will be the final payoff.
💡 Both calls expire worthless -> profit = NET PREMIUM received = 0.60-0.20 = Rs 0.40.
3. Why does Basis Risk arise?
- A. Because the futures expiry date is standardized
- B. Because the futures contract amount is standardized
- C. Both of the above ✅
- D. None of the above
Answer: C — Both of the above
Why: Basis risk arises due to a mismatch between the hedged asset and the futures contract used for hedging. Two key reasons are: - Futures contract amount is standardized – The contract size may not exactly match the quantity of the asset being hedged. - Futures expiry date is standardized – The contract may not mature at the exact time when the hedge is needed. These standardizations create a risk that the futures price and the spot price will not move perfectly in sync, leading to basis risk.
💡 Basis risk arises because futures amount AND expiry are STANDARDIZED (mismatch to hedge).
Practise all 32 Interest Rate Strategies questions
Plus the full 853-question NISM V-D bank and real-feel mock exams.
Other NISM V-D topics
Investment LandscapeConcept & Role of Mutual FundsLegal StructureLegal & RegulatoryScheme Related InformationDistribution & ChannelsNAV, TER & PricingTaxationInvestor ServicesRisk, Return & PerformanceScheme PerformanceScheme SelectionBasics of DerivativesUnderstanding the IndexForwards & FuturesOptionsEquity Derivative StrategiesInterest Rates & Fixed IncomeInterest Rate DerivativesInterest Rate FuturesInterest Rate Options