NISM V-D Introduction to Options — Practice Questions
Practise calls and puts, moneyness, intrinsic and time value, the factors that drive option premiums, the Greeks and the payoffs to buyers and writers.
69 questions on Options in the ScoreSetu bank — each with a detailed explanation and, where useful, a memory hook.
What this topic covers
- Calls and puts
- Moneyness, intrinsic and time value
- Premium drivers and the Greeks
- Buyer and writer payoffs
Free sample questions
1. Which of these is true for an 'In-the-money' option ?
- A. 'In-the-money' has a negative intrinsic value
- B. 'In-the-money' option has zero time value
- C. 'In-the-money' option cannot be profitably exercised by the holder immediately
- D. 'In-the-money' has a positive intrinsic value ✅
Answer: D — 'In-the-money' has a positive intrinsic value
Why: In-the-money (ITM) option: This option would give the option holder a positive cash flow, if it were exercised immediately. The intrinsic value of an option refers to the amount by which the option is in-themoney i.e., the amount an option buyer will realize, before adjusting for premium paid, if he exercises the option instantly. Therefore, only in-the-money options have intrinsic value whereas at-the-money and out-of-the-money options have zero intrinsic value. The intrinsic value of an option can never be negative.
💡 ITM option = POSITIVE intrinsic value; intrinsic value can never be negative.
2. Is it true that at expiration, the value of an option is its intrinsic value?
- A. Yes, its true for all options ✅
- B. No, its not true for all options
- C. Yes, its true but only for Call options
- D. Yes, its true but only for Put options
Answer: A — Yes, its true for all options
Why: At expiration, the exercise settlement value for each unit of the exercised contract is computed as follows: Call options = Closing price of the security on the day of exercise - Strike price Put options = Strike price - Closing price of the security on the day of exercise. In other words, the final settlement amount is equal to the intrinsic value of the option at expiration.
💡 At expiration, an option's value = its INTRINSIC value -> true for ALL options.
3. 'Rho' is connected to the ______ .
- A. Volatility of the underlying
- B. Time to expiry of the option
- C. Price of the underlying asset
- D. Interest rates in the market ✅
Answer: D — Interest rates in the market
Why: Rho is the change in option price given a one percentage point change in the risk-free interest rate. Rho measures the change in an option’s price per unit increase in the cost of funding the underlying. Rho = Change in an option premium / Change in cost of funding the underlying.
💡 RHO -> sensitivity of option price to INTEREST RATES (per 1% change in the risk-free rate).
Practise all 69 Options 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 & FuturesEquity Derivative StrategiesInterest Rates & Fixed IncomeInterest Rate DerivativesInterest Rate FuturesInterest Rate OptionsInterest Rate Strategies