NISM V-D Understanding the Index — Practice Questions

1. An exchange may launch futures and options contracts on an index only if a minimum of _____ of the stocks forming that index are eligible for derivatives trading on an individual basis.

Answer: D — 80%

Why: According to SEBI guidelines: - Exchanges can launch futures and options contracts on a stock index only if at least 80% of the underlying stocks in that index are individually eligible for derivatives trading. - This ensures sufficient liquidity and minimizes risk, as the majority of the index components are actively traded in the derivatives segment.

💡 Index F&O launch: min 80% of the index's stocks must be individually eligible for derivatives -> ensures liquidity.

2. Which of the following instruments are considered suitable and cost-effective for portfolio hedging by mutual funds and institutions?

Answer: A — Index-based derivatives

Why: For portfolio hedging, institutions and mutual funds often want to hedge the overall market or sector risk rather than individual stocks. Index-based derivatives allow them to efficiently hedge large portfolios in a cost-effective manner. Hedging with individual stocks or gold bonds would be less efficient and more expensive.

💡 Portfolio hedging by MFs/institutions -> use INDEX-based derivatives (cost-effective vs single-stock).

3. A stock with a very high market price will have a greater impact on the index level in which of the following types of indices?

Answer: D — A price-weighted index

Why: In a price-weighted index, each stock’s weight depends on its share price. Stocks with higher prices have greater influence because weights are based directly on share price (e.g., Dow Jones Industrial Average). So, a high-priced stock has a larger impact on index movements. Hence, price alone matters most in a price-weighted index.

💡 Price-weighted index (e.g. Dow): weight by SHARE PRICE -> highest-priced stock moves the index most.

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