Preparing for the NISM VIII: Equity Derivatives Certification Examination? If you have already gone through the basic concepts, the next step is to test whether you can actually apply them in practical situations.

In the real market, traders and investors don't just calculate option premiums or futures prices. They use derivatives for hedging, speculation, arbitrage, and managing risk.

That's why case-based questions are so useful. Below are 20 original practice questions based on common NISM VIII concepts. The numbers and situations are different from standard examples, so try solving each question yourself before checking the answer.

Case 1: Hedging a Stock Portfolio with Futures

Rohan owns 1,200 shares of XYZ Ltd. The current market price is ₹850 per share. He is concerned that the stock may fall over the next two months.

The lot size of XYZ futures is 600 shares.

Question 1

How many futures contracts would Rohan need to sell to approximately hedge his entire position?

A. 1 contract
B. 2 contracts
C. 3 contracts
D. 4 contracts

Answer: B. 2 contracts

Explanation: Number of shares to hedge = 1,200

Futures lot size = 600

Therefore: 1,200 ÷ 600 = 2 contracts

Since Rohan owns the shares and is worried about a price fall, he would take a short futures position.

Question 2

Suppose Rohan sells 2 futures contracts at ₹850. At expiry, the futures price falls to ₹790.

What will be his approximate gain on the futures position?

A. ₹36,000
B. ₹60,000
C. ₹72,000
D. ₹84,000

Answer: C. ₹72,000

Explanation: Gain per share: ₹850 − ₹790 = ₹60

Total quantity: 2 × 600 = 1,200 shares

Futures gain: ₹60 × 1,200 = ₹72,000

This gain helps offset the fall in value of his physical shares.

Case 2: Understanding Basis

Meera is holding shares of ABC Ltd. The spot price is ₹1,420, while the corresponding futures contract is trading at ₹1,435.

Question 3

What is the basis?

A. ₹15
B. -₹15
C. ₹2,855
D. ₹1,405

Answer: B. -₹15

Explanation: Basis is: Spot Price − Futures Price

= ₹1,420 − ₹1,435

= -₹15

When futures trade above spot, the basis is negative.

Question 4

As expiry approaches, what normally happens to the basis?

A. It becomes increasingly negative
B. It becomes zero
C. It doubles
D. It remains fixed

Answer: B. It becomes zero

Explanation: At expiry, the futures price and spot price converge. Therefore, the basis generally approaches zero.

This concept is particularly important when understanding futures hedging.

Case 3: Buying a Put for Downside Protection

Arjun owns 500 shares of PQR Ltd. purchased at ₹620 per share.

He is worried about a possible fall in the stock but does not want to sell his shares. He purchases a put option with:

• Strike Price: ₹600
• Premium: ₹18 per share

Question 5

If the stock price falls to ₹550 at expiry, what is the intrinsic value of the put?

A. ₹18
B. ₹32
C. ₹50
D. ₹68

Answer: C. ₹50

Explanation: For a put option: Intrinsic Value = Strike Price − Spot Price

= ₹600 − ₹550

= ₹50

The premium is not included when calculating intrinsic value.

Question 6

What is the net profit on the put option per share at expiry?

A. ₹32
B. ₹50
C. ₹68
D. ₹18

Answer: A. ₹32

Explanation: Put option payoff = ₹50

Premium paid = ₹18

Therefore:

Net profit = ₹50 − ₹18 = ₹32

Remember the difference:

Payoff ≠ Profit

Premium must be considered when calculating the investor's actual profit or loss.

Question 7

What is the maximum loss on the put option for Arjun?

A. ₹18 per share
B. ₹32 per share
C. ₹50 per share
D. Unlimited

Answer: A. ₹18 per share

Explanation: A buyer of an option pays the premium upfront.

If the option expires worthless, the maximum loss is limited to the premium paid.

Therefore, Arjun's maximum loss on the put is:

₹18 per share

Case 4: Buying a Call Option

Neha expects DEF Ltd. to rise sharply over the next month.

She buys a call option with:

• Strike Price: ₹1,000
• Premium: ₹35
• Expiry Spot Price: ₹1,080

Question 8

What is the intrinsic value of the call?

A. ₹35
B. ₹45
C. ₹80
D. ₹1,045

Answer: C. ₹80

Explanation: For a call: Intrinsic Value = Spot Price − Strike Price

= ₹1,080 − ₹1,000

= ₹80

Question 9

What is Neha's net profit per share?

A. ₹35
B. ₹45
C. ₹80
D. ₹115

Answer: B. ₹45

Explanation: Call payoff = ₹80

Premium = ₹35

Net profit:

₹80 − ₹35 = ₹45

Question 10

At what price will the call option break even at expiry?

A. ₹965
B. ₹1,000
C. ₹1,035
D. ₹1,080

Answer: C. ₹1,035

Explanation: For a purchased call: Break-even = Strike Price + Premium

= ₹1,000 + ₹35

= ₹1,035

Above ₹1,035, Neha begins making a net profit at expiry.

Case 5: Futures Pricing

Consider a stock currently trading at ₹1,500.

The annual financing cost is estimated at 8%, and the investor expects a dividend of ₹30 during the relevant period.

For simplicity, assume the financing cost for the period is ₹60.

Question 11

Using the simplified cost-of-carry approach, what would be the theoretical futures price?

A. ₹1,410
B. ₹1,470
C. ₹1,530
D. ₹1,590

Answer: B. ₹1,530

Explanation: Simplified futures price: Spot + Carry Cost − Expected Dividend

= ₹1,500 + ₹60 − ₹30

= ₹1,530

The cost of holding the underlying affects futures pricing, while expected income such as dividends reduces the futures price.

Case 6: Cash-and-Carry Arbitrage

Suppose the theoretical futures price of a stock is ₹2,040, but the actual futures contract is trading at ₹2,090.

A trader believes the futures contract is overpriced.

Question 12

Which strategy is most appropriate?

A. Buy futures and sell shares
B. Buy shares and sell futures
C. Buy both shares and futures
D. Sell both shares and futures

Answer: B. Buy shares and sell futures

Explanation: When futures are significantly overpriced relative to the theoretical fair price, a trader can consider a cash-and-carry arbitrage strategy:

1. Buy the underlying asset.
2. Sell the futures contract.
3. Hold the position until convergence, subject to costs and practical constraints.

Question 13

Why does this strategy potentially generate arbitrage profit?

A. The stock price is guaranteed to rise
B. The futures price is expected to move toward the spot price by expiry
C. Futures never lose value
D. The trader does not need capital

Answer: B. The futures price is expected to move toward the spot price by expiry

Explanation: Futures and spot prices generally converge as expiry approaches.

When the futures contract is overpriced relative to fair value, the price difference can potentially be captured through an appropriately structured arbitrage position.

Case 7: Covered Call Strategy

Suresh owns 1,000 shares of LMN Ltd. He decides to generate additional income by selling call options against his shares.

He sells calls with:

• Strike Price: ₹750
• Premium received: ₹20
• Expiry Spot Price: ₹720

Question 14

What happens to the call option at expiry?

A. It expires worthless
B. It has ₹30 intrinsic value
C. It has ₹20 intrinsic value
D. It must be exercised

Answer: A. It expires worthless

Explanation: A call option has value when: Spot Price > Strike Price

Here: ₹720 < ₹750

Therefore, the call is out-of-the-money and expires worthless.

Suresh keeps the premium received.

Question 15

What is Suresh's premium income from the call option?

A. ₹7,500
B. ₹20,000
C. ₹72,000
D. ₹75,000

Answer: B. ₹20,000

Explanation: Premium = ₹20 per share

Quantity = 1,000 shares

Premium income:

₹20 × 1,000 = ₹20,000

Case 8: Covered Call When the Stock Rises

Now assume that LMN Ltd. rises to ₹800 at expiry while Suresh has sold the ₹750 call for ₹20.

Question 16

What is the intrinsic value of the call at expiry?

A. ₹20
B. ₹30
C. ₹50
D. ₹70

Answer: C. ₹50

Explanation: Call intrinsic value:

₹800 − ₹750 = ₹50

The option is now in the money.

Question 17

What is Suresh's net option result per share after considering the premium received?

A. ₹20 profit
B. ₹30 loss
C. ₹50 loss
D. ₹70 profit

Answer: B. ₹30 loss

Explanation: As the call seller:

Premium received = ₹20

Call payoff = ₹50

Net option result:

₹20 − ₹50 = -₹30

However, because Suresh owns the underlying shares, the increase in the share price contributes positively to the overall covered-call position.

This is why it is important to evaluate the combined strategy, rather than looking at the short call in isolation.

Case 9: Understanding Option Moneyness

Consider a stock trading at ₹950.

A trader is looking at three options:

• Call Strike: ₹900
• Call Strike: ₹1,000
• Put Strike: ₹1,000

Question 18

Which option is currently in-the-money?

A. ₹900 Call only
B. ₹1,000 Call only
C. ₹1,000 Put only
D. Both ₹900 Call and ₹1,000 Put

Answer: D. Both ₹900 Call and ₹1,000 Put

Explanation: A call is ITM when: Spot > Strike

₹950 > ₹900 → ₹900 Call is ITM.

A put is ITM when:

Strike > Spot

₹1,000 > ₹950 → ₹1,000 Put is ITM.

Therefore, both are in-the-money.

Case 10: Understanding Option Premium

Priya purchases a call option for a premium of ₹42.

At expiry, the underlying stock closes below the strike price.

Question 19

What is the most Priya can lose on the option?

A. Unlimited
B. ₹42 per share
C. Strike price
D. Market price of the stock

Answer: B. ₹42 per share

Explanation: For an option buyer, the maximum possible loss is generally limited to the premium paid, assuming a standard long option position.

Here, the premium is ₹42.

So maximum loss = ₹42 per share.

This limited-risk characteristic is one reason options are useful for certain trading and hedging strategies.

Case 11: Futures vs Options

A trader is strongly bullish on a stock and is considering either buying futures or buying a call option.

The trader wants to understand the fundamental difference between the two positions.

Question 20

Which statement is correct?

A. Both positions always have limited losses
B. A long futures position has limited loss equal to the margin
C. A purchased call has limited downside equal to the premium paid
D. A call buyer must buy the shares regardless of the expiry price

Answer: C. A purchased call has limited downside equal to the premium paid

Explanation: A long futures position can suffer substantial losses if the underlying moves sharply against the trader.

A call buyer, on the other hand, pays a premium upfront. If the option expires worthless, the loss is generally limited to that premium.

Therefore, C is the correct answer.

You can check out more NISM 8 Mock test here.

How Did You Score?

Now that you've attempted all 20 questions, check your score.

Important NISM VIII Topics to Revise

If you found some of the questions difficult, don't worry. That's exactly what practice tests are for.

Before appearing for the exam, make sure you're comfortable with:

• Futures terminology and contract specifications
• Futures payoff and P&L calculations
• Basis and convergence
• Cost of carry
• Hedging with futures
• Call and put options
• Intrinsic value and time value
• Option moneyness
• Break-even calculations
• Long call and long put strategies
• Covered calls
• Protective puts
• Arbitrage concepts
• Risk and return characteristics of derivatives

Final Thoughts

One thing I've noticed while preparing learners for NISM VIII is that memorising formulas alone isn't enough. You may remember that a call option's break-even is strike price + premium, but the real test is whether you can identify when to use that formula in a practical situation. That's why case-based practice is so valuable.

When you solve these questions, don't just check whether your final answer is right. Try to understand why the answer is right and why the other options are wrong. That approach will help you handle questions that are worded differently in the actual examination.

The more comfortable you become with applying concepts to different situations, the more confident you'll feel when you sit for the NISM-Series-VIII: Equity Derivatives Certification Examination.

Keep practising, keep calculating, and don't rely only on memorisation.