Free NISM Series V-D Practice Exam: MF and SIF Distributors

How to use this set

This page contains 150 original Finance Prep questions, with one best answer and explanations for every choice. The allocation is 68 mutual-fund distribution, 52 equity derivatives and 30 interest-rate derivatives. The set provides a full-length practice opportunity while remaining independent from NISM.

These are original practice questions, not official NISM questions, copied live-exam content or exam dumps. Mastery Exam Prep and Finance Prep are not affiliated with or endorsed by NISM. The public questions and explanations are free to read; no purchase is required.

1. Allow 180 minutes for an optional pacing exercise. Record answers before opening explanations.
2. Mark uncertain or slow answers in your notes. A correct guess still needs review.
3. Keep results by module and identify whether each error arose from knowledge, a date/rule, interpretation, quantity/units or arithmetic.

The page is a fixed public set, not the official testing interface. Its tools and Finance Prep’s app scoring have not been verified as reproducing NISM’s negative-marking calculation.

Pacing and manual score worksheet

For a separate official-rule marking exercise, record correct, incorrect and unanswered responses. NISM specifies +1 for a correct one-mark response and −0.1 for an incorrect one; leave unanswered items at zero. Compute net marks = correct − 0.1 × incorrect, then divide by 150 for the percentage. For example, 100 correct, 40 incorrect and 10 unanswered give 96 net marks, or 64%. NISM’s published passing score is 90 net marks (60%). These are official scoring facts, not a validated prediction from this independent set.

Practice questions

Questions 1–25

Question 1

Topic: Equity Derivatives

A distributor reviews a client’s plain European call and put on the same non-dividend-paying share. Each option has a ₹1,000 strike price and three months to expiry. The share trades at ₹950.

In an immediate Black-Scholes revaluation, the annualised volatility input increases from 20% to 30%. The share price, risk-free rate and time to expiry remain unchanged.

How should the model premium of each option change?

• A. The call premium rises, and the put premium falls.
• B. The call premium falls, and the put premium rises.
• C. The call premium rises, and the put premium rises.
• D. The call premium stays unchanged, and the put premium stays unchanged.

Best answer: C

Explanation: Plain European calls and puts have positive vega, meaning their model values increase when volatility rises and other inputs remain fixed. Greater price dispersion increases the value of their asymmetric payoffs: holders benefit from favourable outcomes but need not exercise in unfavourable outcomes.

Here, the call is out of the money and the put is in the money, but both premiums rise when volatility increases from 20% to 30%. Their intrinsic values remain unchanged because the share price and strike price have not changed. Higher volatility represents greater price uncertainty, not a certain upward or downward price move.

Answer choices explained:

A — Incorrect: This treats higher volatility like a rising share price; with the share price unchanged, the put’s model value also increases.

B — Incorrect: This treats higher volatility like a falling share price; greater price uncertainty also increases the call’s model value.

C — Correct: Both plain options have positive vega, so increasing volatility raises each model value when the other inputs remain unchanged.

D — Incorrect: An unchanged share price preserves intrinsic value, not total premium; higher volatility increases the time value of both options.

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Question 2

Topic: Interest Rate Derivatives

On 31 July 2026, a client holds a Government of India bond and wants to protect its sale price against rising yields until Friday, 28 August 2026. The distributor must identify the earliest-expiring futures contract that remains tradable on the sale date, with no roll.

Fictional training specification, dated 31 July 2026:

• Underlying: The same Government of India security held by the client, quoted as a bond price per ₹100 face value.
• Trading cycle: Three consecutive monthly contracts. August, September and October 2026 contracts are available for this exercise.
• Expiry and last trading day: The last Thursday of the contract month, including 27 August and 24 September 2026.
• Settlement: Cash-settled. The final settlement value date is the next business day after expiry.

All relevant weekdays are business days, and trades can be executed. Ignore basis risk and costs.

Which position and scheduled final cash-settlement value date should the distributor identify?

• A. Sell the September futures; final cash settlement is on 24 September 2026.
• B. Buy the September futures; final cash settlement is on 25 September 2026.
• C. Sell the August futures; final cash settlement is on 28 August 2026.
• D. Sell the September futures; final cash settlement is on 25 September 2026.

Best answer: D

Explanation: For bond-price futures, rising yields imply lower underlying bond prices. A bondholder therefore sells futures to offset this price risk.

Contract selection must use the last trading day, not the final settlement value date. The August contract stops trading on 27 August, before the client’s planned sale. September is the earliest available maturity that remains tradable on 28 August.

The September contract expires on Thursday, 24 September, with final cash settlement on Friday, 25 September. The client plans to close the hedge on 28 August; 25 September is the scheduled final settlement date only for positions held to expiry. These illustrative terms do not establish actual exchange listing or liquidity.

Answer choices explained:

A — Incorrect: 24 September is the contract’s expiry and last trading day; its final cash-settlement value date is the following business day, 25 September.

B — Incorrect: These futures reference a bond price, which falls when yields rise, so buying increases rather than offsets the client’s bond-price exposure.

C — Incorrect: August expires on 27 August, so its 28 August settlement value date does not allow a tradable hedge through the client’s sale date.

D — Correct: Selling offsets the bond’s exposure to rising yields; September remains tradable on 28 August and settles one business day after its 24 September expiry.

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Question 3

Topic: Mutual Fund Distribution

An AMC reviews two distributors’ certification eligibility for SIF distribution on 1 October 2026.

Both hold Series V-A certificates valid through 30 June 2029. Neither holds Series V-D. All applicable non-certification requirements are satisfied.

Which conclusion applies under the legacy certification transition on the review date?

• A. Kabir qualifies under the legacy certification transition; Meera does not qualify.
• B. Neither Meera nor Kabir qualifies under the legacy certification transition.
• C. Meera qualifies under the legacy certification transition; Kabir does not qualify.
• D. Both Meera and Kabir qualify under the legacy certification transition.

Best answer: C

Explanation: The legacy transition permits a SIF distributor holding valid Series XIII obtained on or before 21 September 2026 to continue until that certificate expires, while also maintaining valid Series V-A.

Meera obtained Series XIII on the cutoff date, which is included. She can therefore continue under the transition through 20 September 2029, provided she maintains valid V-A. To use the full transition period, she must renew V-A before its stated expiry.

Kabir obtained Series XIII after the cutoff, so that certificate does not establish transition eligibility. He needs Series V-D for SIF distribution. A valid V-A certificate alone does not cover SIF distribution.

Answer choices explained:

A — Incorrect: The transition preserves qualifying certificates obtained on or before the cutoff, rather than admitting certificates first obtained after it.

B — Incorrect: Meera’s valid Series XIII and V-A certificates satisfy the transition, so she does not need V-D immediately.

C — Correct: Meera obtained Series XIII on the inclusive cutoff date and holds valid V-A; Kabir obtained Series XIII one day after the cutoff.

D — Incorrect: Kabir’s Series XIII certificate was obtained after 21 September 2026, so it does not qualify despite remaining valid.

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Question 4

Topic: Interest Rate Derivatives

An Indian AMC makes these debt-portfolio purchases:

• Government bond: It receives an allotment in a Government of India reopening auction offering an additional quantity of an outstanding bond under its existing ISIN.
• Corporate bond: It buys listed bonds on an exchange from an insurer that acquired them in the company’s original issue.

Both securities are new holdings for the AMC. How should the two purchases be classified?

• A. The government-bond purchase is secondary-market activity; the corporate-bond purchase is secondary-market activity.
• B. The government-bond purchase is primary-market activity; the corporate-bond purchase is primary-market activity.
• C. The government-bond purchase is secondary-market activity; the corporate-bond purchase is primary-market activity.
• D. The government-bond purchase is primary-market activity; the corporate-bond purchase is secondary-market activity.

Best answer: D

Explanation: Primary debt-market activity channels subscription money to the issuer through new or additional issuance. A government reopening auction is primary issuance even when the bond’s terms and ISIN already exist: additional bonds are issued and the government receives the proceeds.

Secondary-market activity transfers outstanding securities between investors. Here, the insurer receives the corporate-bond sale proceeds; the company receives no fresh financing from that trade. The resale provides investor liquidity and contributes to market-price discovery. Neither exchange trading nor a security being new to a buyer’s portfolio determines whether a transaction is primary or secondary.

Answer choices explained:

A — Incorrect: Using an existing ISIN does not make additional government issuance secondary trading; the reopening still raises fresh funds for the government.

B — Incorrect: The insurer receives the corporate-bond sale proceeds, so that purchase is secondary trading even though the AMC is acquiring its first holding.

C — Incorrect: The reopening issues additional government debt, whereas the insurer’s sale transfers existing corporate bonds between investors.

D — Correct: The auction raises fresh government funds through additional issuance; the corporate-bond trade transfers an existing holding from the insurer to the AMC.

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Question 5

Topic: Equity Derivatives

An investor holds the following equity-index call spread. Both options have the same expiry, and each illustrative contract represents 50 units. The quoted thetas are for long options, in rupees per unit per calendar day.

Using a constant-theta approximation with all other pricing inputs unchanged, what is the estimated mark-to-market effect on the combined position over the next two calendar days?

• A. A gain of ₹1,100.
• B. A gain of ₹300.
• C. A loss of ₹1,100.
• D. A loss of ₹300.

Best answer: B

Explanation: Theta measures an option’s local sensitivity to the passage of time, holding other pricing inputs constant. A quoted long-option theta changes sign when applied to a short position.

The spread’s daily theta per unit is \( -4 - (-7) = +3 \). Across 50 units and two calendar days, the estimated change is \( 3 \times 50 \times 2 = 300 \) rupees. The long call loses ₹400, while the short call’s liability decreases by ₹700, producing a net ₹300 gain.

This is a constant-theta estimate, not a guaranteed profit. Actual theta can change, and different option combinations can have different net time-decay effects.

Answer choices explained:

A — Incorrect: Adding both decay magnitudes as gains incorrectly treats the long call as short; the long call contributes a ₹400 loss.

B — Correct: The short call gains ₹700 as its liability falls, exceeding the long call’s ₹400 loss by ₹300.

C — Incorrect: Summing both negative quoted thetas treats both holdings as long positions; the short call’s time-decay contribution is positive.

D — Incorrect: This reverses the position signs: the long call loses ₹400, while the short call gains ₹700 over the two days.

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Question 6

Topic: Mutual Fund Distribution

A client buys mutual fund units and redeems the entire holding after 100 days.

• Purchase NAV: ₹20.00 per unit.
• Redemption NAV: ₹20.60 per unit.
• Cash distribution during the holding period: ₹0.40 per unit, retained as cash without interest.

Ignore taxes and assume no loads or transaction charges. Use a 365-day year and simple annualization for this short holding period.

What are the holding-period total return and the simple annualized return, respectively, rounded to two decimal places?

• A. Holding-period return of 5.00% and simple annualized return of 19.49%.
• B. Holding-period return of 3.00% and simple annualized return of 10.95%.
• C. Holding-period return of 2.00% and simple annualized return of 7.30%.
• D. Holding-period return of 5.00% and simple annualized return of 18.25%.

Best answer: D

Explanation: Holding-period total return includes both NAV appreciation and cash distributions. The distribution is added once to the gain; because it was retained as cash, no additional units or interest are included.

\[ R_{\mathrm{HP}} = \frac{20.60 - 20.00 + 0.40}{20.00} = 0.05 = 5.00\% \]

Simple annualization scales this return in proportion to the holding period:

\[ R_{\mathrm{annual}} = 0.05 \times \frac{365}{100} = 0.1825 = 18.25\% \]

A compounded annual equivalent instead uses \((1.05)^{365/100}-1\), giving approximately 19.49%. That is a different annualization method, not the simple method specified here. Neither annualized figure guarantees future performance.

Answer choices explained:

A — Incorrect: The 19.49% figure uses compounded annualization, calculated as \((1.05)^{365/100}-1\), rather than the specified simple annualization.

B — Incorrect: The 3.00% return includes only the NAV appreciation and omits the ₹0.40 cash distribution received per unit.

C — Incorrect: The 2.00% return counts the cash distribution alone and excludes the ₹0.60 per-unit increase in NAV.

D — Correct: The total gain is ₹1.00 per unit on ₹20.00 invested, and simple annualization gives \(5\% \times 365/100 = 18.25\%\).

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Question 7

Topic: Mutual Fund Distribution

A GST-registered mutual fund distributor reviews two clients’ investments for FY 2025-26 (AY 2026-27) under the Income-tax Act, 1961. Each client invests ₹50,000 in an eligible ELSS during the year.

• Ananya: Validly opts for the old tax regime and has ₹1,20,000 of other qualifying Section 80C payments.
• Bharat: Uses the new tax regime and has no other qualifying payments.

Both have sufficient eligible income and no other payments covered by the combined Section 80C, 80CCC and 80CCD(1) ceiling.

Separately, the distributor’s total March 2026 commission from all clients is ₹10,000, exclusive of GST. Apply GST at 18%; no exemption or reverse charge applies.

Which combination correctly states the additional Section 80C deduction attributable to each client’s ELSS investment and the distributor’s GST liability on its commission?

• A. Ananya: ₹30,000; Bharat: nil; GST: ₹18,000.
• B. Ananya: ₹50,000; Bharat: nil; GST: ₹1,800.
• C. Ananya: ₹30,000; Bharat: nil; GST: ₹1,800.
• D. Ananya: ₹30,000; Bharat: ₹50,000; GST: ₹1,800.

Best answer: C

Explanation: For FY 2025-26, eligible ELSS subscriptions qualify for Section 80C deduction under the old tax regime, subject to the combined ₹1,50,000 ceiling covering Sections 80C, 80CCC and 80CCD(1). Ananya’s existing payments leave ₹30,000 of capacity, so only that amount of her ₹50,000 ELSS subscription is deductible. Bharat receives no Section 80C deduction because he uses the new tax regime.

The distributor’s GST is a separate service-tax computation. Its taxable value is the ₹10,000 commission, not the amount clients invest. At the supplied 18% rate, GST is ₹1,800. Investor deduction limits do not determine the distributor’s GST base.

Answer choices explained:

A — Incorrect: GST applies to the ₹10,000 distribution commission, not the clients’ combined ₹1,00,000 ELSS subscriptions.

B — Incorrect: Ananya has only ₹30,000 remaining within the ₹1,50,000 combined ceiling, so her entire ₹50,000 ELSS investment cannot be deducted.

C — Correct: Ananya’s remaining deduction capacity is ₹30,000, Bharat cannot claim Section 80C under the new regime, and GST is 18% of ₹10,000.

D — Incorrect: Bharat cannot claim Section 80C under the new tax regime, even though ELSS subscriptions qualify for that deduction under the old regime.

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Question 8

Topic: Equity Derivatives

A client forecasts that an equity-index futures price will rise from 25,000 today to 26,000 at expiry. She wants the largest long position that remains fundable throughout the hypothetical stress path below.

Contract and funding terms:

• Lot size: 50 index units, giving a gain or loss of ₹50 per index point per contract.
• Total available cash: ₹11 lakh, with no borrowing or additional funds.
• Initial margin: ₹1 lakh per contract, blocked until expiry. Daily mark-to-market losses must be paid separately in cash.
• Ignore costs, interest and changes in margin requirements.

Stress path: Prices after entry are daily settlement prices.

What is the maximum number of contracts she can buy and hold to expiry without a funding shortfall under this path?

• A. 7 contracts
• B. 11 contracts
• C. 5 contracts
• D. 6 contracts

Best answer: C

Explanation: Futures funding depends on interim cash obligations, not just the expected expiry profit. Each contract has an initial notional exposure of ₹12.5 lakh, but its cash requirement consists of blocked initial margin and daily settlement payments.

The first decline causes a loss of \(800 \times 50 = 40,000\) rupees per contract. The next decline adds \(1,200 \times 50 = 60,000\) rupees. At the trough, cumulative losses are ₹1 lakh per contract, in addition to ₹1 lakh of blocked margin.

Peak funding is therefore ₹2 lakh per contract. The ₹11 lakh budget supports five whole contracts, requiring ₹10 lakh. Their eventual ₹2.5 lakh profit cannot finance settlement losses payable before the recovery.

Answer choices explained:

A — Incorrect: Seven contracts can fund initial margin and the first day’s loss, but the second day’s additional settlement payment exceeds the remaining cash.

B — Incorrect: Eleven contracts use all ₹11 lakh for initial margin, leaving no cash to pay the first daily settlement loss.

C — Correct: Each contract requires ₹1 lakh of blocked margin plus ₹1 lakh of cumulative losses at the trough, so five contracts require ₹10 lakh.

D — Incorrect: Six contracts require ₹12 lakh at the trough; counting only the largest single-day loss overlooks cash already paid for the earlier loss.

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Question 9

Topic: Mutual Fund Distribution

A client has earmarked ₹18 lakh for a payment due in nine months, but it could be brought forward to three months. There is no separate reserve for this payment. Avoiding a funding shortfall takes priority over earning a higher yield. The client expects interest rates to fall but recognises that they could rise.

The following fictional debt strategies permit daily redemptions under normal conditions and have no exit load. The ultra-short-duration strategy currently has the highest portfolio yield.

For comparing rate sensitivity, consider an immediate parallel rise of 1 percentage point in yields, ignoring carry and convexity.

Which strategy is most suitable for this goal?

• A. The gilt strategy.
• B. The money-market strategy.
• C. The short-duration debt strategy.
• D. The ultra-short-duration debt strategy.

Best answer: B

Explanation: Debt selection should reflect the earliest likely withdrawal, credit exposure and tolerance for NAV fluctuations, rather than a rate forecast or the highest yield.

For a 1 percentage-point yield rise, the approximate immediate price declines are 1.8%, 0.6%, 0.3% and 5.2%, respectively. The money-market strategy combines relatively low rate sensitivity with high-quality short-term holdings, making it the strongest fit among these strategies.

The smallest duration does not necessarily mean the lowest overall risk: weaker corporate credit can introduce spread widening, default and liquidity risks. Similarly, daily redemption availability does not guarantee a stable NAV or liquid underlying securities during stress. Expected rate cuts should not override the client’s near-term funding priority.

Answer choices explained:

A — Incorrect: Government securities limit default risk, but the 5.2-year modified duration implies an approximately 5.2% immediate price decline under the assumed yield rise.

B — Correct: Its estimated rate-shock loss is approximately 0.6%, while high-quality short-term holdings provide the best combined fit for the possible three-month withdrawal.

C — Incorrect: AAA holdings provide high credit quality, but the 1.8-year modified duration implies an approximately 1.8% immediate price decline, increasing early-withdrawal risk.

D — Incorrect: Its lower duration reduces rate sensitivity, but predominantly AA holdings introduce greater credit and stressed-liquidity risks that the higher yield does not remove.

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Question 10

Topic: Mutual Fund Distribution

A fictional mutual fund scheme has the following draft end-of-day figures:

An accountant identifies ₹12 lakh of operating expenses already incurred but omitted from the accounts. Payment is due next month. All other figures are correct, and units outstanding remain unchanged. Use 1 crore = 100 lakh.

What should the corrected net assets and NAV per unit be?

• A. Net assets of ₹186.12 crore and NAV of ₹31.02 per unit.
• B. Net assets of ₹185.76 crore and NAV of ₹30.96 per unit.
• C. Net assets of ₹185.88 crore and NAV of ₹30.98 per unit.
• D. Net assets of ₹186.00 crore and NAV of ₹31.00 per unit.

Best answer: C

Explanation: Expenses must be recognised when incurred, even if payment occurs later. An omitted expense accrual understates liabilities and therefore overstates net assets and NAV.

The ₹12 lakh expense equals ₹0.12 crore. Corrected liabilities are ₹14.12 crore, while assets remain ₹200.00 crore because payment has not occurred. Corrected net assets are therefore ₹185.88 crore.

\[ \text{NAV} = \frac{\text{Net assets}}{\text{Units outstanding}} = \frac{185.88\text{ crore rupees}}{6\text{ crore units}} = 30.98\text{ rupees per unit} \]

The draft NAV of ₹31.00 was overstated by ₹0.02 per unit. Accruing the expense does not change units outstanding.

Answer choices explained:

A — Incorrect: Adding the omitted expense to net assets reverses the effect of an accrued liability; net assets and NAV must decrease.

B — Incorrect: These figures deduct ₹24 lakh, twice the omitted expense; an unpaid accrual increases liabilities without also reducing cash.

C — Correct: Accruing ₹12 lakh increases liabilities by ₹0.12 crore, reducing net assets to ₹185.88 crore and NAV to ₹30.98.

D — Incorrect: Keeping the draft figures defers recognition until payment, although expenses already incurred must be accrued at the valuation date.

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Question 11

Topic: Equity Derivatives

A distributor reviews the same equity-index futures contract over two sessions, with no rollover. Before Session 1, its closing price was 22,000 points and open interest was 100,000 contracts. Volume and open interest below are in contracts.

A client comments:

The larger volume means fresh longs dominated both sessions, so the price must rise again.

Which assessment is best supported?

• A. The pattern suggests long build-up, then short covering; higher volume does not establish that the next price move will be upward.
• B. The pattern suggests long build-up, then short covering; higher volume confirms that the next price move will be upward.
• C. The pattern suggests long build-up in both sessions; higher volume does not establish that the next price move will be upward.
• D. The pattern suggests short covering, then long build-up; higher volume does not establish that the next price move will be upward.

Best answer: A

Explanation: Open interest measures outstanding contracts, whereas volume measures contracts traded during a session. In Session 1, price rises while open interest increases from 100,000 to 112,000, conventionally suggesting long build-up. In Session 2, price rises again while open interest falls to 104,000, conventionally suggesting short covering.

The second session’s volume of 180,000 contracts can include both opening and closing transactions. Higher volume therefore does not mean that outstanding positions increased.

These patterns are evidence consistent with positioning, not proof of individual traders’ motives or a deterministic trading signal. Every outstanding futures contract has both a long and a short side. Price, volume and open interest alone cannot guarantee the next market move.

Answer choices explained:

A — Correct: Rising prices with increasing open interest suggest long build-up, while rising prices with decreasing open interest suggest short covering; neither guarantees continuation.

B — Incorrect: Higher volume measures trading activity, not certainty about future direction; even a correctly interpreted positioning sequence cannot guarantee another price rise.

C — Incorrect: Session 2’s falling open interest indicates net contract closures, so its rising price is conventionally associated with short covering rather than fresh long build-up.

D — Incorrect: Session 1 adds outstanding contracts while Session 2 removes them; this interpretation reverses the conventional readings of their price and open-interest movements.

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Question 12

Topic: Interest Rate Derivatives

An institutional client has a ₹7.5 crore floating-rate loan that resets on 18 November 2026, with interest payable on 18 February 2027. It seeks protection against rates above 7.10%.

Early repayment is possible, so the client’s priority is prompt hedge reduction through an active market. It accepts modest date, strike and rounded-lot mismatches. Both alternatives’ credit and collateral arrangements are acceptable.

Illustrative contract terms: The listed product is theoretical. It offers calls and puts on a cash-settled three-month rate future quoted as \(100-R\), where \(R\) is the annualised reference rate expressed in percent. OTC calls and puts are directly on the same reference rate.

Listed trades are centrally cleared and have an active offsetting market. OTC trades are bilateral under a collateral agreement; early unwind requires a bank-agreed quote. Premium differences are not material to the decision.

Which position best meets the client’s priority while protecting against a rise in its borrowing rate?

• A. Buy listed puts at a strike of 93.00 using rounded whole lots.
• B. Buy a bespoke OTC rate call at 7.10% on ₹7.5 crore.
• C. Buy listed calls at a strike of 93.00 using rounded whole lots.
• D. Buy a bespoke OTC rate put at 7.10% on ₹7.5 crore.

Best answer: A

Explanation: Standardised listed options can be preferable when ease of resizing or exit matters more than an exact cash-flow match. Here, the client explicitly accepts the listed contract’s date, strike and whole-lot mismatches and prioritises an active offsetting market.

Because the futures quote is \(100-R\), rising rates reduce its price. A put on that future therefore provides the required protection; a strike of 93.00 corresponds to a reference rate of 7.00%.

A bespoke OTC rate call, or caplet, would match the ₹7.5 crore notional, 7.10% strike and borrowing dates more closely. However, customisation does not create exchange-style liquidity: early termination depends on a bank-agreed quote. Collateral manages bilateral credit exposure but does not remove this exit trade-off.

Answer choices explained:

A — Correct: Puts benefit when rising rates lower the futures quote, and the active offsetting market serves the client’s exit priority despite accepted mismatches.

B — Incorrect: The rate call closely matches the borrowing and protects against rising rates, but bank-negotiated unwind is less aligned with the client’s exit priority.

C — Incorrect: A rise in the reference rate lowers the futures quote, so calls on that future protect against the opposite rate movement.

D — Incorrect: The rate put benefits from falling rates rather than the rising rates that increase the client’s borrowing cost.

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Question 13

Topic: Interest Rate Derivatives

A SIF portfolio team checks the settlement price of a bond purchase using these fictional trade details:

• Clean price: ₹99.60 per ₹100 face value.
• Coupon: 7.20% per annum, paid half-yearly.
• Previous coupon date: 1 April 2026; next coupon date: 1 October 2026.
• Settlement date: 1 June 2026.
• Day-count basis: 30/360, giving 60 elapsed days in a 180-day coupon period.

The buyer is entitled to the next coupon. Ignore transaction fees and taxes.

What are the accrued interest and dirty price per ₹100 face value on settlement?

• A. Accrued interest ₹1.20; dirty price ₹104.40.
• B. Accrued interest ₹3.60; dirty price ₹103.20.
• C. Accrued interest ₹2.40; dirty price ₹102.00.
• D. Accrued interest ₹1.20; dirty price ₹100.80.

Best answer: D

Explanation: The clean price excludes accrued interest. The dirty price adds the interest earned since the previous coupon date to determine the settlement amount before fees and taxes.

The half-yearly coupon per ₹100 face value is \(100 \times 0.072/2 = 3.60\). Using the stated day-count basis:

\[ \text{Accrued interest} = 3.60 \times \frac{60}{180} = 1.20 \]

Therefore, the dirty price is ₹99.60 + ₹1.20 = ₹100.80 per ₹100 face value. The accrued-interest payment compensates the seller for the elapsed portion of the coupon period. Although the buyer receives the next full coupon, that coupon is not added separately to the settlement price.

Answer choices explained:

A — Incorrect: This adds the full ₹3.60 coupon as well as accrued interest, overstating the amount payable at settlement.

B — Incorrect: The full half-yearly coupon of ₹3.60 has not accrued; only 60 of the 180 days have elapsed.

C — Incorrect: Using the annual coupon for a half-year coupon period doubles accrued interest; the period’s coupon is ₹3.60, not ₹7.20.

D — Correct: Accrued interest is \(3.60 \times 60/180 = 1.20\), which is added to the ₹99.60 clean price.

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Question 14

Topic: Equity Derivatives

A mutual-fund distributor reviews option activity after an equity index declines over five trading sessions. The figures cover the same index, expiry and fixed set of strikes. Open interest (OI) is measured at each session’s close; volume counts contracts traded during that session.

Which interpretation of the change in outstanding option positioning and its price implications is most defensible?

• A. Volume PCR fell from 1.40 to 0.70, indicating relatively less put-heavy outstanding positions; the next price move remains uncertain.
• B. OI PCR rose from 0.80 to 1.20, indicating relatively more put-heavy outstanding positions; a bullish price reversal is confirmed.
• C. OI PCR rose from 0.80 to 1.20, indicating relatively more put-heavy outstanding positions; the next price move remains uncertain.
• D. OI PCR fell from 1.25 to 0.83, indicating relatively less put-heavy outstanding positions; the next price move remains uncertain.

Best answer: C

Explanation: The put-call ratio divides put contracts by call contracts, using a consistent measure and comparison universe. Here, OI PCR rises from 0.80 to 1.20, showing that outstanding positions became more put-heavy relative to calls.

Volume PCR instead falls from 1.40 to 0.70. This describes the two sessions’ trading activity, not the positions remaining outstanding. Volume and OI ratios can therefore move in opposite directions without contradiction.

PCR can contribute to sentiment analysis, but it is not a guaranteed reversal signal. Put activity may reflect protection, speculation or option writing. A contrarian interpretation requires context; these totals alone do not establish that the index’s preceding decline will reverse.

Answer choices explained:

A — Incorrect: Volume measures trading during a session, not contracts outstanding, so its falling PCR does not establish reduced relative put open interest.

B — Incorrect: Higher relative put OI describes outstanding positioning but cannot confirm a bullish reversal or establish why participants hold those positions.

C — Correct: Put OI relative to call OI increased from 0.80 to 1.20, but this positioning measure does not establish the next price direction.

D — Incorrect: The figures 1.25 and 0.83 divide call OI by put OI, reversing the numerator and denominator required for the put-call ratio.

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Question 15

Topic: Mutual Fund Distribution

A distributor discusses two suitable equity mutual fund schemes with a client and recommends Nila’s regular plan. A fictional proposal provides these annual rates:

For a one-year illustration, assume average assets of ₹10 lakh in whichever regular plan is selected, unchanged rates, no exit load and no separately charged distribution fee. The distributor receives no other compensation.

The distributor tells the client:

“The AMC pays my commission, so it does not affect the return reflected in your NAV.”

Which statement most accurately corrects this cost-and-commission communication?

• A. Nila’s total annual plan cost is ₹16,000, including ₹5,000 of distributor commission; Tara’s commission would be ₹3,000.
• B. Nila’s total annual plan cost is ₹11,000, with ₹5,000 commission absorbed separately by the AMC; Tara’s commission would be ₹3,000.
• C. Nila’s total annual plan cost is ₹21,000, with ₹5,000 commission additional to its TER; Tara’s commission would be ₹3,000.
• D. Nila’s total annual plan cost is ₹16,000, including ₹6,500 of distributor commission; Tara’s commission would be ₹3,500.

Best answer: A

Explanation: Regular-plan expenses reduce NAV and therefore investor returns. Commission paid by the AMC is not cost-free to the investor merely because there is no separate debit.

For average assets of ₹10 lakh, Nila’s 1.60% TER represents ₹16,000 in annual expenses. Its 0.50% trail represents ₹5,000 of distributor compensation already included in those expenses. Tara’s 0.30% trail would provide ₹3,000, making the compensation difference relevant to transparent disclosure.

Commission should neither be added again to TER-based expenses nor subtracted when describing the investor’s total cost. Also, the regular-direct TER gap need not equal the particular distributor’s commission. Compensation disclosure should use the stated commission rates, not infer remuneration from that gap.

Answer choices explained:

A — Correct: Applying the disclosed rates to ₹10 lakh gives ₹16,000 in Nila’s expenses and comparative commissions of ₹5,000 and ₹3,000.

B — Incorrect: AMC payment does not remove commission from investor-borne regular-plan expenses, so subtracting it from ₹16,000 understates the cost.

C — Incorrect: Adding ₹5,000 commission to the ₹16,000 TER-based expense double-counts compensation already included in regular-plan expenses.

D — Incorrect: The regular-direct TER differences measure plan expense differences, not this distributor’s compensation; the disclosed trail rates determine commission.

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Question 16

Topic: Equity Derivatives

A trader evaluates a cash-and-carry trade using an illustrative, physically settled stock futures contract. One contract covers 1,000 shares and expires in exactly 0.25 year.

These quotes are executable for the full lot:

• The entire spot purchase is financed at a fixed 12% per annum simple interest, with principal and interest payable at expiry.
• Shares bought now qualify for a certain ₹6-per-share dividend, received at expiry.
• The shares can be delivered against the short futures. Adequate margin funding is available.
• All execution, statutory, settlement and margin-funding costs total ₹2,000, payable at expiry. Ignore income tax and any other costs.

What net profit or loss is locked in at expiry by executing the one-contract cash-and-carry trade?

• A. A net loss of ₹2,000.
• B. A net profit of ₹7,000.
• C. A net profit of ₹6,000.
• D. A net profit of ₹4,000.

Best answer: D

Explanation: Cash-and-carry involves buying shares at the spot ask and selling futures at the futures bid. The purchase costs ₹800 per share. Simple financing interest is \(800 \times 0.12 \times 0.25 = 24\) rupees per share.

The futures position and delivery lock in a selling value of ₹824 per share, while the trader retains the ₹6 dividend. The surplus before fixed costs is therefore \(824 + 6 - 800 - 24 = 6\) rupees per share.

For 1,000 shares, the surplus is ₹6,000. Deducting the ₹2,000 all-in costs leaves a locked-in net profit of ₹4,000. The stated delivery and margin-funding facilities make the transactions feasible.

Answer choices explained:

A — Incorrect: A ₹2,000 loss results from omitting the ₹6,000 dividend receivable on the 1,000 purchased shares.

B — Incorrect: ₹7,000 uses the futures ask of ₹827, whereas opening the short futures position requires selling at the ₹824 bid.

C — Incorrect: ₹6,000 is the surplus after financing and dividend income, before deducting the fixed ₹2,000 costs.

D — Correct: The executable purchase and sale prices produce ₹6,000 after interest and dividend income; deducting ₹2,000 costs leaves ₹4,000.

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Question 17

Topic: Interest Rate Derivatives

A client buys two European call contracts on a bond’s price. The contract is theoretical and cash-settled. Bond prices, strike and premium are quoted in points per ₹100 face value.

• Bond price when the calls are bought: 102.00
• Strike price: 100.00
• Premium paid: 2.50 points per contract
• Contract multiplier: ₹1,000 per price point
• Bond settlement price at expiry: 101.50

Market yields rose during the holding period. Ignore transaction costs and interest on the premium.

What are the client’s total expiry payoff and net profit or loss across both contracts?

• A. Payoff ₹4,000; net loss ₹1,000.
• B. Payoff ₹3,000; net loss ₹2,000.
• C. Payoff ₹3,000; net profit ₹3,000.
• D. Payoff ₹0; net loss ₹5,000.

Best answer: B

Explanation: A call on a bond’s price pays the positive difference between the expiry settlement price and the strike, multiplied by the contract multiplier and number of contracts. It does not pay the change from the bond’s purchase-date price.

The total payoff is \( (101.50-100.00) \times 1{,}000 \times 2 = 3{,}000 \) rupees. The total premium paid is \( 2.50 \times 1{,}000 \times 2 = 5{,}000 \) rupees. Therefore, the client incurs a net loss of ₹2,000.

Rising yields generally reduce a fixed-rate bond’s price, but the call’s payoff rule remains unchanged. Here, the call finishes in the money, yet its payoff is insufficient to recover the premium.

Answer choices explained:

A — Incorrect: ₹4,000 uses the purchase-date bond price of 102.00; the call’s expiry payoff must use the settlement price of 101.50.

B — Correct: The 1.50-point intrinsic value yields ₹3,000 across two contracts; subtracting the ₹5,000 premium gives a ₹2,000 loss.

C — Incorrect: ₹3,000 is the gross expiry payoff; ignoring the ₹5,000 premium incorrectly treats that payoff as net profit.

D — Incorrect: Higher yields do not automatically make a bond-price call worthless; the expiry settlement price of 101.50 remains above the 100.00 strike.

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Question 18

Topic: Equity Derivatives

A trader compares two alternative short positions in illustrative European-style, cash-settled index puts. Both have the same expiry, and the contract multiplier is ₹50 per index point.

The index settles at 19,700. Assess each position separately and ignore interest, margin-funding costs, taxes and transaction costs.

Which comparison correctly states the writer’s net profit or loss, including premiums received?

• A. The 20,000-strike position has a net profit of ₹15,000; the 19,800-strike position has a net loss of ₹5,000.
• B. The 20,000-strike position has a net loss of ₹15,000; the 19,800-strike position has a net profit of ₹3,000.
• C. The 20,000-strike position has a net loss of ₹45,000; the 19,800-strike position has a net loss of ₹25,000.
• D. The 20,000-strike position has a net loss of ₹15,000; the 19,800-strike position has a net profit of ₹5,000.

Best answer: D

Explanation: For a written put, subtract expiry intrinsic value from premium, then multiply by the contract multiplier and contract count. Put intrinsic value is the positive excess of strike over the expiry settlement level.

• Strike 20,000: intrinsic value is 300 points. Net result is \( (200 - 300) \times 50 \times 3 = -15,000 \) rupees.
• Strike 19,800: intrinsic value is 100 points. Net result is \( (120 - 100) \times 50 \times 5 = 5,000 \) rupees.

Both positions initially collect ₹30,000, but equal premium receipts do not mean equal contract quantities. Both puts finish in the money, yet the lower-strike writer remains profitable because the premium exceeds the settlement obligation.

Answer choices explained:

A — Incorrect: These are the buyers’ results; the writer receives premium and pays the expiry intrinsic value, reversing both signs.

B — Incorrect: A ₹3,000 profit uses three lower-strike contracts; the stated position contains five contracts and earns ₹5,000.

C — Incorrect: ₹45,000 and ₹25,000 are settlement payments, not net losses; each position also received ₹30,000 in premiums.

D — Correct: Each position receives ₹30,000, while settlement payments are ₹45,000 and ₹25,000 respectively, producing the stated loss and profit.

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Question 19

Topic: Equity Derivatives

A portfolio manager needs a ₹6.4 crore equity-index hedge for 47 days, but the portfolio may be sold sooner. For this hypothetical comparison, assume:

• Listed index futures: The nearest whole-lot hedge is ₹6.3 crore, expiring in 63 days. Active two-way trading provides sufficient quoted depth for this position.
• Bilateral index forward: The notional is ₹6.4 crore and maturity is 47 days. Early termination requires the dealer’s agreement on a close-out amount. The contract cannot be transferred.

Both contracts are cash-settled. The manager accepts the small notional mismatch and prioritises practical early exit over an exact contractual match. Which assessment best supports the decision?

• A. The tailored forward is preferable: cash settlement allows unilateral early termination at fair market value while preserving the exact initial hedge match.
• B. The listed futures are preferable: an offsetting trade offers a market-based exit route, despite the imperfect notional and maturity match.
• C. The listed futures are preferable: their cash-settlement feature permits the manager to reset the contractual maturity to the portfolio’s sale date.
• D. The tailored forward is preferable: a reversing forward with another dealer cancels the original contract and provides equivalent early-exit flexibility.

Best answer: B

Explanation: Customization and exit flexibility are separate attributes. A bilateral forward can match an unusual notional and maturity precisely, but early termination depends on its contractual terms and the dealer’s agreement on pricing.

A short futures hedge against a long equity portfolio can be closed by buying matching contracts rather than waiting until expiry. Here, active two-way trading and acceptance of the ₹10 lakh initial notional mismatch favour listed futures. Their later expiry does not prevent an earlier offsetting trade. This offers a practical exit route, not a guarantee of future liquidity or a particular execution price. The forward’s exact match does not overcome its negotiated early-termination requirement.

Answer choices explained:

A — Incorrect: Cash settlement determines how obligations are settled, not a unilateral termination right; the forward still requires dealer agreement for early termination.

B — Correct: The short futures hedge can be closed by purchasing matching contracts; the quoted market depth supports this route, subject to execution risk.

C — Incorrect: Cash settlement does not make contractual maturity adjustable; the futures retain their standard expiry even when the position is closed earlier.

D — Incorrect: An opposite forward with another dealer may offset market exposure, but the original bilateral contract and its counterparty obligations remain outstanding.

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Question 20

Topic: Equity Derivatives

An investor enters an illustrative protective-put strategy by buying 1,000 shares at ₹240 each and two European put contracts covering 500 shares each. Both puts have the same expiry, a strike price of ₹230 and a premium of ₹6 per share.

The investor holds both positions to expiry. Measure profit or loss against the total initial cash outlay, including the premium. Ignore dividends, transaction costs and the time value of money.

Which pair correctly states the maximum possible loss at expiry and the net profit if the share price at expiry is ₹270?

• A. Maximum loss: ₹16,000; net profit at ₹270: ₹24,000.
• B. Maximum loss: ₹16,000; net profit at ₹270: ₹30,000.
• C. Maximum loss: ₹10,000; net profit at ₹270: ₹24,000.
• D. Maximum loss: ₹10,000; net profit at ₹270: ₹30,000.

Best answer: A

Explanation: A protective put establishes an expiry value floor at the put’s strike price, not at the original share purchase price. The initial cost is ₹246 per covered share: ₹240 for the share plus ₹6 for the put.

Below ₹230, the put payoff offsets further declines in the shares. The maximum loss is therefore ₹246 minus ₹230, or ₹16 per share. Across 1,000 shares, this is ₹16,000.

At ₹270, the puts expire worthless. Net profit is ₹270 minus ₹246, or ₹24 per share, totalling ₹24,000. The ₹6,000 premium is the cost of protection and reduces returns at every expiry share price.

Answer choices explained:

A — Correct: The ₹246 initial cost per covered share produces a maximum loss of ₹16 at the ₹230 floor and a ₹24 profit at ₹270.

B — Incorrect: The maximum loss includes the premium, but the ₹30,000 profit omits the ₹6,000 cost of the expired puts.

C — Incorrect: The profit correctly deducts the premium, but the maximum loss must include both the ₹10 share-price decline and the ₹6 premium per share.

D — Incorrect: Both figures exclude the ₹6,000 premium, which increases the maximum loss and reduces the profit at ₹270.

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Question 21

Topic: Mutual Fund Distribution

A distributor reviews a fictional SIF strategy’s portfolio disclosure published on 9 December 2026. Its portfolio as-of date is 30 November 2026, and net assets are ₹100 crore.

For this review, gross concentration includes securities at market value and long futures at underlying notional, aggregated by issuer and sector. All issuers listed below belong to the financial sector.

The remaining assets are ₹40 crore in non-financial securities and ₹20 crore in cash.

Which statement correctly reports the portfolio date and both concentrations as percentages of net assets?

• A. As at 30 November 2026: Savera Bank 20%; financial sector 44%.
• B. As at 9 December 2026: Savera Bank 24%; financial sector 48%.
• C. As at 30 November 2026: Savera Bank 16%; financial sector 40%.
• D. As at 30 November 2026: Savera Bank 24%; financial sector 48%.

Best answer: D

Explanation: Concentration aggregates exposure to the same issuer or sector across instruments. Under the stated measure, Savera Bank’s shares, bonds and long futures all count.

In crore, its issuer exposure is \(12 + 4 + 8 = 24\). Financial-sector exposure is \(24 + 15 + 9 = 48\). Dividing each by net assets of ₹100 crore gives 24% and 48%, respectively. These are position exposures, not contributions to investment returns.

The figures describe holdings as at 30 November 2026, not the publication date. SIF portfolio disclosure applies at alternate-month ends, including November, and is due within ten calendar days. Publication on 9 December meets that schedule but does not establish the portfolio’s composition on that later date.

Answer choices explained:

A — Incorrect: These figures exclude Savera Bank’s ₹4 crore bonds, although debt and equity positions both contribute to issuer and sector concentration.

B — Incorrect: The percentages are accurate, but they describe the portfolio on 30 November; publication on 9 December does not update the holdings date.

C — Incorrect: These figures omit the ₹8 crore long-futures notional, which adds exposure to both Savera Bank and the financial sector.

D — Correct: Savera Bank exposure totals ₹24 crore, and financial-sector exposure totals ₹48 crore, representing 24% and 48% of ₹100 crore net assets.

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Question 22

Topic: Interest Rate Derivatives

An investor holds bonds with a face value of ₹20 lakh (₹20,00,000) and buys a European, cash-settled put covering that entire face value. This illustrative contract is based on the bond’s clean price. All quotes below are per ₹100 face value.

Market yields rise over the period. Ignore financing costs, taxes and transaction charges.

What are the put’s cash payoff at expiry and the buyer’s net profit after premium, excluding the bond holding’s own gain or loss?

• A. Cash payoff ₹80,000; net profit ₹80,000.
• B. Cash payoff ₹80,000; net profit ₹55,000.
• C. Cash payoff ₹0; net profit -₹25,000.
• D. Cash payoff ₹1,20,000; net profit ₹95,000.

Best answer: B

Explanation: A put on a bond price provides protection when that price falls below the strike. Its intrinsic value at expiry is \(\max(100-96,0)=4\) rupees per ₹100 face value. The ₹20 lakh face value contains 20,000 blocks of ₹100.

• Cash payoff: \(4\times20{,}000=80{,}000\), or ₹80,000.
• Premium paid: \(1.25\times20{,}000=25{,}000\), or ₹25,000.
• Net profit: \(80{,}000-25{,}000=55{,}000\), or ₹55,000.

The initial ₹102 bond price does not determine the exercise payoff. Rising yields are consistent with falling bond prices, but this contract references the bond’s price, not its yield. These figures describe the put alone, not the combined bond-and-put position.

Answer choices explained:

A — Incorrect: The cash payoff is ₹80,000, but net profit must deduct the ₹25,000 premium paid to purchase the put.

B — Correct: The ₹4 intrinsic value per ₹100 face produces ₹80,000; deducting the total premium of ₹25,000 leaves ₹55,000.

C — Incorrect: The bond price finishes below the strike, so the price-based put has a positive payoff despite the rise in market yields.

D — Incorrect: This uses the decline from ₹102 to ₹96; the put’s payoff instead depends on the ₹100 strike minus the expiry price.

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Question 23

Topic: Interest Rate Derivatives

An Indian company will draw a rupee loan in three months. Its borrowing rate will be fixed at drawdown using a bank lending benchmark plus a company-specific credit spread.

For this theoretical illustration, an exchange-traded futures contract on the price of a Government of India bond expires at drawdown. The company has broker access, can observe executable exchange quotations and can meet margin calls.

The bank benchmark generally moves with government-bond yields, but not by identical amounts. The company’s credit spread may also change.

Which recommendation best uses the futures contract to hedge rising borrowing costs?

• A. Use short futures as a standardised, centrally cleared lock on the entire borrowing rate, retaining risk from daily margin funding.
• B. Use long futures as a transparently priced, broker-accessible hedge, retaining basis risk from benchmark differences and credit-spread changes.
• C. Use short futures as a transparently priced hedge of the company’s credit spread, retaining risk from bank-benchmark rate movements.
• D. Use short futures as a transparently priced, broker-accessible hedge, retaining basis risk from benchmark differences and credit-spread changes.

Best answer: D

Explanation: Exchange trading provides visible executable prices, standardised contracts and access through brokers. These features can make hedging practical even when the company’s exact loan terms are not traded.

Because the contract is based on a bond price, rising government yields generally lower the futures price. A short futures position can therefore generate gains when borrowing rates rise, partly offsetting higher funding costs.

This remains a proxy hedge. The bank benchmark may move differently from government yields, and the company’s credit spread can change independently. These differences leave basis risk. Central clearing supports performance of the futures contract; it does not lock the company’s complete borrowing rate. Daily margin settlement also creates cash-flow requirements, even when the hedge is economically appropriate.

Answer choices explained:

A — Incorrect: Central clearing supports futures-contract performance; it does not eliminate differences between government yields, the bank benchmark and the company’s credit spread.

B — Incorrect: Rising government-bond yields generally reduce bond-price futures prices, so a long position would lose rather than offset higher borrowing costs.

C — Incorrect: Government-bond futures hedge general interest-rate exposure rather than changes in an individual company’s credit spread.

D — Correct: Short bond-price futures can offset rising borrowing costs, while differing benchmark movements and company-specific spread changes prevent an exact rate lock.

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Question 24

Topic: Mutual Fund Distribution

A distributor reviews a proposed ₹100 crore mutual fund portfolio.

• Investment objective: Earn returns primarily from cash-futures spreads, with limited directional equity-market exposure.
• Permitted universe: Cash equities, exchange-traded stock and index futures and options, and money-market instruments.
• Proposed holdings: ₹70 crore in 12 stocks and ₹30 crore in Treasury bills and cash. The stock basket does not replicate the index.
• Market assumptions: Executable one-month futures prices for every stock exceed corresponding cash prices by more than all carrying and transaction costs. No dividends are due before expiry, and adequate collateral is available.

Which one-month derivatives overlay would best align the holdings with the stated mandate?

• A. Sell index futures for a notional equal to the stock basket’s value.
• B. Buy at-the-money puts on each held stock, matching the share quantities.
• C. Sell futures on each held stock, matching the quantities of shares held.
• D. Sell at-the-money calls on each held stock, matching the share quantities.

Best answer: C

Explanation: A fund’s mandate concerns its intended return source and economic exposure, not just its permitted instruments. Cash-futures arbitrage pairs shares with short futures on the same stocks in matching quantities. At expiry, settlement links the futures position to the underlying shares, allowing the initial spread to be realised while stock-price movements offset across the two legs.

Here, executable spreads exceed carrying and transaction costs, making the matched stock-futures overlay consistent with the objective. Treasury bills and cash support liquidity and collateral needs. The hedge reduces directional equity risk; it does not remove operational, liquidity or margin-funding risk.

Answer choices explained:

A — Incorrect: An index hedge leaves basket-to-index basis risk because the holdings do not replicate the index; it does not lock in the individual stocks’ cash-futures spreads.

B — Incorrect: Protective puts limit downside below their strikes but retain directional upside and require premiums; they do not capture cash-futures spreads.

C — Correct: Matching each cash holding with short futures on the same stock captures the positive spread while offsetting stock-price movements.

D — Incorrect: Covered calls earn option premiums but retain substantial downside exposure in the shares, rather than locking in cash-futures spreads.

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Question 25

Topic: Equity Derivatives

During a client discussion, a distributor uses an illustration of a single equity option held to expiry. Its strike price is ₹1,000 and its premium is ₹40 per share.

The table shows net profit, including the premium paid or received. Ignore transaction costs and taxes.

Which position produces this profit profile?

• A. Buying a call option.
• B. Writing a put option.
• C. Writing a call option.
• D. Buying a put option.

Best answer: B

Explanation: A put writer receives the premium and bears the put’s intrinsic value at expiry. With strike price \(K\), expiry share price \(S_T\), and premium \(p\), net profit per share is:

\[ \text{Net profit} = p - \max(K - S_T, 0) \]

At ₹1,000 or above, the put expires worthless and the writer keeps ₹40. At ₹900, intrinsic value is ₹100, producing a net loss of ₹60. At ₹980, intrinsic value is ₹20, leaving ₹20 profit. The flat profit above the strike and declining profit below it identify a short put. Including the premium distinguishes net profit from payoff before premium.

Answer choices explained:

A — Incorrect: A call buyer loses the premium at or below the strike and benefits as the share price rises above it.

B — Correct: A put writer retains ₹40 at or above ₹1,000 and bears the put’s intrinsic value below the strike, matching the profile.

C — Incorrect: A call writer retains the premium below the strike and has declining profit above it, reversing the pattern shown.

D — Incorrect: A put buyer benefits from falling prices and loses the premium at or above the strike, unlike the displayed gains.

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Questions 26–50

Question 26

Topic: Equity Derivatives

A distributor checks put-call parity using these executable quotes in an illustrative market. Prices are in rupees per share.

Contract terms and assumptions:

• The stock pays no dividends before expiry.
• Both options have a strike of ₹1,000, the same six-month expiry and a contract size of 100 shares.
• A risk-free deposit of ₹960 today pays ₹1,000 at expiry. Borrowing is available on the same terms.
• Short selling is permitted, with sale proceeds available for use. All legs settle simultaneously at expiry without additional price spreads.
• The all-in cost of entering and settling a complete matched position is ₹4 per share, paid today. Ignore other costs, taxes and margin requirements.

What net arbitrage gain, if any, can be retained today from one matched 100-share position?

• A. ₹0
• B. ₹1,500
• C. ₹1,200
• D. ₹800

Best answer: D

Explanation: For a non-dividend-paying stock, European put-call parity is \(C+\mathrm{PV}(K)=S+P\), where the options share the same strike and expiry. An executable arbitrage must use bid prices for sales and ask prices for purchases.

Sell the stock for ₹1,004, sell the put for ₹46, buy the call for ₹78 and deposit ₹960. After the ₹4 cost, the cash retained per share is:

\[ 1{,}004+46-78-960-4=8 \]

At expiry, the long call and short put together pay \(S_T-K\). The short stock contributes \(-S_T\), while the deposit pays \(K\), so the terminal amounts cancel. The retained cash is therefore a locked-in gain rather than compensation for an open market exposure.

For 100 shares, the net gain retained today is ₹800. Midpoint prices cannot establish an executable arbitrage.

Answer choices explained:

A — Incorrect: The executable prices leave a positive ₹8 per share after costs, so the matched position offers an arbitrage gain.

B — Incorrect: Using midpoint prices gives ₹15 per share after costs, but purchases execute at asks and sales at bids.

C — Incorrect: The ₹12 per-share receipt before costs gives ₹1,200 per lot, but the ₹400 all-in cost must also be deducted.

D — Correct: Shorting the stock and put, buying the call and depositing ₹960 leaves ₹1,004 + ₹46 - ₹78 - ₹960 - ₹4 = ₹8 per share.

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Question 27

Topic: Mutual Fund Distribution

An investor is selecting a mutual fund for an eight-year equity allocation targeting the Nifty 500 TRI. Consistent benchmark tracking matters more than obtaining the lowest fee. The investor also prefers to minimise ongoing assessment of a manager’s stock-selection skill.

The distributor compares these fictional regular growth plans:

Tracking errors are annualised, calculated from net-NAV returns over the same three-year period, and measured against each fund’s own benchmark. All benchmarks are total return indices.

Which recommendation best meets the investor’s stated objective?

• A. Recommend Fund Q, the passive Nifty 500 fund with a 0.12% TER.
• B. Recommend Fund R, the active equity fund with a 0.85% TER.
• C. Recommend Fund S, the passive Nifty 50 fund with a 0.09% TER.
• D. Recommend Fund P, the passive Nifty 500 fund with a 0.35% TER.

Best answer: D

Explanation: Passive investing seeks to replicate a chosen index, while active management permits deliberate departures to pursue a different return outcome. Suitability depends on the investor’s objective, not on either approach being universally superior.

Fund P directly targets the required exposure. Its higher TER is a trade-off for substantially lower observed tracking variability than the cheaper Nifty 500 tracker, matching the investor’s stated priority. Passive management also reduces reliance on assessing stock-selection skill.

Tracking error measures variability of benchmark-relative returns, not average underperformance. It must be interpreted alongside the benchmark, and historical figures do not guarantee future tracking. An active approach may suit an investor seeking manager-driven outperformance who accepts the associated deviations, costs and assessment effort.

Answer choices explained:

A — Incorrect: Its lower TER is attractive, but its greater Nifty 500 tracking variability conflicts with the investor’s higher priority.

B — Incorrect: Its active mandate and observed benchmark deviations fit an outperformance objective better than the investor’s preference for replication and limited manager assessment.

C — Incorrect: Its low tracking error relates to Nifty 50, not the Nifty 500 exposure the investor intends to maintain.

D — Correct: It targets the required index and has substantially lower observed tracking error than the cheaper tracker of that same index.

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Question 28

Topic: Mutual Fund Distribution

An investor holds units in an open-ended debt mutual fund whose scheme document permits side pocketing. A fictional operational update records:

• 6 July 2026: A portfolio bond is downgraded to default following a missed payment.
• 7 July 2026: Trustees approve segregation effective from 6 July. Segregation is completed, and eligible existing investors receive segregated-portfolio units.
• 8 July 2026: The investor requests a complete cash exit from both portfolios.

Liquidity records show that available main-portfolio cash covers all main-portfolio redemption requests, including this investor’s. Markets and settlement systems are functioning normally.

Which treatment should the distributor explain?

• A. Redeem the main-portfolio units under normal terms and cancel the segregated units when the investor exits the main portfolio.
• B. Defer redemption of both portfolios until recoveries from the segregated bond permit the investor to make a complete exit.
• C. Redeem the main-portfolio units under normal terms and retain the segregated units with entitlement to any future recoveries.
• D. Redeem both portfolios at their separate NAVs, using the main portfolio’s available cash to settle the segregated portion.

Best answer: C

Explanation: Side pocketing separates a credit-impaired security from the main portfolio while preserving eligible investors’ proportionate entitlement to its eventual realisations. It helps prevent redemptions from unfairly shifting the impaired exposure to remaining investors.

Here, segregation is complete and the main portfolio has documented capacity to meet redemption requests. The credit event alone does not justify automatically blocking main-portfolio redemptions. Normal redemption terms therefore apply.

Subscriptions and redemptions are not permitted in the segregated portfolio. The investor retains those units even after fully redeeming the main-portfolio holding and remains entitled to proportionate distributions if recoveries occur. Side pocketing preserves fair treatment; it does not guarantee recovery or immediate liquidity.

Answer choices explained:

A — Incorrect: Ownership of segregated units is separate from continued ownership of main-portfolio units, so redeeming the latter does not cancel recovery rights.

B — Incorrect: The main portfolio has sufficient liquidity and markets are functioning normally, so waiting for the segregated bond’s recovery is not justified.

C — Correct: Redeeming the liquid main portfolio leaves the investor’s separately allotted segregated units and their recovery rights intact.

D — Incorrect: Segregated-portfolio units are not redeemable at NAV; the main portfolio’s cash cannot be used to provide that exit.

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Question 29

Topic: Equity Derivatives

A client holds two long call contracts through expiry. The hypothetical single-stock contract terms, dated 1 July 2026, specify:

• Expiry: 30 July 2026.
• Strike price: ₹800 per share; lot size: 250 shares per contract.
• Settlement: Physical delivery, with automatic exercise of in-the-money calls.

The client paid a premium of ₹65 per share. At expiry, the share’s final settlement price is ₹850. Value shares received at that price and ignore taxes, fees and financing costs.

Which statement correctly describes the client’s expiry settlement and premium-adjusted economic result?

• A. Pay ₹4,25,000 and receive 500 shares; the premium-adjusted economic result is a ₹32,500 loss.
• B. Pay ₹4,00,000 and receive 500 shares; the premium-adjusted economic result is a ₹7,500 loss.
• C. Receive ₹25,000 in cash with no share delivery; the premium-adjusted economic result is a ₹7,500 loss.
• D. Pay ₹4,00,000 and receive 500 shares; the premium-adjusted economic result is a ₹25,000 profit.

Best answer: B

Explanation: An in-the-money call can have a premium-adjusted loss. Under physical settlement, the holder pays the strike price and receives shares rather than receiving only the intrinsic value in cash.

The two contracts cover \(2 \times 250 = 500\) shares:

• Settlement payment: \(500 \times ₹800 = ₹4,00,000\).
• Expiry value of shares: \(500 \times ₹850 = ₹4,25,000\).
• Exercise payoff: ₹25,000.
• Premium already paid: \(500 \times ₹65 = ₹32,500\).

The premium-adjusted economic result is therefore a ₹7,500 loss. The premium affects profitability but does not reduce the strike amount payable on physical settlement.

Answer choices explained:

A — Incorrect: Exercise requires payment at the ₹800 strike, not the ₹850 expiry price, so the settlement payment is ₹4,00,000.

B — Correct: The holder buys 500 shares at the ₹800 strike; their ₹25,000 intrinsic value less the ₹32,500 premium produces a ₹7,500 loss.

C — Incorrect: Physical settlement requires payment of the strike amount and receipt of shares; the ₹25,000 intrinsic value is not paid as cash settlement.

D — Incorrect: ₹25,000 is the exercise payoff before deducting the ₹32,500 premium, which changes the economic result to a ₹7,500 loss.

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Question 30

Topic: Interest Rate Derivatives

A corporate treasury holds fixed-rate government bonds that it must retain for three months. Concerned about rising yields, it sells an illustrative cash-settled bond-price futures contract to limit losses on those holdings.

The futures reference bond has a different maturity from the holdings. The position is sized to offset approximately half of the portfolio’s sensitivity to a small parallel yield change.

Which classification best describes the economic purpose of the futures sale?

• A. Speculation, because the futures reference bond has a different maturity and the resulting offset is imperfect.
• B. Arbitrage, because combining long cash bonds with short futures secures a return independent of market yields.
• C. Hedging, because the short futures position reduces the existing bond portfolio’s exposure to rising market yields.
• D. Speculation, because the short futures position is expected to gain when market yields rise.

Best answer: C

Explanation: A derivative’s economic purpose depends on the participant’s existing exposure and intended outcome, not merely its expected standalone profit. Fixed-rate bond prices generally fall when yields rise. A short bond-price futures position can gain as bond prices fall, offsetting some losses on the treasury’s holdings.

This is a partial hedge because it offsets only about half the portfolio’s sensitivity. The different maturities also leave basis risk, so the hedge need not perform perfectly. Neither limitation makes the trade speculative. Arbitrage requires executable transactions that lock in a gain from a pricing inconsistency; simply holding bonds and selling futures does not establish such an opportunity.

Answer choices explained:

A — Incorrect: A maturity mismatch leaves basis risk, but an imperfect offset of an existing exposure can still serve a hedging purpose.

B — Incorrect: Opposite cash and futures positions do not establish arbitrage; the partial offset and maturity mismatch leave exposure rather than a locked-in return.

C — Correct: The futures sale counteracts part of the existing portfolio’s loss when yields rise, consistent with the treasury’s risk-reduction objective.

D — Incorrect: Expected derivative gains do not establish speculation when the trade is intended to offset losses on an existing bond exposure.

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Question 31

Topic: Mutual Fund Distribution

A distributor is explaining the following fictional mutual fund structure to a client.

An open-ended debt scheme in this fund must sell bonds to meet redemption requests. The sales are routine and within the scheme’s investment mandate.

Which allocation of beneficial ownership and responsibilities is correct?

• A. Scheme assets are held in trust for unitholders; trustees oversee the AMC; the AMC chooses bonds for sale; the custodian handles settlement and safekeeping.
• B. Scheme assets are held in trust for unitholders; trustees choose bonds for sale; the AMC implements their decisions; the custodian handles settlement and safekeeping.
• C. Scheme assets are held in trust for unitholders; trustees oversee the AMC; the custodian chooses bonds for sale; the AMC handles settlement and safekeeping.
• D. Scheme assets are held in trust for the sponsor; trustees oversee the AMC; the AMC chooses bonds for sale; the custodian handles settlement and safekeeping.

Best answer: A

Explanation: A mutual fund is constituted as a trust, with scheme property held by trustees in trust for unitholders. The sponsor establishes the fund; its ownership of shares in the AMC does not make scheme assets its property.

Trustees exercise fiduciary oversight and monitor the AMC’s compliance with the scheme mandate and applicable requirements. The AMC manages investments, including selecting bonds for routine sales and arranging execution. The custodian safeguards securities and performs custody-related settlement functions. These responsibilities remain distinct even when the sponsor controls the AMC. Meeting redemptions therefore requires an AMC investment decision supported by custodial settlement, not investment selection by the sponsor, trustees or custodian.

Answer choices explained:

A — Correct: This separates unitholders’ beneficial interest, trustees’ oversight, the AMC’s investment decisions and the custodian’s settlement and safekeeping functions.

B — Incorrect: Selecting bonds for routine portfolio sales is the AMC’s management function, rather than the trustees’ oversight function.

C — Incorrect: The custodian safeguards securities and handles custody-related settlement; it does not take over the AMC’s portfolio-selection decisions.

D — Incorrect: The sponsor’s shareholding gives it ownership rights in the AMC, not beneficial ownership of the scheme’s assets.

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Question 32

Topic: Mutual Fund Distribution

A debt mutual fund reports a lower NAV after a portfolio issuer is downgraded from AA to A. The issuer’s thinly traded bond has an unchanged coupon and face value.

The AMC outsources fund accounting and obtains pricing inputs from an external valuation agency. The accountant confirms that holdings, accruals, expenses and units reconcile. A unitholder disputes the reduction, citing an unmodified audit opinion on the previous year’s financial statements.

Which allocation of evidence and responsibility is appropriate for reviewing the disputed NAV?

• A. Accounting computes NAV; valuation supplies fair-value inputs; credit assessment addresses repayment risk; audit provides independent assurance. The AMC retains responsibility for valuation and NAV accuracy.
• B. Accounting computes NAV; valuation supplies fair-value inputs; credit assessment addresses repayment risk; audit provides independent assurance. The valuation agency retains responsibility for valuation and NAV accuracy.
• C. Accounting computes NAV; valuation supplies fair-value inputs; credit assessment addresses repayment risk; audit authorises the daily price adjustment. The AMC retains responsibility for valuation and NAV accuracy.
• D. Accounting computes NAV; credit assessment supplies the revised bond price; valuation corroborates that price; audit provides independent assurance. The AMC retains responsibility for valuation and NAV accuracy.

Best answer: A

Explanation: Accounting, valuation, credit assessment and audit address different questions. Fund accounting records transactions, recognises accruals and expenses, and computes NAV using the applicable prices and units outstanding. Reconciled records do not, by themselves, establish that a bond’s valuation is appropriate.

Valuation estimates current fair value, incorporating relevant market and credit information. A downgrade signals changed repayment risk, but it is not a price quotation or an automatic percentage markdown. An unchanged coupon and face value do not guarantee unchanged fair value.

An audit provides independent assurance on financial statements. The previous year’s unmodified opinion does not validate every subsequent daily NAV. The AMC must review the disputed valuation and calculation and remains responsible despite using external service providers.

Answer choices explained:

A — Correct: These roles distinguish calculation, pricing, credit-risk assessment and assurance while preserving the AMC’s responsibility despite outsourcing.

B — Incorrect: The valuation agency supplies pricing inputs, but outsourcing does not transfer the AMC’s responsibility for valuation and NAV accuracy.

C — Incorrect: The auditor provides independent assurance on financial statements, rather than authorising each daily valuation adjustment.

D — Incorrect: Credit assessment evaluates repayment risk; a rating downgrade informs valuation but does not itself supply the bond’s revised fair value.

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Question 33

Topic: Mutual Fund Distribution

In July 2026, a distributor reviews a fictional advertisement for a diversified equity mutual fund. All figures are arithmetically correct, and other prescribed disclosures are present.

“Consistent benchmark outperformance over the last three years.”

Supporting evidence:

• From 1 July 2023 to 30 June 2026, the Regular Plan - Growth CAGR was 15%, against 12% for its designated broad-market Total Return Index (TRI). The displayed advantage is 3 percentage points.
• Both returns cover identical dates and reflect reinvested distributions. Scheme returns are after scheme expenses.
• Across 25 monthly rolling 12-month periods wholly within those dates, the scheme outperformed the same benchmark in eight and underperformed in 17.
• The advertisement prominently displays the scheme’s Very High Risk-o-meter and warns that past performance may or may not be sustained in the future.

Which assessment of the headline is most appropriate?

• A. Misleading, because the three-year CAGR advantage does not demonstrate consistent outperformance across the reported rolling periods.
• B. Misleading, because comparing after-expense scheme returns with a total-return index makes the displayed performance advantage invalid.
• C. Fair, because the prominent risk label and past-performance warning sufficiently qualify the headline’s claim of consistent outperformance.
• D. Fair, because a higher three-year CAGR supports consistent outperformance throughout the same three-year measurement period.

Best answer: A

Explanation: CAGR measures annualised growth between beginning and ending values. A three-year CAGR of 15% against 12% establishes a 3-percentage-point advantage for that complete period. It does not establish consistent superiority across different investment windows.

Rolling returns help assess that consistency. Here, the scheme underperformed in 17 of the 25 reported one-year windows, so the supporting evidence does not justify the headline. The matched dates, reinvestment basis and comparison of after-expense scheme returns with the designated TRI are not the problem.

The Risk-o-meter and past-performance warning remain important disclosures, but they cannot cure a misleading historical inference. A supportable headline would describe the observed three-year CAGR advantage and its measurement period without implying persistent outperformance.

Answer choices explained:

A — Correct: Outperformance in only eight of 25 reported one-year windows does not substantiate consistency, despite the accurate overall three-year CAGR advantage.

B — Incorrect: After-expense NAV returns can appropriately be compared with the designated total-return benchmark; the different expense treatment does not invalidate that comparison.

C — Incorrect: Risk disclosure and a future-performance warning do not correct an unsupported claim about the consistency of the historical record.

D — Incorrect: CAGR compares endpoints and can be higher even when the scheme underperforms over most of the intervening one-year windows.

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Question 34

Topic: Equity Derivatives

A client holds units in an actively managed banking-sector equity mutual fund. Separately, the client buys a cash-settled futures contract on a banking equity index. The mutual fund is not required to replicate that index.

Which statement correctly identifies the futures contract’s underlying exposure and the ownership created by entering it?

• A. The underlying is the banking fund’s NAV; entering the contract creates no additional fund-unit ownership.
• B. The underlying is the banking equity index; entering the contract creates no constituent-share ownership.
• C. The underlying is the banking fund’s NAV; entering the contract creates additional fund-unit ownership.
• D. The underlying is the banking equity index; entering the contract creates constituent-share ownership.

Best answer: B

Explanation: A derivative’s underlying is the asset, index or rate to which its contractual value or settlement is linked. Here, that reference is the banking equity index, not the existing mutual fund’s NAV.

A long index future provides market exposure through contractual gains or losses rather than ownership of constituent shares. Cash settlement satisfies the contract in money instead of delivering shares. The client continues to own the previously purchased mutual-fund units, but the futures trade creates neither additional fund units nor shareholder rights in index constituents. The actively managed fund and the index can perform differently.

Answer choices explained:

A — Incorrect: The futures contract references the banking index, not the NAV of the client’s separately held actively managed fund.

B — Correct: The index provides the referenced market exposure, while entering the futures contract does not acquire any constituent shares.

C — Incorrect: Entering an index futures contract neither references the fund’s NAV nor issues additional mutual-fund units to the client.

D — Incorrect: The index is correctly identified, but buying a futures contract does not purchase or transfer ownership of its constituent shares.

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Question 35

Topic: Mutual Fund Distribution

A resident individual requests an inter-scheme switch within one AMC in FY 2025–26. They switch all 1,000 units of an equity-oriented source scheme, acquired on 2 June 2025 at ₹20 per unit, into another equity-oriented scheme.

Fictional AMC terms and prices:

• The switch is accepted on 16 March 2026; the source redemption NAV is ₹25.
• The source exit load is 1% of the gross redemption value.
• Proceeds become available to the target scheme before its cutoff on 18 March 2026. The target purchase uses the NAV of the date funds become available.

The source redemption meets the applicable STT conditions. Ignore statutory levies when calculating units.

Which combination of target allotment and capital-gains treatment is correct? Round units to three decimal places.

• A. Allot 750.000 target units and recognise the source capital gain only when the target units are redeemed.
• B. Allot 825.000 target units and recognise a taxable short-term capital gain on the source redemption.
• C. Allot 750.000 target units and recognise a taxable short-term capital gain on the source redemption.
• D. Allot 757.576 target units and recognise a taxable short-term capital gain on the source redemption.

Best answer: C

Explanation: An inter-scheme switch comprises a redemption from the source scheme and a fresh purchase in the target scheme. These legs need not receive the same day’s NAV.

The source redemption value is ₹25,000. Deducting the 1% exit load of ₹250 leaves ₹24,750 for investment. Since funds become available on 18 March, the target NAV is ₹33, producing 750.000 units.

The source units were held for less than 12 months, so the gain is short-term. After the exit load, redemption consideration of ₹24,750 less acquisition cost of ₹20,000 gives a ₹4,750 gain. Reinvesting the proceeds does not eliminate this taxable disposal. FY 2025–26 remains governed by the Income-tax Act, 1961. The target allotment starts a fresh holding period.

Answer choices explained:

A — Incorrect: Reinvestment within the same AMC does not defer capital-gain recognition on the source redemption.

B — Incorrect: The allotment uses the request-date NAV of ₹30 instead of the ₹33 NAV applicable when proceeds become available.

C — Correct: Net proceeds of ₹24,750 purchase 750 units at ₹33, while the source units are redeemed within 12 months of acquisition.

D — Incorrect: Dividing the gross ₹25,000 by ₹33 overlooks the ₹250 exit load deducted before the target investment.

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Question 36

Topic: Interest Rate Derivatives

A dealer receives two hedging requests after increased interest-rate volatility:

• A finance company has committed to three-year fixed-rate loans financed by borrowings whose interest rate resets every three months.
• A corporate treasury holds three-year floating-rate investments financed by fixed-rate debt.

Both want to stabilize net interest cash flows while retaining their underlying positions. Assume each swap’s notional, term and floating leg exactly match the relevant exposure, with no changes in credit spreads.

Which pair of interest-rate swap positions meets both participants’ risk-transfer needs?

• A. The finance company pays fixed and receives floating; the treasury receives fixed and pays floating.
• B. The finance company receives fixed and pays floating; the treasury pays fixed and receives floating.
• C. The finance company pays fixed and receives floating; the treasury pays fixed and receives floating.
• D. The finance company receives fixed and pays floating; the treasury receives fixed and pays floating.

Best answer: A

Explanation: Interest-rate derivatives allow participants to transfer repricing risk while retaining their underlying lending, investment and financing arrangements.

The finance company’s lending commitments fix its interest income, but its funding expense can rise. Paying fixed and receiving floating under a matching swap offsets that variable expense, stabilizing its lending margin.

The treasury faces the opposite mismatch: investment income can fall while debt payments remain fixed. Receiving fixed and paying floating offsets its variable investment receipts, stabilizing its net interest cash flow.

These complementary exposures explain demand from different market participants. Neither hedge requires a forecast of the direction of rates, and each gives up favorable rate movements in exchange for greater cash-flow certainty.

Answer choices explained:

A — Correct: Floating swap receipts offset the finance company’s floating funding expense, while floating swap payments offset the treasury’s floating investment income.

B — Incorrect: These positions increase both mismatches: the finance company adds floating payments, while the treasury adds floating receipts.

C — Incorrect: The finance company’s floating funding expense is offset, but the treasury adds floating receipts rather than stabilizing its investment income.

D — Incorrect: The treasury stabilizes its investment income, but the finance company adds floating payments to its existing floating funding expense.

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Question 37

Topic: Interest Rate Derivatives

An Indian fixed-income portfolio keeps a short position in an illustrative bond futures contract open through final settlement.

Fictional contract terms:

• Reference underlying: A notional 10-year Government of India bond with a 7% annual coupon.
• Daily settlement: Cash mark-to-market.
• Final settlement: Physical delivery, with the short selecting a bond from the deliverable basket.
• Deliverable basket: Government of India bonds with 8-12 years’ residual maturity on the delivery date, with no coupon restriction.

Available holdings: The portfolio owns sufficient face value of each security to cover delivery:

• Government of India bond: 6.5% coupon and 9 years’ residual maturity.
• Corporate bond: 7% coupon and 10 years’ residual maturity.

Which interpretation of the portfolio’s final settlement obligation is correct?

• A. The short can deliver the held 9-year government bond to meet the final settlement obligation.
• B. The short must settle entirely through a final cash adjustment, retaining both bond holdings.
• C. The short can deliver the held 10-year corporate bond to meet the final settlement obligation.
• D. The short must acquire a government bond matching the reference coupon and maturity for delivery.

Best answer: A

Explanation: Daily cash settlement and final physical delivery are separate obligations. Cash mark-to-market settles changes in the futures position’s value; it does not remove a delivery obligation specified for expiry.

For this contract, the short selects an eligible government bond and delivers it against the contractual delivery payment. The held 6.5% government bond qualifies because its nine-year residual maturity falls within the permitted range. The notional reference bond does not require delivery of an exact coupon-and-maturity match. Conversely, matching those features does not make the corporate bond eligible. Under a cash-settled contract, final settlement would instead involve the prescribed cash adjustment without transferring a bond.

Answer choices explained:

A — Correct: The government bond’s 9-year residual maturity meets the basket’s 8-12-year requirement, and its different coupon does not affect eligibility.

B — Incorrect: Cash mark-to-market settles daily price changes, but this contract separately requires physical delivery when the short remains open for final settlement.

C — Incorrect: The corporate bond matches the reference coupon and maturity but fails the deliverable basket’s Government of India issuer requirement.

D — Incorrect: The reference specification does not restrict delivery to an exact match; the stated basket permits different coupons and a range of residual maturities.

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Question 38

Topic: Mutual Fund Distribution

A distributor reviews this fictional ISID extract for a SIF equity long-short strategy:

Seek long-term capital appreciation through stock selection while moderating equity-market exposure.

Current portfolio:

Futures exposure is measured by notional value. The long and short books contain different stocks. Assume each equity book has market beta 1 and cash has beta 0.

Which interpretation best reflects the portfolio’s equity exposures and disclosed purpose?

• A. Net equity exposure is 50% and gross equity exposure is 90%; the strategy is market-neutral, with returns driven solely by relative stock selection.
• B. Net equity exposure is 90% and gross equity exposure is 90%; the strategy has market sensitivity equivalent to a 90% long-only equity portfolio.
• C. Net equity exposure is 50% and gross equity exposure is 90%; the strategy moderates directional exposure while retaining loss risk on both books.
• D. Net equity exposure is 50% and gross equity exposure is 50%; the strategy’s total equity exposure is represented by the residual long position.

Best answer: C

Explanation: Net equity exposure measures the directional balance between long and short positions. Gross equity exposure measures the combined size of both books:

• Net exposure: \(70\% - 20\% = 50\%\).
• Gross exposure: \(70\% + 20\% = 90\%\).

With the assumed betas, the shorts reduce market sensitivity compared with holding the same 70% long book alone. This supports the stated purpose of moderating equity-market exposure while seeking capital appreciation through stock selection.

The portfolio is neither market-neutral nor capital-protected. Long positions lose when their prices fall, while short futures lose when the underlying prices rise. Both books can therefore lose simultaneously if stock selection is unfavourable. Net exposure is not a ceiling on portfolio losses.

Answer choices explained:

A — Incorrect: With both equity books at beta 1, the unmatched 50% net long exposure leaves positive market sensitivity rather than a market-neutral position.

B — Incorrect: Short futures contribute negative market sensitivity, so adding their exposure to the long book confuses gross exposure with directional net exposure.

C — Correct: The short book offsets part of the long book’s market sensitivity, consistent with the disclosed purpose, while either book can incur losses.

D — Incorrect: Gross equity exposure adds the absolute long and short exposures, giving 90%; deducting the short book calculates net exposure instead.

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Question 39

Topic: Mutual Fund Distribution

A distributor claims that a debt fund’s outperformance of its stated benchmark, the Short AAA Index, demonstrates manager skill.

Fictional factsheet extract: Average maturity and modified duration are in years. Returns cover the same year and include reinvested income.

These risk profiles were broadly maintained throughout the year. Bond yields fell and AA credit spreads narrowed.

Which comparison provides the most appropriate starting point for assessing the distributor’s claim?

• A. Use the Short AAA Index; the fund outperformed it by 2.0 percentage points.
• B. Use Corporate Index Y; the fund outperformed it by 0.2 percentage point.
• C. Use the Government Index; the fund outperformed it by 0.7 percentage point.
• D. Use Corporate Index X; the fund outperformed it by 0.5 percentage point.

Best answer: B

Explanation: A debt fund’s benchmark should broadly match its maturity, duration and credit composition before excess returns are interpreted as evidence of skill. Maturity alone does not establish equivalent interest-rate sensitivity; duration matters. Credit composition also affects income and sensitivity to credit-spread changes.

Falling yields generally favour longer-duration portfolios, while narrowing AA spreads can benefit AA holdings. The fund therefore had exposures that could help it outperform the shorter-duration, entirely AAA stated benchmark.

Corporate Index Y is the closest overall match. Against its 9.2% return, the fund’s 9.4% return represents excess performance of 0.2 percentage point, rather than 2.0 percentage points. Even this more comparable one-year excess return does not by itself establish repeatable manager skill.

Answer choices explained:

A — Incorrect: The stated benchmark has substantially shorter maturity and duration and no AA exposure, so the return difference does not isolate manager skill.

B — Correct: Corporate Index Y closely matches maturity, duration and credit composition, making its 0.2-percentage-point return gap the most relevant initial comparison.

C — Incorrect: The Government Index matches maturity and duration but lacks the fund’s corporate credit exposure, which matters when AA credit spreads narrow.

D — Incorrect: Corporate Index X matches maturity and rating proportions, but its shorter duration makes its return less comparable during falling yields.

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Question 40

Topic: Interest Rate Derivatives

A portfolio manager trades a theoretical interest-rate futures contract on a Government of India bond. It is quoted in rupees per ₹100 face value. Each contract represents ₹10 lakh face value, so a 1.00-point quote movement produces a ₹10,000 gain or loss per contract.

Trades:

• Before Day 1 settlement, the manager sells four contracts at 100.20.
• On Day 2, the manager buys back one contract at that day’s settlement quote. The remaining three contracts stay short through Day 3 settlement.

Ignoring initial margin, interest and transaction costs, what is the cumulative net variation margin across these trades through Day 3 settlement?

• A. ₹18,000 net debit.
• B. ₹22,000 net credit.
• C. ₹18,000 net credit.
• D. ₹26,000 net credit.

Best answer: C

Explanation: A short futures position receives variation margin when the settlement quote falls and pays it when the quote rises. Apply each daily movement to the contracts exposed during that interval:

• Day 1: \(4 \times (100.20 - 99.85) \times 10{,}000 = 14{,}000\) rupees credited.
• Day 2: \(4 \times (100.05 - 99.85) \times 10{,}000 = 8{,}000\) rupees debited.
• Day 3: \(3 \times (100.05 - 99.65) \times 10{,}000 = 12{,}000\) rupees credited.

The buyback occurs at Day 2’s settlement quote, so all four original shorts participate in Day 2’s price change. Only three participate in Day 3’s change.

Cumulative net variation margin is \(14{,}000 - 8{,}000 + 12{,}000 = 18{,}000\) rupees, a net credit.

Answer choices explained:

A — Incorrect: This reverses the net cash-flow direction: the short position’s settlement gains exceed its settlement losses.

B — Incorrect: ₹22,000 applies four short contracts to the entire price path, overlooking that only three remain exposed to Day 3’s movement.

C — Correct: The position receives ₹14,000 on Day 1, pays ₹8,000 on Day 2 and receives ₹12,000 on Day 3.

D — Incorrect: ₹26,000 totals the Day 1 and Day 3 credits but omits the ₹8,000 variation-margin debit on Day 2.

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Question 41

Topic: Mutual Fund Distribution

A GST-registered mutual fund distributor is checking its draft commission invoice for April 2026.

Fictional AMC schedule, effective 1 April 2026:

• Trail uses average daily eligible assets and an actual/365 accrual basis. April has 30 days.
• Annual commission rates exclude GST; add GST at 18% to distributor commission.
• No investor transaction charges are payable to the distributor.

₹1 crore = ₹10,000,000.

The draft also treats ₹3,000 calculated under a legacy ₹150-per-new-investor convention and ₹4,000 of exit loads collected on redemptions as distributor earnings.

What is the corrected total invoice amount, including GST?

• A. ₹24,000
• B. ₹31,860
• C. ₹33,040
• D. ₹28,320

Best answer: D

Explanation: Trail commission depends on eligible assets, the annual commission rate and the accrual period. Investor exit loads are credited to the scheme, not earned by the distributor. A legacy transaction-charge convention cannot override the current payout schedule.

The April calculations are:

• Equity trail: \(36,500,000 \times 0.006 \times 30/365 = 18,000\) rupees.
• Debt trail: \(14,600,000 \times 0.005 \times 30/365 = 6,000\) rupees.

Total trail commission is ₹24,000. GST is \(24,000 \times 18\% = 4,320\) rupees, making the corrected invoice total ₹28,320. Neither the ₹3,000 legacy charge nor the ₹4,000 exit-load collection enters the commission or its GST base. GST increases the invoice total but is not additional trail income.

Answer choices explained:

A — Incorrect: This is the total trail commission before GST; the invoice must also include ₹4,320 of GST.

B — Incorrect: This adds the obsolete ₹3,000 transaction charge to commission before applying GST, although the current schedule provides no transaction-charge entitlement.

C — Incorrect: This adds ₹4,000 of exit loads to commission before applying GST; exit-load collections belong to the scheme, not the distributor.

D — Correct: The two schemes generate ₹18,000 and ₹6,000 of trail; adding 18% GST gives an invoice total of ₹28,320.

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Question 42

Topic: Mutual Fund Distribution

A mid-cap equity fund uses a mid-cap total return index (TRI) as its stated benchmark. A client also compares its performance with a large-cap TRI.

The following fictional figures cover the year from 1 April 2025 to 31 March 2026. The sole IDCW distribution was fully reinvested on 30 September 2025 at the stated ex-IDCW NAV. There were no other investor cash flows. Ignore investor-level taxes and charges.

Which conclusion correctly states the fund’s reinvested total return and performance against its appropriate benchmark?

• A. A total return of 10.25%, underperforming the benchmark by 0.75 percentage point.
• B. A total return of 10.25%, outperforming the benchmark by 2.25 percentage points.
• C. A total return of 5.00%, underperforming the benchmark by 6.00 percentage points.
• D. A total return of 10.00%, underperforming the benchmark by 1.00 percentage point.

Best answer: A

Explanation: Fund and benchmark performance should use consistent periods and distribution treatment. A TRI includes reinvested dividends, so the fund’s return should also reflect IDCW reinvestment.

For each original unit, the ₹1.00 distribution purchases \(1/20 = 0.05\) additional unit. The investor therefore finishes with 1.05 units worth \(1.05 \times 21 = 22.05\) rupees. The total return is:

\[ R = \frac{22.05 - 20}{20} \times 100 = 10.25\% \]

Compared with the stated mid-cap TRI return of 11.00%, the fund underperforms by 0.75 percentage point. Although it exceeds the large-cap TRI by 2.25 percentage points, that comparison concerns a different market segment and does not establish outperformance against its appropriate benchmark.

Answer choices explained:

A — Correct: Reinvestment produces an ending value of ₹22.05 per original unit, giving 10.25%, which falls below the mid-cap TRI’s 11.00%.

B — Incorrect: The fund return is accurate, but the 2.25-percentage-point excess uses the large-cap TRI rather than the fund’s mid-cap benchmark.

C — Incorrect: The 5.00% NAV increase excludes both the IDCW distribution and the value subsequently earned on the reinvested units.

D — Incorrect: Adding the cash distribution to closing NAV gives 10.00%, but omits the subsequent gain on units purchased through reinvestment.

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Question 43

Topic: Mutual Fund Distribution

A distributor must reconcile an older KIM with an addendum for a fictional mutual fund scheme.

Original Key Information Memorandum (KIM), dated 1 April 2026:

Exit load is 1% for redemption within 180 days of allotment; nil thereafter.

Addendum issued 20 June 2026:

For units allotted on or after 1 July 2026, the exit load is reduced to 0.50%. All other exit-load terms remain unchanged.

The investor’s holdings are:

The investor redeems all 8,000 units on 15 September 2026 at an applicable NAV of ₹25. Ignore taxes and other charges.

What total exit load should the distributor calculate?

• A. ₹2,000
• B. ₹1,000
• C. ₹1,500
• D. ₹1,200

Best answer: C

Explanation: An addendum must be applied according to its effective date and stated scope, not merely its publication date. The revised load covers allotments from 1 July 2026, so the 25 June allotment retains the original 1% rate. The 5 July allotment attracts 0.50%. Both lots are redeemed within 180 days.

Exit load uses the redemption value at the applicable NAV, not the original investment cost. Each lot’s 4,000 units at ₹25 has a redemption value of ₹1,00,000. The respective loads are ₹1,000 and ₹500, giving a total exit load of ₹1,500.

Answer choices explained:

A — Incorrect: This applies 1% to the entire ₹2,00,000 redemption value, overlooking the revised 0.50% rate applicable to the 5 July allotment.

B — Incorrect: This applies 0.50% to both lots, although publication on 20 June does not extend the revised rate to allotments before 1 July.

C — Correct: The June allotment incurs ₹1,000 and the July allotment ₹500, using their respective load schedules and redemption values of ₹1,00,000 each.

D — Incorrect: This applies the correct rates to each lot’s original ₹80,000 investment cost instead of its ₹1,00,000 redemption value.

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Question 44

Topic: Equity Derivatives

A distributor reviews an illustrative trade in which a client buys one lot of a cash-settled index put and holds it to expiry.

• Strike: 24,000 index points.
• Premium paid: ₹180 per index unit.
• Lot size: 50 index units.
• Final settlement level: 23,880 index points.

Each index point is worth ₹1 per unit. Ignore transaction costs and taxes. What are the total expiry payoff and net profit or loss on the put position?

• A. Expiry payoff of ₹6,000 and net loss of ₹3,000.
• B. Expiry payoff of ₹0 and net loss of ₹9,000.
• C. Expiry payoff of ₹6,000 and net profit of ₹15,000.
• D. Expiry payoff of ₹6,000 and net profit of ₹6,000.

Best answer: A

Explanation: A long put pays the positive difference between its strike and the underlying’s expiry settlement level. Its net profit also accounts for the premium paid.

The payoff per unit is \( \max(24{,}000 - 23{,}880, 0) = 120 \) rupees. For 50 units, the total payoff is ₹6,000. The premium cost is \( 180 \times 50 = 9{,}000 \) rupees, leaving a net loss of ₹3,000.

The expiry break-even level is \( 24{,}000 - 180 = 23{,}820 \). The put finishes in the money, but the settlement level remains above break-even. A positive payoff therefore does not necessarily mean a net profit.

Answer choices explained:

A — Correct: The put pays ₹120 per unit, giving ₹6,000, while the ₹9,000 premium leaves a ₹3,000 net loss.

B — Incorrect: The settlement level is below the strike, so the put has positive intrinsic value rather than expiring worthless.

C — Incorrect: Adding the ₹9,000 premium to the payoff treats an amount paid by the buyer as a receipt.

D — Incorrect: ₹6,000 is the gross expiry payoff; treating it as profit omits the ₹9,000 premium paid.

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Question 45

Topic: Mutual Fund Distribution

A distributor reviews this fictional dashboard for the regular growth plan of an ordinary open-ended hybrid mutual fund, dated 30 June 2026. The benchmark blends equity and debt total return indices. Both returns cover the same three years; the scheme’s return is NAV-based.

The investor says:

“The 14.0% headline proves this fund beat the equity market on a risk-adjusted basis.”

Which interpretation is best supported?

• A. The annualised return beat the blended benchmark by 2.0 percentage points after scheme expenses; matching Risk-o-meter categories do not establish equal risk.
• B. The annualised return beat the blended benchmark by 2.0 percentage points after scheme expenses; matching Risk-o-meter categories establish risk-adjusted superiority.
• C. The annualised return beat the blended benchmark by 0.4 percentage points after scheme expenses; matching Risk-o-meter categories do not establish equal risk.
• D. The annualised return beat the pure-equity index by 2.0 percentage points after scheme expenses; matching Risk-o-meter categories do not establish equal risk.

Best answer: A

Explanation: NAV-based performance already reflects expenses charged to the scheme. The annualised return advantage is therefore 14.0% minus 12.0%, or 2.0 percentage points. Subtracting TER again would double-count expenses; the current TER also need not represent expenses throughout the historical period.

The comparison is against a 75:25 equity-debt benchmark, not a pure-equity index. The scheme’s 78:22 allocation likewise shows mixed exposure, but its debt holdings do not make it low risk.

A Risk-o-meter is a broad classification, not a quantitative measure showing identical volatility or downside risk. Matching Very High labels cannot convert a return difference into proof of risk-adjusted superiority. Historical outperformance alone also does not establish suitability or guarantee future returns.

Answer choices explained:

A — Correct: The NAV-based return exceeds the stated benchmark by 2.0 percentage points after scheme expenses, while matching broad risk categories do not establish identical risk.

B — Incorrect: Matching Very High classifications do not provide the quantitative risk measures needed to establish risk-adjusted superiority.

C — Incorrect: NAV-based returns already reflect scheme expenses; deducting the 1.60% TER again incorrectly reduces the 2.0 percentage-point difference to 0.4.

D — Incorrect: The 12.0% return belongs to the blended benchmark, not its equity component, so outperformance against the pure-equity index cannot be calculated.

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Question 46

Topic: Mutual Fund Distribution

A distributor reviews a fictional compliance summary dated 7 July 2026 for an actively managed, diversified equity mutual fund scheme.

Applicable rule: Investment in the equity shares and equity-related instruments of one company is limited to 10% of scheme NAV. No exemption applies.

All exposure to Company R consists of listed ordinary equity shares.

The changes between these valuations arose solely from market-price movements.

Proposed trade: Purchase another ₹1.10 crore of Company R shares using existing scheme cash. Ignore transaction costs and assume no other changes.

Immediately after execution, which assessment correctly states the issuer exposure and the classification of the resulting limit breach?

• A. Exposure would be 11.00% of NAV, with the breach classified as passive.
• B. Exposure would be 12.10% of NAV, with the breach classified as active.
• C. Exposure would be 11.00% of NAV, with the breach classified as active.
• D. Exposure would be 10.50% of NAV, with the breach classified as passive.

Best answer: C

Explanation: Single-issuer equity concentration uses current scheme NAV as its denominator. Market movements alone increased Company R’s weight from 9.50% to 10.50%, so the initial exceedance was passive.

The proposed purchase exchanges ₹1.10 crore of cash for shares. NAV therefore remains ₹220 crore, while the Company R holding increases to ₹24.20 crore. Its post-trade weight is \(24.20 / 220 \times 100 = 11.00\%\).

A discretionary purchase that increases an already excessive issuer exposure constitutes an active breach. The passive origin of the earlier excess does not make the additional purchase passive.

Answer choices explained:

A — Incorrect: Although the weight is 11.00%, the further purchase actively increases the excess; only the earlier increase arose solely from market prices.

B — Incorrect: 12.10% uses the earlier ₹200 crore NAV; the relevant NAV is ₹220 crore and remains unchanged when cash is exchanged for shares.

C — Correct: The holding becomes ₹24.20 crore against ₹220 crore NAV, or 11.00%; the discretionary purchase increases exposure above the 10% limit.

D — Incorrect: 10.50% is the pre-trade weight; it omits the ₹1.10 crore purchase, which actively increases an already excessive issuer exposure.

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Question 47

Topic: Mutual Fund Distribution

An investor first complained to an AMC about a disputed mutual fund redemption and then escalated the unresolved complaint through SCORES. The AMC’s initial action-taken report on SCORES rejects the claim. No review has been requested, and the review window remains open.

The investor wants the next available complaint review and, if necessary, a binding decision on compensation. Which recommendation is appropriate?

• A. Request first-level review by SEBI through SCORES; pursue eligible arbitration if compensation remains disputed.
• B. Request first-level review by the designated body through SCORES; pursue eligible arbitration if compensation remains disputed.
• C. Request first-level review by SEBI through SCORES; seek a binding compensation order through that review.
• D. Request first-level review by the designated body through SCORES; seek a binding compensation order through that review.

Best answer: B

Explanation: SCORES facilitates and monitors grievance redressal; it is not a forum for adjudicating compensation claims. After receiving the AMC’s initial action-taken report, a dissatisfied investor can request first-level review by the designated body through SCORES. If dissatisfaction continues after that review, second-level review by SEBI is available within the applicable review window.

A remaining monetary dispute requires an appropriate dispute-resolution mechanism. Under the securities-market online dispute resolution (ODR) framework, conciliation seeks an agreed settlement, while arbitration can produce a binding award. The investor should therefore distinguish review of complaint handling from adjudication of the claimed financial loss.

Answer choices explained:

A — Incorrect: SEBI handles second-level review after the designated body’s review, so requesting first-level review by SEBI skips the applicable stage.

B — Correct: The designated body handles the first review, while eligible arbitration can provide a binding decision on an unresolved compensation dispute.

C — Incorrect: The first review belongs with the designated body, and SCORES review cannot issue the proposed binding compensation order.

D — Incorrect: The designated body is the appropriate first reviewer, but SCORES review does not adjudicate compensation or issue a binding monetary award.

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Question 48

Topic: Equity Derivatives

A SIF investment strategy has net assets of ₹40 crore. Its futures positions across trading accounts are shown below. All contracts are on the same illustrative equity index, Index X, with a multiplier of ₹50 per index point.

Prices are current futures prices. Total margin posted is ₹2.50 crore. The October short serves as a calendar hedge against part of the September long. All other conditions for permitted offsets are satisfied.

What regulatory gross exposure do these futures contribute after permitted offsets, excluding exposure and offsets from other holdings?

• A. ₹30.10 crore, or 75.25% of net assets.
• B. ₹42.10 crore, or 105.25% of net assets.
• C. ₹5.90 crore, or 14.75% of net assets.
• D. ₹2.50 crore, or 6.25% of net assets.

Best answer: A

Explanation: Futures exposure uses current futures price multiplied by the contract multiplier and number of contracts, not margin cash. The September long has a notional of ₹24 crore, the September short ₹6 crore, and the October short ₹12.10 crore.

The September positions have the same underlying and expiry and satisfy the other offset conditions. Their permitted offset leaves ₹18 crore of long exposure. The October short has a different expiry, so its ₹12.10 crore must be added when calculating regulatory gross exposure. A calendar spread can hedge economic risk without qualifying for this offset.

The resulting gross futures exposure is ₹30.10 crore, representing 75.25% of the strategy’s ₹40 crore net assets. Margin posted is collateral, not the exposure measure.

Answer choices explained:

A — Correct: Offsetting the September positions leaves ₹18 crore; adding the different-expiry October short’s ₹12.10 crore gives ₹30.10 crore.

B — Incorrect: ₹42.10 crore adds all three notionals without recognising the permitted offset between the same-underlying, same-expiry September positions.

C — Incorrect: ₹5.90 crore nets the October short against the residual September long, although their different expiries prevent this regulatory exposure offset.

D — Incorrect: ₹2.50 crore is margin collateral; regulatory futures exposure uses contract notionals rather than the amount posted as margin.

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Question 49

Topic: Equity Derivatives

A distributor reviews the following complete trading record for one stock futures contract. The session begins with open interest of 1,000 contracts. All quantities are in contracts, and no contracts expire during the session.

What are the session’s trading volume and end-of-session open interest?

• A. Volume of 600 contracts and open interest of 1,080 contracts.
• B. Volume of 300 contracts and open interest of 940 contracts.
• C. Volume of 300 contracts and open interest of 1,080 contracts.
• D. Volume of 300 contracts and open interest of 1,300 contracts.

Best answer: C

Explanation: Trading volume measures contracts traded during a session, while open interest measures contracts still outstanding. Each matched contract is counted once, not separately for its buyer and seller.

When both counterparties open positions, open interest increases by 120 contracts. When one opens and the other closes, an existing position changes hands, leaving open interest unchanged. When both close positions, open interest decreases by 40 contracts.

The session’s volume is \(120 + 80 + 60 + 40 = 300\) contracts. End-of-session open interest is \(1{,}000 + 120 - 40 = 1{,}080\) contracts. Trading activity therefore need not produce an equivalent increase in outstanding contracts.

Answer choices explained:

A — Incorrect: The open interest calculation is accurate, but counting both counterparties separately doubles trading volume from 300 to 600 contracts.

B — Incorrect: Subtracting the 80-contract and 60-contract mixed opening-and-closing trades incorrectly reduces open interest; these trades transfer existing positions.

C — Correct: All 300 contracts contribute to volume; only the 120 contracts opened by both counterparties and 40 closed by both change open interest.

D — Incorrect: Adding all traded contracts to initial open interest incorrectly treats position transfers and closures as new outstanding contracts.

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Question 50

Topic: Mutual Fund Distribution

A distributor is comparing four schemes currently in the flexi-cap category for a client whose suitability assessment supports this category. The client treats the displayed three-year returns as broadly comparable and prioritises downside control demonstrated under a consistent mandate.

Fictional comparison as at 30 June 2026: All figures relate to Regular Growth plans. Returns are NAV-based after scheme expenses. Maximum drawdown covers the same three-year period.

• Aruna has the highest one-year return in this group.
• Aruna, Kaveri and Nila retained their flexi-cap mandates throughout the three years.
• Veda changed from conservative hybrid to flexi-cap on 1 July 2025; its three-year figures span both mandates.

Which scheme is best supported by this comparison for the client’s priority?

• A. Recommend Veda.
• B. Recommend Nila.
• C. Recommend Aruna.
• D. Recommend Kaveri.

Best answer: D

Explanation: Peer comparisons should align category, plan, measurement dates and investment mandate. Three years of comparable flexi-cap evidence are available for Aruna, Kaveri and Nila. With their returns treated as broadly similar, Kaveri’s smaller maximum drawdown supports the client’s downside priority.

Historical NAV returns already include expenses charged during the period, so deducting current TER again would double-count costs. Current TER still matters when evaluating ongoing costs. A record spanning different mandates cannot establish the current mandate’s three-year downside behaviour, and a recent rank is not a substitute for matched-period evidence. Historical drawdowns do not guarantee that future losses will be limited.

Answer choices explained:

A — Incorrect: Veda’s 12% drawdown spans conservative-hybrid and flexi-cap mandates, so it does not establish comparable three-year downside behaviour for its current category.

B — Incorrect: Nila’s lower current TER does not outweigh its larger 21% drawdown, and the historical NAV returns already reflect expenses charged.

C — Incorrect: Aruna’s recent lead and slightly higher three-year return do not outweigh its larger 24% drawdown under the client’s stated priority.

D — Correct: Kaveri has the smallest three-year drawdown among schemes with an unchanged flexi-cap mandate, while their returns are treated as broadly comparable.

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Questions 51–75

Question 51

Topic: Equity Derivatives

A distributor reviews an illustrative cash-settled equity-index futures contract expiring today. Trading ends at 15:30. The contract’s final settlement price equals the same index’s official closing value. Settlement cash is transferred the next business day.

Expiry-day record:

An investor compares the last futures trade with the official closing index and reports a -15-point basis, defined as futures minus spot.

Which interpretation of expiry convergence is correct?

• A. The contract settles at 25,000; the reported basis compares an earlier futures trade with the closing reference.
• B. The contract settles at 24,980; convergence uses the spot index recorded when the last futures trade occurred.
• C. The contract settles at 24,985; convergence allows a residual basis in cash-settled contracts.
• D. The contract settles above 25,000; financing carry continues until the next-business-day cash transfer.

Best answer: A

Explanation: Cash-futures convergence requires matching the underlying, timing and settlement reference. As expiry approaches, the remaining financing and dividend carry over the contract’s life shrinks to zero. For this cash-settled contract, final settlement equals the prescribed official closing index of 25,000.

The last futures trade occurred earlier, at 15:20. Its simultaneous spot comparison gives a positive 5-point basis: 24,985 minus 24,980. Comparing that trade with the later closing reference instead produces -15 points, but does not demonstrate failed expiry convergence. The next-business-day transfer of settlement cash does not add another day’s carry to the final settlement price.

Answer choices explained:

A — Correct: Final settlement uses 25,000; the earlier trade at 24,985 does not establish a difference between the final settlement price and its reference.

B — Incorrect: The simultaneous 15:20 spot quote measures basis at that time, but it is not the contract’s final settlement reference.

C — Incorrect: The contract specifies the official closing index, not the last traded futures price, as its final settlement reference.

D — Incorrect: Next-day cash transfer does not extend the contract’s life or add financing carry to its specified expiry settlement price.

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Question 52

Topic: Interest Rate Derivatives

A treasury manager will sell a government-bond holding on 10 September 2026 and initiates a short futures hedge on 1 July 2026. In this theoretical cash-settled futures market, the contracts track the same government-bond basket and have comparable liquidity.

The manager wants continuous hedging until the sale without rolling, while minimising the difference between the sale date and contractual expiry. Any futures position still open will be closed when the bonds are sold.

Which contract selection and timing assessment best meets this objective?

• A. Use December futures, with expiry 112 calendar days after the bond sale.
• B. Use September futures, with expiry 20 calendar days after the bond sale.
• C. Use September futures, with no residual expiry mismatch after closing the hedge.
• D. Use August futures, with expiry 10 calendar days before the bond sale.

Best answer: B

Explanation: When rollover is excluded, the nearest suitable futures expiry on or after the exposure’s end generally provides the closest horizon match. An earlier expiry leaves part of the exposure period uncovered.

The September contract remains available through the 10 September bond sale and expires 20 calendar days later. The manager closes the short futures position when selling the bonds rather than holding it until expiry.

Early closure does not make contractual expiry coincide with the sale date. The 20-day maturity mismatch remains relevant to basis risk because cash and futures prices need not have converged when the hedge is closed. It does not represent 20 days of unhedged bond exposure after the sale, since the bonds are no longer held.

Answer choices explained:

A — Incorrect: December covers the exposure period, but its 112-day expiry gap is larger than September’s 20-day gap under the stated minimisation objective.

B — Correct: September is the nearest expiry that covers the sale date, leaving a 20-day difference between the cash transaction and contractual expiry.

C — Incorrect: Closing on 10 September ends the hedge but does not change the contractual expiry of 30 September or its 20-day maturity mismatch.

D — Incorrect: August expiry precedes the sale, so a hedge that is not rolled would end 10 days before the cash exposure ends.

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Question 53

Topic: Equity Derivatives

A client buys an exchange-traded equity-index futures contract, cleared through clearing member A. The matched seller clears through clearing member B. The clearing corporation accepts the trade for clearing. Subsequently, B’s creditworthiness weakens and the futures settlement price falls.

For this trade, which statement correctly describes the clearing relationship and the buying client’s exposure?

• A. The clearing corporation is seller to A and buyer to B; daily settlement transfers the long position’s price losses to the corporation.
• B. The clearing corporation is buyer to A and seller to B; the client must still fund the long position’s daily losses.
• C. The clearing corporation is seller to A and buyer to B; the client must still fund the long position’s daily losses.
• D. B remains seller to A under a clearing-corporation guarantee; the client must still fund the long position’s daily losses.

Best answer: C

Explanation: Through novation, the clearing corporation interposes itself between the two sides of the accepted trade. A clears the long position, so the corporation is seller to A. B clears the short position, so the corporation is buyer to B. A therefore does not rely directly on B to honour this trade. Central clearing, supported by margin and settlement arrangements, reduces bilateral counterparty credit exposure rather than eliminating every risk.

The client still holds a long futures position. Falling settlement prices create mark-to-market losses that the client must fund through A. Daily settlement realises these losses; it does not insure the client against adverse market movements.

Answer choices explained:

A — Incorrect: Daily mark-to-market settlement requires the client to pay the price loss; it does not transfer that economic loss to the clearing corporation.

B — Incorrect: A clears the long position, so the corporation is seller to A; B clears the short position, so it is buyer to B.

C — Correct: The corporation takes the opposite side of each clearing member’s position, while the client’s long futures position retains its market risk.

D — Incorrect: Novation replaces the direct counterparty relationship with contracts facing the clearing corporation, rather than merely adding a settlement guarantee.

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Question 54

Topic: Interest Rate Derivatives

An Indian portfolio manager considers a theoretical, cash-settled European put spread on a Government of India bond. Both legs reference the same bond and expiry and settle using its clean price.

Each leg covers ₹50 lakh face value. Strike and premium quotes are in rupees per ₹100 face value.

Ignore transaction costs, taxes and financing effects. Measure profit after the initial net premium, for the option spread alone.

What are the net premium and the minimum and maximum possible profit at expiry?

• A. Net credit ₹45,000; minimum profit -₹1,55,000; maximum profit ₹45,000.
• B. Net debit ₹95,000; minimum profit -₹95,000; maximum profit ₹1,05,000.
• C. Net debit ₹45,000; minimum profit -₹45,000; maximum profit ₹1,55,000.
• D. Net debit ₹45,000; minimum profit -₹45,000; maximum profit ₹2,00,000.

Best answer: C

Explanation: Buying a higher-strike put and selling a lower-strike put creates a bear put spread. Its payoff increases as the bond price falls, but protection is capped below the lower strike.

₹50 lakh represents 50,000 blocks of ₹100 face value. The net premium paid is \( (1.40 - 0.50) \times 50{,}000 = 45{,}000 \) rupees.

At an expiry settlement price of ₹100 or above, both puts expire worthless. The resulting loss is limited to the ₹45,000 premium debit.

At ₹96 or below, the difference between the two put payoffs is fixed at ₹4 per ₹100 face value. This gives a maximum gross payoff of ₹2,00,000. After deducting the premium debit, maximum profit is ₹1,55,000. Between the strikes, net profit rises as the bond price falls.

Answer choices explained:

A — Incorrect: These amounts describe the reversed spread: selling the higher-strike put and buying the lower-strike put, rather than the stated position.

B — Incorrect: Adding paid and received premiums incorrectly gives ₹95,000; the received ₹25,000 reduces, rather than increases, the ₹70,000 paid.

C — Correct: The ₹45,000 premium debit is the maximum loss, while the ₹2,00,000 capped gross payoff produces a maximum profit of ₹1,55,000.

D — Incorrect: ₹2,00,000 is the capped gross payoff; deducting the ₹45,000 premium debit reduces the maximum net profit to ₹1,55,000.

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Question 55

Topic: Interest Rate Derivatives

A corporate client will draw a three-month rupee loan three months from today. Its interest rate will equal the three-month reference rate R observed on the drawdown date, plus a predetermined fixed spread.

The client wants to lock the reference-rate component for that single borrowing period. Consider illustrative contracts with suitable notionals available and ignore transaction costs. Which position most directly matches the client’s underlying risk and timing?

• A. Sell a bond-price futures contract expiring in month 3 on a ten-year fixed-coupon government bond.
• B. Pay fixed and receive R under a forward rate agreement covering month 3 to month 6.
• C. Buy a bond-price put option expiring in month 3 on a ten-year fixed-coupon government bond.
• D. Receive fixed and pay R under a two-year interest rate swap beginning in month 3.

Best answer: B

Explanation: A forward rate agreement (FRA) references a specified interest rate for a future borrowing or lending period. Here, R is observed in month 3 and applies to borrowing through month 6, so the matching FRA covers months 3-6.

A borrower hedges by paying fixed and receiving the reference rate. A rise in R produces an FRA receipt that compensates for higher benchmark borrowing costs; a fall produces an FRA payment that offsets the interest saving. The predetermined lending spread remains unchanged. Bond-price derivatives reference a different underlying, so a matching expiry alone does not eliminate the mismatch with the loan’s short-term reference rate.

Answer choices explained:

A — Incorrect: Short bond futures may benefit from rising yields, but their underlying bond price does not directly match the loan’s three-month reference rate.

B — Correct: The agreement references the loan’s three-month rate and borrowing period, with the receive-R position compensating for a higher rate fixing.

C — Incorrect: The put protects against a decline in the specified bond’s price, rather than fixing the client’s three-month borrowing reference rate.

D — Incorrect: Paying R under the swap adds to the loan’s floating-rate exposure rather than offsetting the higher borrowing cost when R rises.

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Question 56

Topic: Equity Derivatives

A client holds three long futures contracts on the fictional company Nila Engineering Ltd. All three contracts will remain open through expiry.

Illustrative contract sheet, dated 7 September 2026:

Assume 30 September 2026 is a business day.

What final-settlement obligation should the client plan for?

• A. Pay for and receive 1,200 shares on 30 September 2026.
• B. Pay for and receive 1,200 shares on 29 September 2026.
• C. Cash-settle the three contracts covering 1,200 shares on 30 September 2026.
• D. Pay for and receive 400 shares on 30 September 2026.

Best answer: A

Explanation: A futures contract’s lot size converts the number of contracts into the underlying quantity. Three contracts of 400 shares each represent 1,200 shares. Because the client holds a long position through expiry, physical settlement requires paying for and receiving those shares.

Expiry and final settlement are distinct dates. Here, expiry is 29 September 2026, but delivery occurs on the next business day, 30 September. The dated terms for the particular series determine the obligation; settlement methods and expiry arrangements should not be assumed to be identical across equity-futures contracts.

Answer choices explained:

A — Correct: Three long contracts represent 1,200 shares, with payment and receipt due on the specified business day after expiry.

B — Incorrect: 29 September is the expiry date, while the contract specifies physical settlement on the following business day.

C — Incorrect: The contract specifies physical delivery, not cash settlement of the futures price difference.

D — Incorrect: 400 shares is the lot size for one contract; the three open contracts together require delivery of 1,200 shares.

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Question 57

Topic: Mutual Fund Distribution

A distributor is reviewing a flexi-cap equity fund whose mandate permits investment across Indian large-, mid- and small-cap companies. Debt and cash are used only for temporary liquidity needs. Currently, 78% of its equity portfolio is in large-cap shares.

The distributor wants to compare growth-option NAV returns over a full market cycle, including the effects of the manager’s shifts between market-cap segments. Which primary benchmark is most appropriate?

• A. 65% Nifty 500 TRI and 35% government-bond TRI
• B. Nifty 500 Price Return Index
• C. Nifty 500 Total Return Index
• D. Nifty 50 Total Return Index

Best answer: C

Explanation: Benchmark selection should follow the investment mandate, not a temporary portfolio tilt. The Nifty 500 Total Return Index represents a broad Indian equity opportunity set spanning large-, mid- and small-cap companies. It provides an independent reference for evaluating the manager’s allocation decisions across these segments.

Total-return indices incorporate dividends and their reinvestment, making them more meaningful comparators for growth-option NAV returns than price-only indices. The current large-cap concentration is an active investment decision, not a change in mandate. Similarly, temporary liquidity holdings do not justify a permanent strategic bond allocation in the benchmark.

Answer choices explained:

A — Incorrect: A permanent 35% bond allocation introduces an asset mix and interest-rate exposure that do not represent the fund’s equity mandate.

B — Incorrect: A price-return index excludes dividends, whereas growth-option NAV returns reflect dividend income retained within the scheme.

C — Correct: Its broad equity universe matches the mandate, while its total-return measure includes dividends for comparison with growth-option NAV returns.

D — Incorrect: A large-cap-only index omits the mandate’s mid- and small-cap opportunities, even though large-cap shares currently dominate the portfolio.

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Question 58

Topic: Equity Derivatives

A distributor tracks an illustrative price-weighted index containing three shares. Its level equals the sum of constituent prices divided by a divisor. The methodology adjusts the divisor so that a stock split alone leaves the index level unchanged, then holds that divisor fixed during the session.

Before today’s trading, A undergoes a 3-for-1 split: each old share becomes three shares. The previous divisor was 3.00. No dividends or other corporate actions occur.

Which revised divisor and close-to-close index return should the distributor report? Round the return to two decimal places.

• A. Divisor 2.00; index return +0.50%.
• B. Divisor 1.00; index return +101.00%.
• C. Divisor 3.00; index return -33.00%.
• D. Divisor 2.00; index return +0.67%.

Best answer: A

Explanation: Divisor adjustment prevents a stock split from being recorded as a market loss. The previous index level is \( (600 + 300 + 300)/3 = 400 \).

A 3-for-1 split changes A’s reference price to ₹200. With the other prices unchanged, the reference sum becomes ₹800. To preserve the level of 400, the revised divisor is \( 800/400 = 2.00 \).

Today’s closing price sum is ₹804, giving an index level of \( 804/2 = 402 \). The close-to-close return is \( (402/400 - 1) \times 100 = 0.50\% \).

A simple average of constituent percentage returns would use equal weights, whereas this index weights constituents by their adjusted share prices.

Answer choices explained:

A — Correct: The split-adjusted reference sum of ₹800 requires a divisor of 2.00; the closing sum of ₹804 raises the index from 400 to 402.

B — Incorrect: Dividing the entire divisor by A’s split factor overadjusts the index because only A, not every constituent, undergoes the split.

C — Incorrect: Retaining the old divisor gives a closing level of 268 and incorrectly includes the split’s mechanical price reduction as an index loss.

D — Incorrect: The 0.67% figure equally averages the constituents’ 2%, 1%, and -1% returns, whereas their post-split index weights are unequal.

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Question 59

Topic: Equity Derivatives

A trader buys one illustrative equity futures contract at ₹1,000 per share, with a lot size of 100 shares. The contract expires on day 3. The table shows two alternative daily settlement-price paths for this position.

Settlement prices (₹ per share):

Cash arrangements:

• Initial margin is fully funded separately, remains fixed and is unavailable for daily settlements.
• The settlement cash balance starts at zero. Settlement credits are retained for later debits; additional cash is deposited only to cover a shortfall.
• Ignore interest, fees and intraday margin calls.

Which statement correctly gives the cumulative futures gain and minimum total additional cash required over each path, excluding initial margin?

• A. Gain: ₹8,000 for Path A and ₹10,000 for Path B; additional cash: ₹6,000 for Path A and ₹2,000 for Path B.
• B. Gain: ₹2,000 in each path; additional cash: ₹6,000 for Path A and ₹2,000 for Path B.
• C. Gain: ₹2,000 in each path; additional cash: ₹0 for Path A and ₹0 for Path B.
• D. Gain: ₹2,000 in each path; additional cash: ₹6,000 for Path A and ₹8,000 for Path B.

Best answer: B

Explanation: Daily mark-to-market settlement makes cash-flow timing depend on the price path, even when cumulative futures gains are identical. For a long position, each day’s settlement is the price change multiplied by the lot size.

Both paths produce a cumulative gain of \( (1,020 - 1,000) \times 100 = 2,000 \) rupees.

• Path A: Daily settlements are −₹6,000, +₹4,000 and +₹4,000. The first debit requires ₹6,000 of additional cash; subsequent credits require no further funding.
• Path B: Daily settlements are +₹6,000, −₹8,000 and +₹4,000. The retained first-day credit covers ₹6,000 of the second-day debit, leaving ₹2,000 to fund externally.

Thus, cumulative profit does not establish the liquidity needed to maintain a futures position through daily settlement.

Answer choices explained:

A — Incorrect: ₹8,000 and ₹10,000 are total positive settlement credits, not cumulative gains; the settlement debits must also be deducted.

B — Correct: Path A requires ₹6,000 before receiving credits, while Path B’s first-day credit reduces its later funding shortfall to ₹2,000.

C — Incorrect: A positive terminal gain does not eliminate earlier settlement obligations: Path A needs external cash on day 1 and Path B on day 2.

D — Incorrect: Path B’s ₹8,000 debit is partly covered by its retained ₹6,000 first-day credit, leaving only ₹2,000 to be funded externally.

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Question 60

Topic: Mutual Fund Distribution

A distributor is checking the timing of an investor’s complete exit from a SIF strategy.

Fictional ISID extract:

• Subscriptions: Every business day.
• Redemptions: Friday windows only, with at least three clear business days between receipt of the request and redemption. Exclude both the receipt date and the redemption date when counting notice.
• Normal payout: Two business days after redemption.
• Liquidity tool: Temporary redemption restrictions may apply during exceptional market stress, subject to applicable regulations and the disclosed policy.

A valid full-redemption request has an effective receipt date of Tuesday, 7 July 2026. Treat every Monday to Friday through 21 July as a business day, and assume no redemption restriction applies.

Which is the earliest eligible redemption date and its normal payout date?

• A. Redemption on 17 July; normal payout on 20 July.
• B. Redemption on 17 July; normal payout on 21 July.
• C. Redemption on 7 July; normal payout on 9 July.
• D. Redemption on 10 July; normal payout on 14 July.

Best answer: B

Explanation: An ISID can specify different schedules for subscriptions, redemptions and payment of redemption proceeds. Daily subscription access does not establish daily exit liquidity.

For the request received on Tuesday, 7 July, only Wednesday, 8 July and Thursday, 9 July fall strictly between receipt and the Friday, 10 July window. Two clear business days are insufficient, so the earliest eligible redemption window is Friday, 17 July.

Counting payout time from the next business day, Monday, 20 July is day one and Tuesday, 21 July is day two. The normal payout date is therefore 21 July. This schedule assumes that no disclosed liquidity restriction applies.

Answer choices explained:

A — Incorrect: The eligible redemption date is 17 July, but 20 July is only the first business day after redemption, not the second.

B — Correct: The 10 July window fails the notice requirement; 17 July qualifies, and the following two business days are 20 and 21 July.

C — Incorrect: Daily subscriptions do not create daily redemptions; the Friday-only redemption windows and advance-notice requirement still apply.

D — Incorrect: Only 8 and 9 July are clear business days before 10 July; counting the receipt date would incorrectly make this window eligible.

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Question 61

Topic: Equity Derivatives

A distributor reviews a client’s open position in an illustrative European-style equity put with physical settlement. The client wrote the put and received the premium. The strike price is ₹800 per share, and the share price at expiry is ₹740.

Which statement correctly describes the contractual exercise right and the obligation on assignment?

• A. The client may sell the shares at the strike price, and the put buyer must buy them if assigned.
• B. The client may buy the shares at the strike price, and the put buyer must sell them if assigned.
• C. The put buyer may sell the shares at the strike price, and the client must buy them if assigned.
• D. The put buyer may buy the shares at the strike price, and the client must sell them if assigned.

Best answer: C

Explanation: An option buyer holds the exercise right, while an option writer must perform if assigned. A call gives its buyer the right to buy the underlying; a put gives its buyer the right to sell it.

Here, the client wrote a physically settled put. The put buyer can exercise the right to sell shares at ₹800 per share, and the client must buy those shares if assigned. The ₹740 expiry price makes the put in the money. Receiving a premium does not give the writer an exercise right or limit the writer’s obligation to that premium.

Answer choices explained:

A — Incorrect: The client is the writer; the right to sell belongs to the put buyer, while the client’s obligation is to buy.

B — Incorrect: The writer cannot compel exercise; the put buyer holds a right to sell rather than an obligation to sell at the writer’s election.

C — Correct: A put gives its buyer the right to sell at the strike price and obligates its writer to buy if assigned.

D — Incorrect: The right to buy and the obligation to sell describe a call, not the put written by the client.

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Question 62

Topic: Equity Derivatives

A manager will sell an equity basket on 18 August 2026. It tracks an index exactly at ₹1,000 per index point, with no dividends during the hedge period. The manager compares two illustrative short hedges covering the full exposure:

• Dealer forward: agreed level 10,050, cash-settled on 18 August, with no interim collateral calls and limited unwind liquidity.
• Exchange-traded futures: expire on 26 August, are liquid and settle daily. Initial margin is already funded and must remain posted.

The interim peak below is the highest daily futures settlement price before sale.

Ignore costs, tax, interest and default. Total proceeds mean basket-sale proceeds plus net hedge settlements. Which comparison correctly states total proceeds and the maximum additional cash required for futures daily settlement?

• A. Forward proceeds: ₹100.50 lakh; futures proceeds: ₹100.80 lakh; additional futures cash: ₹2.00 lakh.
• B. Forward proceeds: ₹100.50 lakh; futures proceeds: ₹100.60 lakh; additional futures cash: ₹2.00 lakh.
• C. Forward proceeds: ₹100.00 lakh; futures proceeds: ₹100.60 lakh; additional futures cash: ₹2.00 lakh.
• D. Forward proceeds: ₹100.50 lakh; futures proceeds: ₹100.60 lakh; additional futures cash: ₹0.00 lakh.

Best answer: B

Explanation: The exact-date forward removes maturity mismatch under the quoted terms. Its settlement is \((10{,}050 - 9{,}600) \times 1{,}000\), or ₹4.50 lakh. Adding the ₹96 lakh basket sale gives ₹100.50 lakh.

The short futures position earns \((10{,}080 - 9{,}620) \times 1{,}000\), or ₹4.60 lakh, giving total proceeds of ₹100.60 lakh. Closing before expiry leaves basis risk: the remaining 20-point futures premium affects the effective sale proceeds.

At the interim peak, cumulative futures settlement losses are \((10{,}280 - 10{,}080) \times 1{,}000\), or ₹2 lakh. The unsold basket’s appreciation is not cash available for settlement. Futures offer easier exit, but their liquidity and eventual profit do not remove this interim funding need. The forward avoids those calls under its stated terms, while being harder to unwind.

Answer choices explained:

A — Incorrect: The 20-point futures premium over spot at close-out reduces effective sale proceeds below the entry futures level, giving ₹100.60 lakh.

B — Correct: The forward fixes proceeds at ₹100.50 lakh; futures add ₹4.60 lakh to the ₹96 lakh sale but require ₹2 lakh before sale.

C — Incorrect: The forward locks the agreed 10,050 level, not the starting 10,000 index level, so forward-hedged proceeds are ₹100.50 lakh.

D — Incorrect: The short futures position pays ₹2 lakh as settlement prices rise to 10,280; its eventual net gain does not eliminate earlier cash calls.

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Question 63

Topic: Equity Derivatives

An investor holds 1,000 shares of a company and plans to sell them in one month. The investor shorts two futures contracts on the same shares, each covering 500 shares. The futures expire two months after the hedge opens, but the investor closes them when selling the shares after one month.

Define basis as spot price minus futures price. Ignore dividends, taxes, transaction costs and funding costs.

What is the combined profit or loss over the one-month hedge period?

• A. Net profit of ₹10,000.
• B. Net loss of ₹6,000.
• C. No net profit or loss.
• D. Net profit of ₹6,000.

Best answer: D

Explanation: For an equal-quantity long-share, short-futures hedge, combined P/L equals the share quantity multiplied by the change in basis. Here, basis strengthens from -₹10 to -₹4 per share, producing a ₹6,000 gain.

• Share P/L: \(1,000 \times (950 - 1,000) = -50,000\) rupees.
• Futures P/L: \(2 \times 500 \times (1,010 - 954) = 56,000\) rupees.

Although the underlying and quantity match, futures expiry is later than the planned share sale. Spot and futures prices need not converge on the early closing date, leaving basis risk. This residual effect can benefit or hurt the investor.

Answer choices explained:

A — Incorrect: This assumes the opening ₹10-per-share futures premium is fully captured; the remaining ₹4-per-share premium at the early close reduces the gain.

B — Incorrect: Basis increases by ₹6 per share; for a long-share, short-futures hedge, this produces a gain rather than a loss.

C — Incorrect: Matching the underlying and quantity does not ensure complete offset: spot falls by ₹50 per share while futures fall by ₹56.

D — Correct: The shares lose ₹50,000 while the short futures gain ₹56,000, leaving a ₹6,000 profit from the basis change.

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Question 64

Topic: Equity Derivatives

A distributor is asked to classify an illustrative Indian exchange-traded contract. A fictional product note dated 7 July 2026 provides these terms:

• Reference value: An index calculated from the share prices of listed Indian banks.
• Cash flows: Both buyer and seller post initial margin and pay or receive daily mark-to-market amounts in rupees.
• Expiry: Positions not closed earlier remain subject to binding final cash settlement against the final index value.

How should the distributor classify the contract?

• A. An interest-rate futures contract.
• B. An equity-index futures contract.
• C. A currency futures contract.
• D. An equity-index option contract.

Best answer: B

Explanation: Classify a derivative using its underlying and the obligations it creates. An index built from listed bank share prices is an equity underlying. Banks’ sensitivity to interest rates does not make the contract an interest-rate derivative, and rupee settlement does not make it a currency derivative.

The two-sided margin, daily mark-to-market cash flows and binding final settlement identify futures. An equity-index option would also reference an equity index, but its holder would acquire an exercise right by paying a premium. Both the reference asset and the contract structure therefore matter when identifying the product.

Answer choices explained:

A — Incorrect: Bank shares are sensitive to interest rates, but an index of their share prices is an equity underlying, not an interest-rate underlying.

B — Correct: The underlying is a bank-share index, while daily mark-to-market cash flows and binding final settlement identify the contract as futures.

C — Incorrect: Rupees are the settlement currency; the contract references bank share prices rather than a foreign-exchange rate.

D — Incorrect: The two-sided margin and daily mark-to-market obligations describe futures, rather than an option holder’s premium-funded exercise right.

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Question 65

Topic: Mutual Fund Distribution

Two valid online redemption requests reach the AMC’s official electronic point of acceptance at 6:20 p.m. on Friday, 10 July 2026. One is for an overnight fund; the other is for a short-duration debt fund.

Fictional AMC operating extract, dated 7 July 2026:

• Overnight fund: Requests received by the cutoff use the closing NAV of the calendar day immediately preceding the next business day. Later requests use the next business day’s closing NAV.
• Short-duration fund: Requests received by the cutoff use that day’s closing NAV. Later requests use the next business day’s closing NAV.

Saturday and Sunday are non-business days for both schemes. Monday, 13 July 2026 is the next business day, with no other processing exceptions.

Which pair of applicable NAV dates is correct?

• A. Overnight: 13 July 2026; short-duration: 13 July 2026.
• B. Overnight: 10 July 2026; short-duration: 13 July 2026.
• C. Overnight: 12 July 2026; short-duration: 13 July 2026.
• D. Overnight: 12 July 2026; short-duration: 10 July 2026.

Best answer: C

Explanation: Redemption timing requires two checks: the cutoff for the scheme and submission mode, followed by the applicable NAV rule.

The overnight request arrives before the 7:00 p.m. online cutoff. Its applicable NAV is therefore dated the calendar day immediately preceding the next business day. Since the next business day is Monday, 13 July, the applicable NAV is Sunday’s, 12 July.

The short-duration fund has a 3:00 p.m. cutoff even for online requests. Its 6:20 p.m. request therefore uses Monday’s closing NAV. The later online cutoff for overnight funds must not be extended to other debt schemes. These are NAV valuation dates, not necessarily the dates when redemption proceeds reach the investor.

Answer choices explained:

A — Incorrect: Using Monday’s NAV for the overnight request incorrectly applies the after-cutoff rule despite receipt before its 7:00 p.m. online cutoff.

B — Incorrect: The overnight request meets its cutoff, but uses the NAV of the calendar day preceding Monday, not the Friday receipt date.

C — Correct: The overnight request meets its online cutoff and uses Sunday’s NAV; the short-duration request misses its cutoff and uses Monday’s NAV.

D — Incorrect: The short-duration fund retains its 3:00 p.m. cutoff, so the 6:20 p.m. request uses Monday’s NAV rather than Friday’s.

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Question 66

Topic: Mutual Fund Distribution

A client initially invested ₹10,00,000 with a target allocation of 60% to equity mutual funds and 40% to debt mutual funds. Market movements alone have changed the holdings to:

• Equity funds: ₹7,80,000
• Debt funds: ₹4,20,000

The client will now invest an additional ₹3,00,000 in full. Assume NAVs remain unchanged during investment and ignore transaction costs.

How should the contribution be allocated to restore the target weights without selling existing units?

• A. Invest ₹1,80,000 in equity funds and ₹1,20,000 in debt funds.
• B. Invest ₹0 in equity funds and ₹3,00,000 in debt funds.
• C. Invest ₹1,20,000 in equity funds and ₹1,80,000 in debt funds.
• D. Invest ₹1,95,000 in equity funds and ₹1,05,000 in debt funds.

Best answer: C

Explanation: Allocation drift occurs when portfolio weights move away from their targets. Before the contribution, the portfolio totals ₹12,00,000. Equity represents 65%, so market movements have increased its weight by 5 percentage points above target.

The fresh ₹3,00,000 is a contribution, not an investment gain. Once fully invested, it increases the portfolio total to ₹15,00,000. The target holdings are therefore ₹9,00,000 in equity and ₹6,00,000 in debt.

Subtracting the existing holdings gives the required purchases: ₹1,20,000 in equity and ₹1,80,000 in debt. Using contributions to fill these shortfalls restores the allocation without selling existing units.

Answer choices explained:

A — Incorrect: Splitting only the contribution at the target weights leaves equity at ₹9,60,000, or 64% of the enlarged portfolio.

B — Incorrect: Directing the entire contribution to debt overcorrects the equity overweight, reducing equity to 52% of the enlarged portfolio.

C — Correct: These additions bring equity to ₹9,00,000 and debt to ₹6,00,000, restoring the target weights within the ₹15,00,000 portfolio.

D — Incorrect: Splitting the contribution at the current 65% equity and 35% debt weights preserves the drift rather than correcting it.

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Question 67

Topic: Mutual Fund Distribution

A distributor reviews a SIF strategy on 30 September 2026. Its net assets are ₹100 crore. Non-derivative holdings contribute ₹50 crore to cumulative gross exposure and share no underlying with the derivatives below.

Exposure summary: All amounts are in ₹crore. Position value means aggregate futures notional for futures and aggregate current underlying market value for options.

All contracts are permissible exchange-traded derivatives. The short futures qualify as a hedge of part of the long futures exposure. The written calls are unhedged and are not for rebalancing.

Which assessment correctly applies the SIF exposure limits?

• A. The unhedged-short, cumulative gross exposure and gross option-premium limits are all breached.
• B. The gross option-premium limit is breached; the unhedged-short and cumulative gross exposure limits are met.
• C. The cumulative gross exposure limit is breached; the unhedged-short and gross option-premium limits are met.
• D. The cumulative gross exposure and gross option-premium limits are breached; the unhedged-short limit is met.

Best answer: D

Explanation: SIF exposure limits are separate tests: 25% for unhedged shorts for purposes other than hedging or rebalancing, 100% for cumulative gross exposure, and 20% for gross option-premium exposure.

The qualifying futures hedge is excluded from the unhedged-short measure. However, its different expiry prevents offsetting it against the long futures for cumulative gross exposure. Bought options contribute premium paid to cumulative gross exposure; written options contribute underlying market value.

With amounts in crore and net assets of ₹100 crore:

• Unhedged shorts: 20 crore, or 20%, within the 25% cap.
• Cumulative gross exposure: \(50 + 10 + 4 + 17 + 20 = 101\) crore, or 101%, above the 100% cap.
• Gross option premiums: \(17 + 5 = 22\) crore, or 22%, above the 20% cap.

Paid and received option premiums are added for the separate premium-exposure test, not netted.

Answer choices explained:

A — Incorrect: The qualifying short futures hedge is excluded from unhedged shorts, leaving only ₹20 crore of written calls, below the 25% cap.

B — Incorrect: Different-expiry futures cannot offset for cumulative gross exposure, which totals ₹101 crore and exceeds the 100% limit.

C — Incorrect: Gross option premiums total ₹22 crore, exceeding 20% of net assets; netting the ₹5 crore received against ₹17 crore paid is not permitted.

D — Correct: Unhedged shorts are 20%, within the 25% cap; cumulative gross exposure of 101% and gross option premiums of 22% exceed their respective limits.

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Question 68

Topic: Equity Derivatives

A client buys one single-stock futures contract at ₹1,200 per share. The contract lot is 500 shares, and the client deposits ₹90,000 in cash as initial margin. The client squares off the entire position later that day at ₹1,224 per share. Ignore brokerage, taxes, interest and all other charges.

Which statement correctly distinguishes the margin deposit, entry notional value and realised trading result?

• A. The deposit is a premium, the entry notional is ₹6 lakh, and the realised loss is ₹78,000.
• B. The deposit is collateral, the entry notional is ₹6 lakh, and the realised profit is ₹12,000.
• C. The deposit is collateral, the entry notional is ₹6 lakh, and the realised profit is ₹102,000.
• D. The deposit is collateral, the entry notional is ₹90,000, and the realised profit is ₹1,800.

Best answer: B

Explanation: Initial margin is cash security for performance of a futures contract, not an option premium or payment to purchase the underlying shares. Entry notional equals the futures price multiplied by the contract quantity: \(1{,}200 \times 500 = 600{,}000\) rupees, or ₹6 lakh.

For the long position, realised profit is \((1{,}224 - 1{,}200) \times 500 = 12{,}000\) rupees. The ₹90,000 margin is not deducted as a trading expense. Once settlement obligations are met, releasing that margin returns the client’s own collateral; it does not add to trading profit.

Answer choices explained:

A — Incorrect: Futures initial margin is collateral, not a premium, so subtracting ₹90,000 from the ₹12,000 trading gain incorrectly treats security as an expense.

B — Correct: Entry notional equals ₹1,200 times 500 shares, while the ₹24-per-share increase produces ₹12,000 of profit without expensing the margin.

C — Incorrect: ₹102,000 combines the returned ₹90,000 collateral and ₹12,000 trading gain; returning the client’s own collateral does not create profit.

D — Incorrect: Exposure depends on the contract’s 500 shares, not the margin deposited; applying the 2% price increase to margin understates the trading profit.

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Question 69

Topic: Mutual Fund Distribution

An investor holds a regular plan in a folio tagged to ARN-111111. The registrar has authenticated the investor’s request to replace that code with ARN-222222 for the existing holdings, with no change to the scheme, plan or unit holders. The incoming distributor’s registration and empanelment have been verified. The outgoing distributor refuses to issue a no-objection certificate (NOC).

Fictional AMC terms applicable to this change:

The incoming distributor receives no trail on the existing units. Eligible fresh subscriptions under its ARN follow the normal trail schedule.

Which treatment should the registrar apply?

• A. Update the ARN in the existing folio without requiring the outgoing NOC, and pay no incoming trail on the existing units.
• B. Update the ARN in the existing folio after obtaining the outgoing NOC, and pay no incoming trail on the existing units.
• C. Update the ARN in the existing folio after obtaining the outgoing NOC, and pay incoming trail on existing units at the fresh-subscription rate.
• D. Update the ARN in the existing folio without requiring the outgoing NOC, and pay incoming trail on existing units at the fresh-subscription rate.

Best answer: A

Explanation: An authenticated investor instruction authorises a change of distributor code; the outgoing distributor cannot make its NOC a condition for that change. The registrar should update the ARN through its normal processing procedure.

The ARN records the distribution relationship, not ownership of the investment. Changing it does not itself redeem units, create a fresh purchase or change the scheme, plan or unit holders.

Remuneration must be assessed separately under the applicable terms. Here, the incoming distributor receives no trail on the existing units. The normal trail schedule applies to eligible fresh subscriptions, not automatically to holdings whose distributor code has changed.

Answer choices explained:

A — Correct: The authenticated investor instruction permits the ARN change without the outgoing NOC, while the applicable terms exclude incoming trail on existing units.

B — Incorrect: The remuneration treatment follows the stated terms, but the outgoing distributor’s NOC is not a prerequisite for processing the authenticated investor instruction.

C — Incorrect: This imposes an unnecessary outgoing-consent condition and incorrectly applies fresh-subscription remuneration to existing units.

D — Incorrect: Changing the ARN does not make existing units fresh subscriptions; the supplied terms exclude incoming trail on those units.

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Question 70

Topic: Interest Rate Derivatives

On 1 July 2026, a corporate client plans to borrow ₹1 crore from 1 October to 30 December 2026 (90 days). Interest is payable at maturity at the three-month reference rate fixed on 1 October. Rates use simple actual/360 interest, with no credit spread.

The client compares two illustrative hedge contracts:

• FRA: Same notional and borrowing period; the client pays 6% fixed and receives the reference rate. Net cash settlement occurs on 1 October.
• Bond futures: Standard maturity of 30 September 2026, daily mark-to-market, and cash settlement against a 10-year government bond’s price per ₹100 face value. The position would match the loan’s initial interest-rate sensitivity.

Assume the reference rate fixes at 7% on 1 October, and the reference rate and bond yield generally move together. Ignore costs.

Which comparison is correct, rounding the FRA settlement to the nearest rupee?

• A. The FRA pays ₹24,570 at the borrowing start; selling the September bond futures offers a proxy hedge.
• B. The FRA pays ₹25,000 at the borrowing start; selling the September bond futures offers a proxy hedge.
• C. The FRA pays ₹24,570 at the borrowing start; buying the September bond futures offers a proxy hedge.
• D. The FRA pays ₹24,570 at the borrowing start; selling the September bond futures locks the borrowing rate at 6%.

Best answer: A

Explanation: An FRA can match a future loan’s notional, rate-fixing date and interest period. A borrower paying fixed and receiving floating receives compensation when the reference rate exceeds the agreed rate.

₹1 crore equals ₹10,000,000. The maturity-date interest difference is \(10{,}000{,}000 \times (0.07-0.06) \times 90/360 = 25{,}000\) rupees. Because settlement occurs at the borrowing start, this difference is discounted:

\[ \text{Receipt} = \frac{25{,}000}{1+0.07\times90/360} = 24{,}570.02 \]

The client therefore receives ₹24,570 on 1 October.

Bond prices generally fall when yields rise, making a short bond futures position the appropriate hedge direction. However, the September expiry and 10-year bond underlying do not exactly match the loan’s reference rate and borrowing period. Matching initial sensitivity leaves basis and timing risk. Futures also create daily margin cash flows rather than one FRA settlement.

Answer choices explained:

A — Correct: Discounting the ₹25,000 interest difference at 7% for 90 days gives ₹24,570; short bond futures provide indirect protection against rising yields.

B — Incorrect: ₹25,000 is the maturity-date interest difference; settlement at the borrowing start requires discounting that amount at the reference rate.

C — Incorrect: Buying bond-price futures generally produces losses when yields rise, increasing rather than offsetting the borrower’s exposure to higher interest rates.

D — Incorrect: Initial sensitivity matching does not make September futures on a 10-year bond replicate the three-month reference rate fixed on 1 October.

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Question 71

Topic: Equity Derivatives

A client buys two contracts of an illustrative stock future. Each contract covers 500 shares. The opening futures price is ₹1,000 per share, and the client deposits total initial margin of ₹1,25,000.

Following a decline in the underlying share price, the futures price falls to ₹980 per share. Ignore costs and interest. Use the initial margin and opening notional exposure as fixed percentage bases.

What is the mark-to-market loss as a percentage of initial margin and opening notional exposure, respectively?

• A. 2% of initial margin and 0.25% of opening notional exposure.
• B. 8% of initial margin and 1% of opening notional exposure.
• C. 16% of initial margin and 2% of opening notional exposure.
• D. 2% of initial margin and 2% of opening notional exposure.

Best answer: C

Explanation: Futures profit or loss is calculated on the full contract exposure, not just the margin deposit. Opening notional exposure is \(2 \times 500 \times 1{,}000 = 10{,}00{,}000\) rupees. The loss is \(2 \times 500 \times (1{,}000 - 980) = 20{,}000\) rupees.

Relative to initial margin, the loss is \(20{,}000 / 1{,}25{,}000 \times 100 = 16\%\). Relative to opening notional exposure, it is \(20{,}000 / 10{,}00{,}000 \times 100 = 2\%\).

Notional exposure is eight times the initial margin, so the 2% adverse price move produces a loss equal to 16% of margin. Initial margin is collateral, not the purchase price or a ceiling on possible losses.

Answer choices explained:

A — Incorrect: These percentages apply the price decline to margin, producing ₹2,500; futures losses instead depend on the full contract exposure.

B — Incorrect: These percentages count only one contract’s ₹10,000 loss while retaining the total margin and notional exposure for both contracts.

C — Correct: The ₹20,000 loss is 16% of the ₹1,25,000 initial margin and 2% of the ₹10,00,000 opening notional exposure.

D — Incorrect: The 2% price decline measures the loss relative to notional exposure; the smaller margin base makes the loss percentage larger.

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Question 72

Topic: Mutual Fund Distribution

A mutual fund distributor receives three servicing requests:

• Meera has turned 18. Her father is still recorded as guardian of her folio.
• Arun, previously an NRI, has become resident in India for the applicable KYC and banking requirements.
• The Karta of Shah HUF has died. The HUF continues without partition, and its adult coparceners have agreed on a successor Karta.

Which servicing instruction correctly identifies the required authority changes and key supporting records?

• A. Register Meera’s own signature, KYC and bank details; update Arun’s status and bank records; record the successor Karta using the death certificate, proof of authority and KYC.
• B. Register Meera’s own signature, KYC and bank details; update Arun’s status and bank records; transmit the HUF units to the successor Karta’s personal folio using the death certificate and KYC.
• C. Register Meera’s own signature, KYC and bank details; require Arun to transfer existing units into a new resident folio; record the successor Karta using the death certificate, proof of authority and KYC.
• D. Retain the father’s guardian signature with Meera’s updated KYC and bank details; update Arun’s status and bank records; record the successor Karta using the death certificate, proof of authority and KYC.

Best answer: A

Explanation: A change in investor status does not always change ownership. It may instead change transaction authority or the records supporting that authority.

On reaching majority, Meera must complete the minor-to-major formalities, including her own KYC, validated signature and bank documentation. Her father’s former guardian status no longer authorises him to transact.

Arun remains the same investor. His residential-status, KYC and banking records must reflect his resident status; a new folio is not compulsory.

Shah HUF also remains the investor because it continues without partition. The AMC must establish the former Karta’s death and the successor’s authority, and obtain the successor’s KYC and prescribed supporting documents. The successor acts for the HUF, not as personal owner of its units.

Answer choices explained:

A — Correct: These updates establish Meera’s personal authority, revise Arun’s residential records and document the successor’s authority to represent the continuing HUF.

B — Incorrect: The continuing HUF remains the unitholder; replacing its Karta does not make the units the successor Karta’s personal property.

C — Incorrect: Becoming resident requires Arun to update his existing records; it does not require transferring his units into a new folio.

D — Incorrect: The father’s authority as guardian does not continue after Meera reaches majority; Meera must establish her own transaction authority.

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Question 73

Topic: Mutual Fund Distribution

A distributor compares two fixed-rate debt portfolios with different coupon and principal cash-flow patterns. All bond holdings in each portfolio have the long-term credit rating shown. Average maturity and modified duration are in years.

Assume a parallel increase of 25 basis points in yields, with credit spreads and ratings unchanged. Ignore income accrual and convexity.

Which statement correctly combines the approximate price declines with the ratings-based credit-risk comparison?

• A. P declines by 1.75% and Q by 2.00%; P has lower credit risk.
• B. P declines by 1.45% and Q by 1.30%; P has lower credit risk.
• C. P declines by 1.75% and Q by 2.00%; Q has lower credit risk.
• D. P declines by 1.45% and Q by 1.30%; Q has lower credit risk.

Best answer: B

Explanation: Modified duration estimates price sensitivity to a small yield change. A 25-basis-point increase equals 0.0025 in decimal form, giving these first-order price changes:

• Portfolio P: \(-5.8 \times 0.0025 = -1.45\%\).
• Portfolio Q: \(-5.2 \times 0.0025 = -1.30\%\).

Q is less sensitive despite its longer average maturity. Maturity describes the repayment horizon, whereas duration reflects the timing and present value of cash flows when measuring interest-rate sensitivity.

Credit ratings assess creditworthiness, not sensitivity to interest rates. P’s AAA-rated holdings indicate lower credit risk than Q’s AA-rated holdings. Thus, Q has lower interest-rate sensitivity but higher ratings-based credit risk. Neither rating prevents price losses when yields rise.

Answer choices explained:

A — Incorrect: The credit-risk comparison follows the ratings, but the price declines incorrectly use average maturity instead of modified duration.

B — Correct: The declines are \(5.8 \times 0.25\% = 1.45\%\) and \(5.2 \times 0.25\% = 1.30\%\); AAA indicates lower credit risk than AA.

C — Incorrect: These declines substitute maturity for modified duration, while the credit-risk comparison reverses the relative creditworthiness indicated by AAA and AA.

D — Incorrect: The duration-based declines are appropriate, but Q’s lower interest-rate sensitivity does not make its AA-rated holdings less exposed to credit risk.

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Question 74

Topic: Mutual Fund Distribution

A distributor reviews fictional disclosures for the same recurring expenses of a mutual fund scheme. The unaudited half-year results cover 1 April to 30 September 2025. The annual report covers 1 April 2025 to 31 March 2026.

Extracts from financial statements and notes (₹ lakh):

Expenses are accrued, and the annual expense total includes the half-year amount unchanged. There are no prepayments or movements in expense payables other than expense recognition and cash settlement.

How much cash was paid for these expenses during 1 October 2025 to 31 March 2026?

• A. ₹70 lakh
• B. ₹44 lakh
• C. ₹42 lakh
• D. ₹40 lakh

Best answer: D

Explanation: Annual expense totals cover the whole financial year, while expenses payable are liabilities measured at particular dates. Subtracting the half-year expense of ₹30 lakh from the annual expense of ₹72 lakh gives second-half expenses of ₹42 lakh.

Under accrual accounting, recognising an expense and paying it need not occur together. Cash paid equals the period’s expense plus opening payables minus closing payables:

\[ \text{Cash paid (in lakh)} = (72 - 30) + 8 - 10 = 40. \]

The September closing payable is the October opening balance. Since payables increased by ₹2 lakh during the second half, cash paid was ₹2 lakh less than expenses recognised.

Answer choices explained:

A — Incorrect: ₹70 lakh uses full-year expenses with second-half payable balances, mixing an annual expense flow with a six-month liability movement.

B — Incorrect: Adding the ₹2 lakh increase in expenses payable reverses the adjustment; a higher unpaid balance reduces cash paid.

C — Incorrect: ₹42 lakh is the second-half accrued expense, not the cash settlement, because expenses payable increased by ₹2 lakh.

D — Correct: Second-half expenses are ₹42 lakh; adding ₹8 lakh opening payables and subtracting ₹10 lakh closing payables gives ₹40 lakh paid.

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Question 75

Topic: Mutual Fund Distribution

A mutual fund scheme has 3 lakh units outstanding and a previously declared NAV of ₹23 per unit.

At today’s common valuation point:

• Provisional net assets are ₹90 lakh, including ₹18 lakh of fresh subscription cash.
• Units for these subscriptions have not yet been issued.

Subscriptions are allotted at today’s NAV. Ignore stamp duty and transaction costs, and assume there are no other unit changes.

What is the NAV per unit immediately after allotment, rounded to two decimal places?

• A. ₹24.00 per unit
• B. ₹30.00 per unit
• C. ₹25.00 per unit
• D. ₹23.79 per unit

Best answer: A

Explanation: Fresh subscriptions increase scheme assets and create corresponding units; they do not create investment gains for existing holders. The provisional ₹90 lakh includes ₹18 lakh awaiting allotment, so net assets attributable to the existing units are ₹72 lakh. Today’s applicable NAV is therefore \(72/3 = 24\) rupees per unit.

The subscription receives \(18/24 = 0.75\) lakh units. After allotment, net assets remain ₹90 lakh and total units become 3.75 lakh, giving \(90/3.75 = 24\) rupees per unit. The increase from the previous ₹23 NAV reflects changes in net assets attributable to existing holders, not the incoming subscription cash.

Answer choices explained:

A — Correct: The existing units represent ₹72 lakh, giving a ₹24 NAV; issuing 0.75 lakh units for the subscription preserves that NAV.

B — Incorrect: Dividing ₹90 lakh by the existing 3 lakh units includes subscription cash in assets while omitting the corresponding new units.

C — Incorrect: Including subscription cash first gives an incorrect allotment price of ₹30; issuing 0.60 lakh units at that price produces ₹25.

D — Incorrect: Allotting at the previous ₹23 NAV would issue approximately 0.78261 lakh units, incorrectly using an outdated price and producing ₹23.79.

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Questions 76–100

Question 76

Topic: Equity Derivatives

A distributor is comparing underlying indices for strategies using equity-index futures. The intended exposure is a broad, diversified cross-section of Indian equities, and the cash basket should be economical to replicate at the expected trade size. All four fictional indices have transparent rules and similar rebalancing schedules.

Which index is most suitable for the stated purpose?

• A. The free-float market-cap-weighted 120-stock index.
• B. The free-float market-cap-weighted 50-stock index.
• C. The full-market-cap-weighted 300-stock index.
• D. The equal-weighted 500-stock index.

Best answer: A

Explanation: Index suitability depends on investability and weight distribution, not just the number of constituents. A derivative underlying should support cash-basket trading for replication, hedging and arbitrage while representing the intended equity exposure.

The 120-stock index combines reasonably broad coverage, a 24% top-five weight and liquidity at the required trade size. Free-float market-capitalisation weighting bases weights on publicly tradable share capital rather than total share capital, aligning the index more closely with investable market value. A long constituent list does not compensate for poor liquidity, while a liquid basket can still carry substantial company concentration.

Answer choices explained:

A — Correct: Liquid constituents, free-float-based weights and moderate top-five concentration provide the strongest combination of replicability and diversification for the intended exposure.

B — Incorrect: Trading liquidity supports replication, but the 62% top-five weight leaves the exposure heavily dependent on a few companies.

C — Incorrect: The larger constituent count does not overcome replication difficulties arising from substantial weights in shares with limited free float and trading depth.

D — Incorrect: Equal weighting limits concentration, but thinly traded constituents make the cash basket costly to replicate at the expected trade size.

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Question 77

Topic: Mutual Fund Distribution

A distributor reviews four contact-detail correction requests at close of business on 13 July 2026. A fictional AMC’s service charter, effective 1 July 2026, states:

Complete each request by close of the third business day after receiving complete, valid investor documents. Exclude the receipt date.

Business-day calendar: 6-10 July and 13-17 July are business days. The AMC is closed on 11-12 July.

All dates below are in July 2026. Pending requests with complete documents are awaiting internal processing, not further investor information.

Which request has breached the stated turnaround standard?

• A. Request R44 has breached the turnaround standard.
• B. Request R42 has breached the turnaround standard.
• C. Request R41 has breached the turnaround standard.
• D. Request R43 has breached the turnaround standard.

Best answer: D

Explanation: A service-delay breach is measured from receipt of complete, valid documents, not from the first submission. Excluding the receipt date, R43’s three business days are 8, 9 and 10 July. Its deadline was close of business on 10 July, so remaining unprocessed on 13 July breaches the AMC’s stated standard.

Weekends do not count toward this period. Missing investor documents prevent the clock from starting, while an internal processing backlog does not extend an established deadline. Completion on the third business day is timely.

Answer choices explained:

A — Incorrect: The three business days after 8 July are 9, 10 and 13 July, so completion on 13 July meets the deadline.

B — Incorrect: The missing investor signature means the documents remain incomplete, so the turnaround period has not started despite the earlier submission.

C — Incorrect: Complete documents arrived on 10 July, making 13, 14 and 15 July the three business days; the deadline has not passed.

D — Correct: After complete documents arrived on 7 July, the deadline was 10 July; the request remains pending beyond that deadline.

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Question 78

Topic: Mutual Fund Distribution

A mutual fund distributor has a valid AMFI Registration Number (ARN) and has separately completed empanelment with an asset management company (AMC). Its draft client brochure states:

“Our ARN confirms that we are registered with SEBI as a mutual fund distributor.”

Which description should replace the brochure’s statement?

• A. The ARN records AMFI registration of the distributor; AMFI and SEBI both exercise statutory regulatory powers over mutual funds.
• B. The ARN records AMC registration of the distributor; AMFI coordinates that registration and SEBI is the statutory mutual-fund regulator.
• C. The ARN records AMFI registration of the distributor; AMFI is an industry body and SEBI is the statutory mutual-fund regulator.
• D. The ARN records SEBI registration of the distributor; AMFI administers the statutory registration process as SEBI’s delegated registration authority.

Best answer: C

Explanation: AMFI is the mutual fund industry’s association, not its statutory regulator. It administers ARN registration for distributors, promotes industry standards and codes of conduct, and supports investor information and awareness. SEBI sets and enforces the statutory regulatory framework for mutual funds.

An ARN therefore identifies an AMFI-registered distributor; it is not evidence of SEBI registration. AMC empanelment is a separate arrangement for distributing that AMC’s products. These functions should not be conflated in client communications. AMFI’s non-statutory status also does not make applicable distributor-registration requirements or conduct standards optional.

Answer choices explained:

A — Incorrect: AMFI’s registration and industry-standard functions do not confer statutory regulatory powers; SEBI is the statutory regulator.

B — Incorrect: AMC empanelment is separate from ARN registration; an ARN records registration with AMFI, not with an individual AMC.

C — Correct: AMFI administers distributor registration as an industry association, while SEBI exercises statutory regulatory authority over the mutual-fund framework.

D — Incorrect: An ARN records registration with AMFI; its issuance does not amount to registration of the distributor with SEBI.

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Question 79

Topic: Equity Derivatives

A fund manager hedges a diversified equity portfolio using index futures.

• Portfolio value: ₹4 crore (₹400 lakh), with beta 1.25 relative to the index.
• Hedge: 40 futures contracts sold at 20,000 index points.
• Illustrative contract terms: lot size of 50 index units, so each index-point movement is worth ₹50 per contract.
• At close-out, both the index and futures prices have fallen by 8%.

Assume beta remains constant. Estimate the portfolio’s return using beta, and ignore stock-specific returns, dividends, transaction costs and margin-funding costs.

What is the approximate combined profit or loss on the portfolio and futures hedge?

• A. A net loss of ₹8 lakh.
• B. A net gain of ₹6.4 lakh.
• C. A net loss of ₹72 lakh.
• D. No net profit or loss.

Best answer: A

Explanation: A protective short futures hedge gains when futures prices fall, offsetting the portfolio’s market loss. Beta determines the portfolio’s estimated sensitivity to the index.

The estimated portfolio loss is \(400 \times 1.25 \times 0.08 = 40\) lakh rupees. The futures gain is \((20,000 \times 0.08) \times 50 \times 40 = 3,200,000\) rupees, or ₹32 lakh. The combined result is therefore a loss of ₹8 lakh.

The futures notional equals the portfolio’s value, but the portfolio’s beta-adjusted exposure is higher. A full approximate market hedge would require 50 short contracts rather than 40.

Answer choices explained:

A — Correct: The estimated equity loss is ₹40 lakh, while the short futures gain ₹32 lakh, leaving a combined loss of ₹8 lakh.

B — Incorrect: This results from dividing the index return by beta rather than multiplying it, understating the portfolio’s estimated loss.

C — Incorrect: This adds the futures movement as a loss, whereas falling futures prices produce a gain on the short position.

D — Incorrect: This treats portfolio beta as 1; at beta 1.25, the equity loss exceeds the futures gain despite equal initial notionals.

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Question 80

Topic: Mutual Fund Distribution

An investor wants to reduce dependence on Indian banking-sector performance. The current equity portfolio is:

The investor proposes adding ₹10 lakh of fresh money to a financial-services equity fund from a different AMC. This fund invests 80% in Indian banks and 20% in Indian insurers. Its bank holdings include the two banks held directly.

Assume these weights remain unchanged and ignore transaction costs and market movements. How will the addition affect the portfolio’s banking-sector concentration?

• A. Banking-sector exposure will be 64% of portfolio value, reducing concentration.
• B. Banking-sector exposure will be 56% of portfolio value, reducing concentration.
• C. Banking-sector exposure will be 72% of portfolio value, increasing concentration.
• D. Banking-sector exposure will be 76% of portfolio value, increasing concentration.

Best answer: C

Explanation: Concentration must be assessed using the underlying exposures across direct holdings and mutual funds, rather than the number of schemes or AMCs.

The existing banking exposure is ₹24 lakh directly plus 25% of ₹16 lakh through the diversified fund, giving ₹28 lakh. This represents 70% of the current ₹40 lakh portfolio.

The proposed investment adds banking exposure of \(10 \times 0.80 = 8\) lakh. After investment, banking exposure becomes ₹36 lakh within a ₹50 lakh portfolio, or 72%.

Although the addition introduces another AMC and some insurance exposure, it increases dependence on banking-sector performance. Overlapping bank holdings also preserve common company-specific risks.

Answer choices explained:

A — Incorrect: This includes the direct bank shares and the new fund’s banking exposure but omits ₹4 lakh held through the existing equity fund.

B — Incorrect: This increases the portfolio denominator for the fresh investment but omits the ₹8 lakh of banking exposure that investment adds.

C — Correct: Banks held directly and through both funds total ₹36 lakh in a ₹50 lakh portfolio, increasing exposure from the current 70%.

D — Incorrect: This counts the entire financial-services investment as banking exposure, although 20% of that fund is invested in insurers.

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Question 81

Topic: Mutual Fund Distribution

A client was allotted 12,000 units of a fictional open-ended debt mutual fund on 5 January 2026 at an NAV of ₹25.00. The client redeems all units on 6 July 2026 at the applicable NAV of ₹27.50.

Exit-load schedule applicable to this purchase:

• Up to 90 days after allotment: 2%.
• From 91 to 365 days after allotment: 1%.
• More than 365 days after allotment: Nil.

The scheme’s published annual TER is 1.20%. Ignore investor-level income tax; no STT or additional transaction charges apply.

How much will the client receive after the exit load?

• A. ₹3,23,400
• B. ₹3,26,700
• C. ₹3,22,740
• D. ₹3,27,000

Best answer: B

Explanation: Exit load is calculated on the redemption value at the applicable NAV, using the rate corresponding to the holding period. These units have been held for more than 90 days but not more than 365 days, so the applicable rate is 1%.

The gross redemption value of 12,000 units at ₹27.50 each is ₹3,30,000. The exit load is ₹3,300, leaving net proceeds of ₹3,26,700.

The purchase NAV determines the original investment cost, not the base for calculating exit load. TER is already reflected in the published NAV and must not be deducted again. Investor-level income tax is excluded as stated.

Answer choices explained:

A — Incorrect: This applies the 2% load for redemptions within 90 days; the actual holding period falls in the 1% band.

B — Correct: The units fall in the 1% band, so deducting ₹3,300 from their ₹3,30,000 redemption value gives ₹3,26,700.

C — Incorrect: This deducts ₹3,300 as exit load and another ₹3,960 for TER, although scheme expenses are already reflected in NAV.

D — Incorrect: This calculates the 1% load on the ₹3,00,000 purchase cost rather than the ₹3,30,000 value at redemption.

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Question 82

Topic: Equity Derivatives

An Indian distributor is reviewing a fictional training-note extract about the development of exchange-traded equity derivatives. FII means foreign institutional investor, the historical participant category.

Which interpretation correctly distinguishes the three developments after the index-futures launch?

• A. Index options added a derivative type; FII product access widened participation; revised lot sizes changed contract specifications.
• B. Index options added a derivative type; FII product access added a derivative type; revised lot sizes changed contract specifications.
• C. Index options changed contract specifications; FII product access widened participation; revised lot sizes changed contract specifications.
• D. Index options added a derivative type; FII product access widened participation; revised lot sizes added a derivative type.

Best answer: A

Explanation: Derivative-market development can involve a new instrument, broader participation or revised contract specifications. These changes should be distinguished even when each affects market access.

Index options introduced a different contractual structure from index futures: an option gives its buyer a right, while a futures contract creates obligations for both parties. FIIs already had limited index-futures access from August 2000. The February 2002 change broadened their permitted product access to all exchange-traded derivative contracts, subject to prescribed position limits; it was not their first admission to derivatives.

Revising lot sizes changed the quantity represented by each contract and therefore its notional exposure at a given price. Such revisions can affect the practical scale of participation, but they do not turn an existing future or option into a new derivative type.

Answer choices explained:

A — Correct: The timeline distinguishes a new instrument, broader permitted product access for an existing investor category, and a change in the quantity represented by each contract.

B — Incorrect: The FII change broadened the existing derivative contracts that this investor category could trade; it did not create another derivative instrument.

C — Incorrect: Index options introduced a right-based instrument distinct from obligation-based futures, rather than merely revising the specifications of existing futures.

D — Incorrect: Revising lot sizes changes the units represented by a contract, not whether the instrument is a future or an option.

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Question 83

Topic: Equity Derivatives

A distributor reviews a proposed unhedged short strangle using illustrative cash-settled index options. Both legs have the same expiry and a lot size of 50 index units.

Two contracts of each leg are sold and held until expiry. Ignore transaction costs and taxes.

The position’s stress-loss limit is ₹1.50 lakh, measured after including premium receipts. The review tests expiry index levels of 18,000 and 23,000.

What is the largest net loss across these stress levels, and how does it compare with the limit?

• A. ₹2.28 lakh; the position exceeds the stress-loss limit.
• B. ₹22,000; the position is within the stress-loss limit.
• C. ₹1.28 lakh; the position is within the stress-loss limit.
• D. ₹2.50 lakh; the position exceeds the stress-loss limit.

Best answer: A

Explanation: A short strangle earns premium upfront but creates settlement obligations when either written option finishes in the money. Each leg covers 100 index units, so total premium received is ₹22,000.

• At 18,000, the put’s intrinsic value is ₹1,500 per unit. Settlement is ₹1.50 lakh, leaving a net loss of ₹1.28 lakh after premium receipts.
• At 23,000, the call’s intrinsic value is ₹2,500 per unit. Settlement is ₹2.50 lakh, leaving a net loss of ₹2.28 lakh.

The largest tested loss exceeds the ₹1.50 lakh budget by ₹78,000. It is not the maximum possible loss: a still higher index level increases the written-call loss. Premium received is the strategy’s maximum profit, not a ceiling on loss.

Answer choices explained:

A — Correct: At 23,000, call settlement of ₹2.50 lakh less total premium receipts of ₹22,000 produces a ₹2.28 lakh loss.

B — Incorrect: ₹22,000 is the premium received, not a loss cap; settlement obligations on the written options can exceed that amount.

C — Incorrect: ₹1.28 lakh is the loss at 18,000; the 23,000 scenario produces a larger loss on the written calls.

D — Incorrect: ₹2.50 lakh is the gross call settlement at 23,000; deducting the ₹22,000 premium received gives the net loss.

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Question 84

Topic: Mutual Fund Distribution

An investor promptly complains to the AMC after a physical account statement reveals a switch she did not authorise. After verifying her identity, the AMC finds:

• The distributor submitted the switch without any instruction or mandate from the investor.
• The transaction confirmation went to an incorrect email address entered by the investor on her application.

The distributor argues that the email error and failure to object to the confirmation make the switch binding. Which statement correctly describes the investor’s rights and obligations?

• A. She must accept the switch as authorised because confirmation was dispatched, while remaining responsible for correcting the email address in her folio.
• B. She may challenge the switch only through the distributor, while the AMC’s responsibility is limited to correcting the email address in her folio.
• C. She must correct her email address before the AMC is required to consider her complaint about the unauthorised switch.
• D. She may challenge the switch through the AMC’s grievance process and must correct the inaccurate email address recorded in her folio.

Best answer: D

Explanation: An investor’s obligation to provide accurate information is separate from the right to dispute unauthorised transactions. Incorrect contact details may explain why a confirmation was not received, but they do not give a distributor authority to switch investments or turn silence into consent.

Here, no investor instruction or mandate supports the switch. The investor may therefore seek examination of the transaction through the AMC’s grievance process. At the same time, she must correct the email address in her folio. Neither the inaccurate email nor the absence of an earlier objection removes her right to have the complaint addressed.

Answer choices explained:

A — Incorrect: Dispatching a confirmation does not establish authorisation; her email error cannot validate a switch made without her instruction.

B — Incorrect: The AMC must address complaints about transactions in its schemes, including disputed instructions submitted by a distributor.

C — Incorrect: Correcting inaccurate contact information is her duty, but it is not a prerequisite for the AMC to examine her unauthorised-transaction complaint.

D — Correct: She retains the right to dispute a transaction made without her authority and remains responsible for providing accurate contact information.

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Question 85

Topic: Equity Derivatives

A portfolio manager wants to reduce an equity portfolio’s estimated market beta to zero using futures on its benchmark index.

• Portfolio market value: ₹3.20 crore (₹320 lakh)
• Portfolio beta to the index: 1.15
• Illustrative futures price: 24,000 index points
• Contract lot size: 50 units, with ₹1 per index point per unit

Round the hedge size to the nearest whole contract. Measure residual market exposure as beta-adjusted portfolio exposure less short futures notional. Ignore basis risk, transaction costs and changes in beta.

Which hedge and residual market exposure result?

• A. Sell 31 contracts; residual exposure is ₹4 lakh net short.
• B. Sell 23 contracts; residual exposure is ₹92 lakh net long.
• C. Sell 27 contracts; residual exposure is ₹44 lakh net long.
• D. Sell 30 contracts; residual exposure is ₹8 lakh net long.

Best answer: A

Explanation: A market-neutral hedge uses beta-adjusted portfolio exposure rather than portfolio value alone. The portfolio’s exposure is \(320 \times 1.15 = 368\) lakh rupees. Each futures contract represents \(24,000 \times 50 = 1,200,000\) rupees, or ₹12 lakh.

The required number of short contracts, \(N\), is:

\[ N = \frac{368}{12} = 30.6667 \]

Rounding to the nearest whole contract gives 31 contracts. These provide ₹372 lakh of short index exposure, so residual exposure is \(368 - 372 = -4\) lakh rupees. The negative sign indicates ₹4 lakh net short: a small overhedge caused by whole-contract rounding, not a trading loss.

Answer choices explained:

A — Correct: Beta-adjusted exposure is ₹368 lakh; 31 contracts hedge ₹372 lakh, leaving ₹4 lakh net short after nearest-contract rounding.

B — Incorrect: Dividing portfolio value by beta instead of multiplying produces 23 contracts and leaves ₹92 lakh of long market exposure.

C — Incorrect: Using portfolio value without adjusting for its 1.15 beta produces 27 contracts, understating the required hedge and leaving ₹44 lakh long.

D — Incorrect: The required 30.67 contracts must be rounded to 31, not down to 30; selling 30 contracts leaves ₹8 lakh long.

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Question 86

Topic: Equity Derivatives

An equity portfolio manager wants to minimise the residual short-term volatility of a ₹6 crore long-only mid-cap equity portfolio using futures on just one index. For this illustration, futures on both indices below are available, each with a notional value of ₹20 lakh per contract.

The portfolio’s estimated relationships with the indices, measured over the same daily-return period, are:

Assume these relationships remain stable, futures percentage price changes equal the respective index returns, and transaction costs are nil. Which position best meets the manager’s objective?

• A. Sell 36 contracts of large-cap index futures.
• B. Sell 30 contracts of large-cap index futures.
• C. Sell 30 contracts of mid-cap index futures.
• D. Sell 27 contracts of mid-cap index futures.

Best answer: D

Explanation: An index hedge should match the portfolio’s return behaviour, not merely its rupee value. The mid-cap index’s higher correlation indicates lower estimated residual volatility when each hedge is appropriately sized.

For a long equity portfolio, sell futures using the portfolio beta relative to the selected index. Expressing both values in lakh, the number of contracts is:

\[ N = \frac{\beta \times \text{portfolio value}}{\text{contract notional}} = \frac{0.90 \times 600}{20} = 27 \]

The hedge remains imperfect because correlation is below 1. Differences in portfolio and index composition leave tracking risk even after beta adjustment. In practice, futures-index basis changes can add further risk; those changes are excluded by the illustration’s assumptions.

Answer choices explained:

A — Incorrect: The quantity correctly uses the large-cap beta, but the lower portfolio correlation leaves more residual volatility than the mid-cap index hedge.

B — Incorrect: This uses unadjusted notional matching for the less-correlated index; its 1.20 beta requires 36 contracts for a beta-adjusted hedge.

C — Incorrect: This matches portfolio value to futures notional but ignores the 0.90 beta, producing a larger short position than the minimum-variance hedge.

D — Correct: The mid-cap index has the higher correlation, and its beta gives a hedge of \(0.90 \times 600/20 = 27\) contracts.

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Question 87

Topic: Mutual Fund Distribution

A client must pay a non-deferrable education fee of ₹5,00,000 in 24 days. She has ₹5,03,000 earmarked for it and cannot provide additional money. She understands that mutual funds do not guarantee capital and prioritises minimising the risk of a payment shortfall over earning a higher return.

All four schemes offer daily redemption. Her planned redemption date allows proceeds to reach her bank before the deadline, and no exit load will apply. The returns quoted below are past one-year returns, not assured yields.

Which scheme is most suitable for this reserve?

• A. An arbitrage fund holding cash equities hedged with futures expiring in six weeks; past one-year return of 7.4%.
• B. A corporate bond fund holding AAA bonds with modified duration of 3 years; past one-year return of 7.8%.
• C. A gilt fund holding government bonds with modified duration of 6 years; past one-year return of 8.6%.
• D. A liquid fund holding Treasury bills maturing within 60 days; past one-year return of 6.2%.

Best answer: D

Explanation: An unavoidable near-term payment calls for matching both redemption availability and downside risk to the deadline. The client has only a ₹3,000 cushion, so even a modest capital loss could leave the fee underfunded.

Among these schemes, the liquid fund’s short-maturity Treasury bills provide the closest fit. Their low credit risk and limited interest-rate sensitivity matter more than the higher historical returns available elsewhere. Daily redemption establishes access to money, not stability of its value. Past one-year returns neither predict the next 24 days nor ensure that the payment can be met. The liquid fund still does not guarantee capital.

Answer choices explained:

A — Incorrect: Cash-futures hedges reduce directional equity risk, but spreads can fluctuate before expiry, making capital preservation over 24 days less dependable.

B — Incorrect: AAA credit quality does not remove interest-rate risk; three-year duration can produce NAV losses exceeding the client’s small reserve cushion.

C — Incorrect: Government securities have low credit risk, but six-year duration creates substantial NAV sensitivity to interest-rate changes over the short holding period.

D — Correct: Short-maturity Treasury bills combine low credit risk with low interest-rate sensitivity, fitting the 24-day horizon and ₹3,000 cushion.

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Question 88

Topic: Interest Rate Derivatives

A fund holds fixed-rate government bonds and wants to hedge losses from rising yields. It compares two theoretical cash-settled futures contracts referencing the same fixed-rate government bond:

The contracts are alternative hedges, not a combined position. Assume a parallel rise in yields and unchanged basis; ignore hedge sizing.

Which opening direction is appropriate for each alternative?

• A. Buy the bond-price futures and buy the yield-quoted futures.
• B. Sell the bond-price futures and buy the yield-quoted futures.
• C. Sell the bond-price futures and sell the yield-quoted futures.
• D. Buy the bond-price futures and sell the yield-quoted futures.

Best answer: B

Explanation: Fixed-rate bond prices move inversely to required yields. A long bond portfolio therefore loses value when yields rise, and an economically offsetting hedge should gain under that movement.

A bond-price futures quotation falls as the underlying bond price falls, so a short futures position provides the offset. A directly yield-quoted futures quotation rises when the yield rises, so a long futures position provides the offset.

The quoted variable determines the hedge direction. A direct yield quotation must not be confused with a quotation of 100 minus an interest rate, which moves oppositely to that rate. Correct direction alone does not ensure a perfect hedge; contract sizing and basis movements also matter.

Answer choices explained:

A — Incorrect: Buying yield-quoted futures provides an offset, but buying bond-price futures adds to the portfolio’s losses as bond prices fall.

B — Correct: Rising yields lower bond prices and increase the direct yield quotation, allowing short bond-price futures and long yield-quoted futures each to gain.

C — Incorrect: Selling bond-price futures provides an offset, but selling yield-quoted futures incurs a loss when the directly quoted yield rises.

D — Incorrect: Both directions reinforce the loss: long bond-price futures lose as prices fall, while short yield-quoted futures lose as yields rise.

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Question 89

Topic: Equity Derivatives

A distributor reviews an unexpired equity call option for a client. The underlying share currently trades at ₹1,286, the strike price is ₹1,250, and the quoted call premium is ₹59 per share.

What are the call’s intrinsic value and time value per share?

• A. Intrinsic value: ₹0; time value: ₹59.
• B. Intrinsic value: ₹23; time value: ₹36.
• C. Intrinsic value: ₹36; time value: ₹23.
• D. Intrinsic value: ₹59; time value: ₹0.

Best answer: C

Explanation: A call’s intrinsic value is the greater of zero and the current underlying price minus the strike price. Here, the call is in the money by ₹36 per share.

Time value is the portion of the premium exceeding intrinsic value. Deducting ₹36 from the quoted premium of ₹59 leaves ₹23 per share.

Intrinsic value measures current exercise value, not profit after paying the premium. An in-the-money call can therefore have both positive intrinsic value and positive time value.

Answer choices explained:

A — Incorrect: The share price exceeds the strike by ₹36, giving the call positive intrinsic value regardless of its premium-adjusted break-even price.

B — Incorrect: These components are reversed: ₹36 is the current exercise value, while ₹23 is the premium remaining after deducting that value.

C — Correct: The call’s intrinsic value is ₹1,286 minus ₹1,250, or ₹36; the remaining ₹23 of its ₹59 premium is time value.

D — Incorrect: The entire premium is not intrinsic value: the current share-price excess over the strike accounts for only ₹36 of the ₹59 premium.

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Question 90

Topic: Mutual Fund Distribution

A distributor is reviewing a client’s investment in an equity scheme’s Regular Plan-Growth. The review must compare the latest completed one-year scheme return, net of ongoing scheme expenses, with the designated benchmark. Ignore investor-level taxes and exit loads.

The following document extracts are fictional.

AMC factsheet, issued 6 July 2026:

• Year ended 30 June 2026: Direct Plan-Growth return 18%; designated benchmark TRI return 15%.
• Highlighted rolling one-year Regular Plan-Growth return: 22%, for the year ended 31 March 2026.

AMFI NAV disclosure, downloaded 7 July 2026:

Scheme document, dated 1 April 2026:

Ongoing plan expenses are reflected in each plan’s NAV. The Regular Plan’s annual TER is 2%.

Which scheme return and excess return over the benchmark should the distributor report?

• A. Scheme return: 16%; excess return over the benchmark: +1 percentage point.
• B. Scheme return: 22%; excess return over the benchmark: +7 percentage points.
• C. Scheme return: 18%; excess return over the benchmark: +3 percentage points.
• D. Scheme return: 14%; excess return over the benchmark: -1 percentage point.

Best answer: A

Explanation: Comparable performance requires the correct plan and option, matching measurement dates, and consistent treatment of expenses. The latest supported one-year period ends on 30 June 2026. For Regular Plan-Growth, the NAV-based return is \( (116/100 - 1) \times 100 = 16\% \). Against the same-period benchmark TRI return of 15%, this represents outperformance of 1 percentage point.

Ongoing expenses are already reflected in NAV, so TER must not be deducted again. The direct-plan return belongs to a separate NAV series. The highlighted 22% rolling return covers an earlier interval and cannot replace the latest annual result simply because it is higher. Document publication or download dates do not determine the performance measurement period.

Answer choices explained:

A — Correct: The regular-plan NAV increases from ₹100 to ₹116 over the matching year, giving 16% against the benchmark’s 15%.

B — Incorrect: The 22% return ends on 31 March 2026, so comparing it with the June-ending benchmark return combines different measurement periods.

C — Incorrect: The 18% return belongs to Direct Plan-Growth, whereas the client’s holding requires the Regular Plan-Growth NAV series.

D — Incorrect: The regular-plan NAVs already reflect ongoing expenses; subtracting the 2% TER again double-counts those expenses.

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Question 91

Topic: Mutual Fund Distribution

An Indian distributor reviews a fictional open-ended equity scheme in July 2026. The applicable category minima are percentages of scheme net assets:

• Flexi cap: At least 65% in equity and equity-related instruments, with no prescribed market-cap segment minima.
• Multi cap: At least 75% in equity and equity-related instruments, including at least 25% each in large-cap, mid-cap and small-cap companies.

Scheme mandate:

At least 65% in equity and equity-related instruments. The manager may vary the market-cap mix, with no minimum allocation to any segment.

Current portfolio:

An investor accepts long-term equity volatility but requires the chosen scheme’s normal mandate to prescribe at least 25% in each market-cap segment. Which classification and assessment of this specific allocation requirement is correct?

• A. Multi cap; its mandate does not meet the investor’s required segment floors.
• B. Flexi cap; its mandate does not meet the investor’s required segment floors.
• C. Flexi cap; its mandate meets the investor’s required segment floors.
• D. Multi cap; its mandate meets the investor’s required segment floors.

Best answer: B

Explanation: Scheme classification follows its binding investment mandate, not merely a portfolio snapshot. The scheme requires at least 65% equity exposure and permits unrestricted changes in the market-cap mix, which fits the flexi cap category.

Its current equity allocation totals 80%, with at least 25% in each market-cap segment. Although these holdings satisfy the numerical multi cap minima today, they do not create a continuing obligation to maintain them.

Suitability must separately consider the investor’s requirements. Here, acceptance of equity volatility does not resolve the mismatch: the investor specifically wants mandatory segment floors, which this scheme does not provide.

Answer choices explained:

A — Incorrect: The allocation concern is valid, but the absence of mandatory segment floors rules out multi cap classification under the existing mandate.

B — Correct: The 65% overall equity floor and discretionary market-cap mix fit flexi cap, while leaving the investor’s required segment minima uncommitted.

C — Incorrect: Flexi cap classification fits, but current segment allocations do not make those exposures mandatory under the scheme’s mandate.

D — Incorrect: The current portfolio satisfies the numerical multi cap floors, but the mandate does not impose those floors.

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Question 92

Topic: Mutual Fund Distribution

An investor has an eight-year goal and holds a flexi-cap scheme as her core equity investment. She also owns a separate small-cap scheme. A distributor recommends replacing the entire core holding with another flexi-cap scheme because it ranked first in its category over the past six months.

Fictional review notes:

• Both schemes have six-year histories.
• The existing scheme’s small-cap allocation has remained near 15%.
• The proposed scheme’s small-cap allocation increased from 15% to 50% nine months ago, within its mandate.
• The investor’s goal and risk capacity are unchanged.

Which review best tests whether the proposed switch improves long-term suitability?

• A. Review three-year rolling returns and holdings overlap, treating the common flexi-cap category as establishing comparable market-cap risk between the schemes.
• B. Review five-year returns and drawdowns, treating the proposed scheme’s full record as representative of its current market-cap risk.
• C. Review six-month risk-adjusted returns and category ranks, treating recent leadership as sufficient support for suitability over the eight-year horizon.
• D. Review combined small-cap exposure and longer-term return and drawdown patterns, assessing performance before and after the allocation change separately.

Best answer: D

Explanation: Suitability depends on the investor’s total portfolio, risk capacity and investment horizon, not recent rankings alone. The proposed scheme’s higher small-cap allocation could increase an exposure the investor already holds separately.

The allocation change also affects how its performance history should be interpreted. Most of the six-year record reflects the earlier portfolio mix, while recent leadership covers only a short market phase. The distributor should assess combined small-cap exposure and holdings overlap, then examine returns and drawdowns while distinguishing periods before and after the change. Limited post-change history restricts conclusions about performance across market cycles. An eight-year horizon and a shared flexi-cap classification do not, by themselves, establish that the switch improves suitability.

Answer choices explained:

A — Incorrect: Rolling returns and overlap are useful, but the flexi-cap classification permits materially different market-cap allocations and does not establish equivalent risk.

B — Incorrect: Most of the five-year record predates the allocation change, so its returns and drawdowns may not represent the current portfolio’s risk.

C — Incorrect: Risk adjustment does not make six months representative of an eight-year horizon or establish that increased small-cap exposure suits the investor.

D — Correct: This tests total-portfolio suitability while preventing performance under the earlier allocation from being treated as representative of the current exposure mix.

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Question 93

Topic: Mutual Fund Distribution

A mutual-fund distributor reviews this fictional industry summary for the quarter ended 30 June 2026.

Net inflows during the quarter were ₹2 lakh crore. There were no distributions or other AUM adjustments; the remaining asset change arose from market movements.

Which interpretation is supported by these figures?

• A. Market appreciation added ₹4 lakh crore, and folios grew 5%; the change in unique investors cannot be inferred.
• B. Market appreciation added ₹2 lakh crore, and folios grew 5%; the change in unique investors cannot be inferred.
• C. Market appreciation added ₹4 lakh crore, and folios grew 5%; the number of unique investors therefore also increased by 5%.
• D. Market appreciation added ₹6 lakh crore, and folios grew 5%; the change in unique investors cannot be inferred.

Best answer: A

Explanation: AUM growth can reflect both investor flows and changes in the market value of holdings. Here, AUM increased by ₹6 lakh crore. After subtracting ₹2 lakh crore of net inflows, market appreciation contributed ₹4 lakh crore, or two-thirds of the increase.

Folios increased by 1.2 crore from an opening 24 crore, giving growth of \( (1.2/24) \times 100 = 5\% \). A folio is an investment account, not a unique investor. Existing investors can open additional folios, so these figures establish account growth but do not establish how the number of unique investors changed.

Answer choices explained:

A — Correct: Subtracting net inflows from the AUM increase leaves ₹4 lakh crore of appreciation, while folio growth measures accounts rather than unique investors.

B — Incorrect: ₹2 lakh crore represents net inflows, whereas market appreciation is the ₹6 lakh crore AUM increase less those inflows.

C — Incorrect: An investor may hold multiple folios, so a 5% increase in folios does not establish a matching increase in unique investors.

D — Incorrect: The ₹6 lakh crore AUM increase includes ₹2 lakh crore of net inflows, so it cannot all be attributed to market appreciation.

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Question 94

Topic: Interest Rate Derivatives

A debt portfolio manager plans to reduce interest-rate sensitivity using an illustrative bond-price futures contract.

• Portfolio market value: ₹75 crore (₹750,000,000).
• Current modified duration: 5.8 years.
• Target effective modified duration: 3.5 years, measured against the unchanged portfolio market value.
• Futures PVBP: ₹1,450 per contract, representing the gain on one long contract for a 1 basis point fall in yield.

Assume small, equal parallel yield changes for the portfolio and futures. Ignore basis and convexity effects, and round the required position to the nearest whole contract.

Which futures position most closely achieves the target?

• A. Buy 119 futures contracts.
• B. Sell 300 futures contracts.
• C. Sell 119 futures contracts.
• D. Sell 181 futures contracts.

Best answer: C

Explanation: A duration-based hedge offsets the required change in interest-rate sensitivity. For market value \(V\) and modified duration \(D\), portfolio PVBP is \(V \times D \times 0.0001\).

For the ₹75 crore portfolio, current PVBP is ₹435,000 and target PVBP is ₹262,500. The hedge must therefore remove ₹172,500 of sensitivity per basis point.

\[ N = \frac{435{,}000 - 262{,}500}{1{,}450} = 118.9655 \approx 119 \]

A long bond-price futures position has the same directional sensitivity as the debt portfolio. Selling 119 contracts supplies the offset, leaving an effective modified duration of approximately 3.499 years after rounding.

Answer choices explained:

A — Incorrect: Buying futures adds interest-rate sensitivity because both the debt portfolio and the long bond-price futures position lose value when yields rise.

B — Incorrect: Selling 300 contracts offsets the full existing PVBP of ₹435,000, targeting zero duration rather than the required 3.5 years.

C — Correct: The required PVBP reduction is ₹172,500; dividing by ₹1,450 gives 118.97 contracts, rounded to a short position of 119.

D — Incorrect: Using the target PVBP of ₹262,500 gives about 181 contracts; the hedge must instead offset the difference between current and target sensitivity.

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Question 95

Topic: Interest Rate Derivatives

A distributor reviews a hypothetical interest-rate futures contract with the following specification and quotes:

How should the distributor interpret the change?

• A. The annual yield implied by the 10-year bond futures fell by 25 basis points.
• B. The 10-year bond futures price rose by ₹0.25 per ₹100 face value.
• C. The annualised three-month reference rate implied by the futures fell by 25 basis points.
• D. The three-month Treasury bill futures price rose by ₹0.25 per ₹100 face value.

Best answer: B

Explanation: An IRF must be interpreted using its specified underlying and quotation convention. Here, the underlying is a Government of India bond with ten years remaining, while the futures contract expires in three months. These are different maturity references.

The quote is a clean futures price per ₹100 face value. Its rise from 98.40 to 98.65 therefore represents a ₹0.25 price increase per ₹100 face value. Under a 100-minus-rate convention, the same numerical rise would indicate a 25-basis-point fall in the referenced rate, but that convention does not apply here. Bond prices and yields generally move inversely, not point-for-point.

Answer choices explained:

A — Incorrect: A bond-price change does not translate one-for-one into a yield change, so a 25-basis-point fall cannot be inferred.

B — Correct: The quotation is a price per ₹100 face value, and the increase from 98.40 to 98.65 is ₹0.25.

C — Incorrect: This interpretation applies a 100-minus-rate convention, whereas the supplied contract uses a bond-price quotation.

D — Incorrect: Three months describes the futures expiry, not the underlying maturity; the specified underlying is a bond with ten years remaining.

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Question 96

Topic: Mutual Fund Distribution

A resident individual redeems equity-oriented mutual fund units on 20 February 2026. The short-term holdings were acquired on 10 June 2025, and the long-term holdings on 10 January 2024. Her correctly computed capital results for FY 2025-26 are:

She also receives ₹50,000 as IDCW during the year. There are no other capital transactions. She files a valid belated return after her applicable statutory due date; no extension or condonation applies.

Rule summary dated 31 March 2026, applicable to FY 2025-26 (AY 2026-27) under the Income-tax Act, 1961:

• Short-term capital losses may offset either short-term or long-term capital gains. Long-term capital losses may offset only long-term capital gains.
• Capital losses cannot offset income under other heads, including IDCW income.
• Unabsorbed capital losses may be carried forward for up to eight assessment years only when the loss return is filed by the statutory due date. Belated filing does not prevent permitted current-year set-off.

After the maximum permitted current-year set-off, which summary correctly states her remaining short-term gain, IDCW income and eligible capital-loss carry-forward, before exemptions and deductions?

• A. Short-term gain: ₹40,000; IDCW income: ₹50,000; capital-loss carry-forward: nil.
• B. Short-term gain: ₹1,00,000; IDCW income: ₹50,000; capital-loss carry-forward: nil.
• C. Short-term gain: ₹1,00,000; IDCW income: nil; capital-loss carry-forward: nil.
• D. Short-term gain: ₹1,00,000; IDCW income: ₹50,000; long-term loss carry-forward: ₹60,000.

Best answer: B

Explanation: Current-year set-off and carry-forward are separate tests. Apply ₹1,00,000 of the long-term loss against the ₹1,00,000 long-term gain. Apply the ₹80,000 short-term loss against the ₹1,80,000 short-term gain, leaving ₹1,00,000 of short-term gains.

The remaining ₹60,000 long-term loss cannot reduce short-term gains or IDCW. Consequently, the ₹50,000 IDCW remains income from other sources. Timely filing could permit the unused long-term loss to be carried forward for up to eight assessment years, but the belated return prevents that here. It does not undo the permitted set-off within the current year.

Answer choices explained:

A — Incorrect: The ₹40,000 result improperly offsets the unused ₹60,000 long-term loss against short-term gains, which is not permitted.

B — Correct: Permitted set-off leaves ₹1,00,000 of short-term gains; IDCW is unaffected, and belated filing blocks carry-forward of the unused long-term loss.

C — Incorrect: Capital losses cannot reduce IDCW income, so the ₹50,000 remains assessable under income from other sources.

D — Incorrect: The unused ₹60,000 long-term loss cannot be carried forward because the loss return was filed after the statutory due date.

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Question 97

Topic: Mutual Fund Distribution

An AMC is processing claims following the deaths of an individual mutual fund distributor and an investor whose folio he serviced.

Claim-review extract (fictional):

• Distributor Arun: Saira is his registered distributor nominee. Unpaid trail commission of ₹18,600 has been confirmed as payable under this arrangement.
• Investor Neel: He was the sole holder of 2,400 units. Manav is his registered folio nominee.

All required claim documents have been accepted, with no competing claims or court restrictions.

Which settlement instruction correctly applies these records?

• A. Pay the commission to Manav and transmit the units to Manav.
• B. Pay the commission to Saira and transmit the units to Saira.
• C. Pay the commission to Saira and transmit the units to Manav.
• D. Pay the commission to Manav and transmit the units to Saira.

Best answer: C

Explanation: Distributor nomination and investor nomination concern different assets. A distributor’s nominee receives the commission entitlement recognised under the distributor arrangement. Servicing a client’s folio does not give the distributor, or the distributor’s nominee, ownership of that client’s mutual fund units.

Here, the confirmed ₹18,600 commission is payable to Saira. The 2,400 units belonged to Neel, so the accepted transmission claim follows Neel’s folio nomination in favour of Manav. These are separate settlements: the distributor’s nomination does not override the investor’s nomination, and the investor’s nomination does not redirect the distributor’s commission.

Answer choices explained:

A — Incorrect: Manav’s folio nomination supports transmission of Neel’s units but does not give him entitlement to the distributor’s unpaid commission.

B — Incorrect: Saira’s distributor nomination covers Arun’s commission entitlement, not the units owned by an investor whose folio Arun serviced.

C — Correct: The accepted records identify Saira for Arun’s commission entitlement and Manav for transmission of Neel’s units.

D — Incorrect: This reverses the two arrangements: Manav is the investor’s folio nominee, while Saira is the nominee for the distributor’s commission entitlement.

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Question 98

Topic: Equity Derivatives

A client holds 12 stocks drawn from a 50-stock, free-float market-capitalisation-weighted equity price index. On one trading day, the index rises 1.2%, although 30 constituent stocks decline. The client’s portfolio falls 0.5%.

What does the reported 1.2% index rise represent?

• A. The total investment return of the constituent basket including dividends reinvested in those shares.
• B. The price increase of the selected constituent basket using the index’s assigned weights.
• C. The average investment return earned by investors holding diversified portfolios of the constituent shares.
• D. The price increase of the average listed share using equal weights across the exchange.

Best answer: B

Explanation: An equity index measures movements in a defined basket of shares according to its construction and weighting rules. Here, companies with larger free-float market capitalisations have greater influence on the index. Strong gains in heavily weighted constituents can therefore outweigh declines in more numerous, smaller-weight constituents.

The 1.2% increase does not mean that most constituents, or every exchange-listed share, rose. A client holding only 12 constituents with different portfolio weights can lose 0.5% over the same period. Because this is a price index, its reported movement excludes dividend reinvestment.

Answer choices explained:

A — Incorrect: A price index measures share-price movements; reinvested dividends are incorporated in a total return index instead.

B — Correct: Gains in heavily weighted constituents can lift the basket despite a majority falling, while the client’s different exposures can produce a loss.

C — Incorrect: The index does not average investors’ portfolio returns; their holdings and weights can differ substantially from the index basket.

D — Incorrect: The index covers its selected 50 stocks using free-float market-capitalisation weights, rather than all exchange-listed shares using equal weights.

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Question 99

Topic: Equity Derivatives

A dealer continuously displays a firm two-way quote of 24,010 bid / 24,014 ask (index points) for one index-futures contract. It initially has no index-related position.

At these quotes, with the dealer acting as principal:

• An equity fund sells 60 contracts to reduce its portfolio’s market exposure.
• Another customer buys 40 contracts.

Both trades concern the same contract and expiry. No other trades or hedges occur. Which statement best describes the dealer’s role and remaining market risk?

• A. It is hedging its own equity exposure, with 20 long futures contracts protecting it against a fall in equity prices.
• B. It is market making, with 20 short futures contracts and inventory risk from a rise in the futures price.
• C. It is matching customer risk transfers, with no remaining futures position and no directional inventory risk.
• D. It is market making, with 20 long futures contracts and inventory risk from a fall in the futures price.

Best answer: D

Explanation: Market making involves quoting prices at which an intermediary will buy and sell, then trading as principal to provide liquidity. A customer’s reason for trading does not determine the intermediary’s role: the fund is reducing portfolio risk, while the dealer is supplying liquidity.

The dealer buys 60 contracts at its bid and sells 40 at its ask, leaving a net long inventory of 20 contracts. A subsequent fall in the futures price creates a loss on that residual position. Executing trades on both sides can earn the spread on matched quantities, but it does not eliminate unmatched inventory or guarantee an overall profit.

Answer choices explained:

A — Incorrect: The equity fund is hedging, not the dealer; the dealer has no initial index-related exposure, and long futures do not protect against falling index prices.

B — Incorrect: The dealer buys when customers sell at its bid and sells when customers buy at its ask, leaving it long rather than short.

C — Incorrect: Only 40 of the 60 contracts purchased are offset by sales, leaving the dealer with directional exposure on 20 contracts.

D — Correct: Providing executable two-way quotes supplies liquidity; buying 60 contracts and selling 40 leaves 20 long contracts vulnerable to falling futures prices.

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Question 100

Topic: Equity Derivatives

An equity portfolio desk must buy 6,000 shares of an index constituent immediately. The best bid is ₹249.75 per share, and the available sell orders are:

Use ₹250.00 per share, the midpoint of the best bid and best ask, as the reference price. The purchase executes against the lowest asks first, with no change to the order book. Ignore taxes and other charges.

What is the impact cost of the purchase as a percentage of the reference price, rounded to two decimal places?

• A. 0.23%
• B. 0.10%
• C. 0.40%
• D. 0.28%

Best answer: D

Explanation: Impact cost measures the adverse difference between the volume-weighted execution price and the reference price. For a purchase, execution above the reference represents a positive cost.

The order consumes all three ask levels. The fills cost ₹250,250, ₹501,000 and ₹753,000, totalling ₹1,504,250. Dividing by 6,000 shares gives an average execution price of ₹250.708333 per share.

\[ \text{Impact cost} = \frac{250.708333\ldots - 250}{250} \times 100 = 0.283333\ldots\% \]

The rounded impact cost is 0.28%. Weighting by executed quantities captures the cost of the complete order rather than just its first or last fill.

Answer choices explained:

A — Incorrect: This gives equal weight to the three ask prices rather than weighting each price by the number of shares purchased.

B — Incorrect: This uses only the best ask of ₹250.25, ignoring the shares that must be purchased at higher prices.

C — Incorrect: This uses the highest executed ask of ₹251.00 for the entire order rather than the share-weighted execution price.

D — Correct: The share-weighted execution price is ₹250.708333, giving an impact cost of approximately 0.283333% relative to the ₹250 reference.

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Questions 101–125

Question 101

Topic: Mutual Fund Distribution

Meera’s holdings at one AMC are shown below after recent NAV declines. All three SIF strategies belong to the same SIF. No minimum-investment exception applies.

A same-day subscription to Strategy A was submitted before the applicable cutoff, with funds successfully credited to the scheme before that cutoff. Its net addition is ₹0.80 lakh.

Strategy A’s redemption window is open today, and Meera has met its notice requirement. Assume no further NAV movement.

What is the maximum amount Meera can partially redeem from Strategy A today while maintaining the ordinary SIF minimum investment?

• A. ₹1.00 lakh
• B. ₹2.50 lakh
• C. ₹3.50 lakh
• D. ₹0.20 lakh

Best answer: A

Explanation: The ordinary ₹10 lakh minimum is aggregated across strategies of the concerned SIF under the relevant PAN. Joint holdings are attributed to the first holder’s PAN.

Meera’s sole holding and first-holder joint holding total ₹10.20 lakh. Strategy C is excluded from her calculation, as are her ordinary MF holdings. The qualifying same-day subscription raises her relevant aggregate to ₹11.00 lakh, leaving ₹1.00 lakh available for partial redemption while retaining ₹10 lakh.

The open redemption window and satisfied notice requirement meet the liquidity terms but do not relax the minimum. The earlier NAV declines did not take her relevant holdings below ₹10 lakh. A partial redemption exceeding ₹1.00 lakh would create an investor-initiated active breach, not a passive market-driven shortfall.

Answer choices explained:

A — Correct: Meera’s relevant holdings total ₹10.20 lakh; adding ₹0.80 lakh and retaining ₹10 lakh permits a ₹1.00 lakh partial redemption.

B — Incorrect: ₹2.50 lakh incorrectly includes the joint folio where Meera is second holder; that folio is assessed under the first holder’s PAN.

C — Incorrect: ₹3.50 lakh incorrectly includes ordinary MF holdings, which do not contribute to the SIF minimum even at the same AMC.

D — Incorrect: ₹0.20 lakh is the headroom before the eligible ₹0.80 lakh subscription; excluding that subscription understates the amount available for redemption.

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Question 102

Topic: Equity Derivatives

A distributor is reviewing a theoretical premium for a European call on a share that pays no dividends before expiry. The analyst uses the standard Black-Scholes model with annualised volatility of 24%, inferred from comparable traded options.

The analyst considers two separate revisions, holding the share price, strike, remaining term and risk-free rate fixed:

• Revision P: Replace 24% with 29%, inferred from current option prices, and rerun the same formula.
• Revision Q: Replace constant volatility with a process in which volatility itself varies randomly during the option’s life.

Which statement correctly classifies these revisions?

• A. Revision P changes a model input; Revision Q changes a model input.
• B. Revision P changes a model assumption; Revision Q changes a model assumption.
• C. Revision P changes a model assumption; Revision Q changes a model input.
• D. Revision P changes a model input; Revision Q changes a model assumption.

Best answer: D

Explanation: A pricing model combines structural assumptions with numerical inputs. Standard Black-Scholes assumes a constant volatility over the option’s remaining life. The percentage assigned to that constant is an input, which may be estimated from historical returns or inferred from market option prices as implied volatility.

Replacing 24% with 29% updates the input without changing the constant-volatility assumption. Allowing volatility itself to evolve randomly changes the assumed dynamics and requires an extension or a different model. Calibrating an input to market prices does not establish that the model’s assumptions accurately describe future market behaviour.

Answer choices explained:

A — Incorrect: Allowing volatility to vary randomly changes the model’s assumed dynamics, rather than merely supplying a different numerical input.

B — Incorrect: Replacing 24% with 29% updates the volatility estimate while preserving the assumption that volatility remains constant throughout the option’s life.

C — Incorrect: This reverses the distinction: recalibrating a constant updates an input, while introducing random volatility changes the assumed process.

D — Correct: The revised percentage is a numerical volatility input, whereas randomly evolving volatility replaces the standard model’s constant-volatility assumption.

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Question 103

Topic: Equity Derivatives

A distributor values a European call using a one-step binomial model with these inputs:

• Current share price: ₹100.
• Share price at expiry in six months: ₹120 or ₹80.
• Call strike price: ₹100 per share.
• Effective risk-free return over the entire six-month period: 4%.
• Analyst’s estimated real-world probabilities: 70% for ₹120 and 30% for ₹80.

Assume no dividends, taxes or transaction costs, with unrestricted share trading and borrowing or lending at the stated risk-free rate.

What is the call’s current no-arbitrage value per share, rounded to two decimal places?

• A. ₹11.54
• B. ₹13.46
• C. ₹9.62
• D. ₹12.00

Best answer: A

Explanation: No-arbitrage binomial valuation uses risk-neutral probabilities, not an analyst’s estimated real-world probabilities. The risk-neutral up probability makes the share’s expected terminal price equal its current price accumulated at the risk-free rate:

\[ p = \frac{100 \times 1.04 - 80}{120 - 80} = 0.60 \]

The call pays ₹20 when the share finishes at ₹120 and zero when it finishes at ₹80. Its current value is the risk-neutral expected payoff discounted for six months:

\[ C_0 = \frac{0.60 \times 20 + 0.40 \times 0}{1.04} = 11.53846\ldots \]

Therefore, the value is ₹11.54 per share. The 70% real-world estimate describes a forecast; it is not the probability used in this risk-free-discounted valuation.

Answer choices explained:

A — Correct: The risk-neutral up probability is 60%, giving a discounted expected payoff of \(0.60 \times 20 / 1.04 = 11.53846\ldots\) per share.

B — Incorrect: This discounts the payoff using the analyst’s 70% real-world up probability rather than the risk-neutral probability required for no-arbitrage valuation.

C — Incorrect: This uses equal up and down probabilities, calculating \(0.50 \times 20 / 1.04\), instead of deriving the risk-neutral probability.

D — Incorrect: This is the risk-neutral expected expiry payoff, \(0.60 \times 20\), before discounting it over the six-month period.

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Question 104

Topic: Equity Derivatives

An investor holds a ₹60 lakh equity portfolio with beta 1 relative to an equity index. The investor wants to retain all shares but reduce current equity-market exposure by approximately 50% until index futures expire in one month.

Contract assumptions:

• Index futures price: 25,000.
• Lot size: 40 index units per contract.
• No derivative positions are currently held.
• Ignore basis changes and transaction costs.

Which trade provides the intended hedge?

• A. Sell six index futures contracts.
• B. Sell three index futures contracts.
• C. Buy three index futures contracts.
• D. Buy six index futures contracts.

Best answer: B

Explanation: A long equity portfolio is exposed to falling share prices. Selling index futures creates a short hedge: gains on the futures when the index falls can offset losses on the shares.

Each contract represents \(25{,}000 \times 40 = 1{,}000{,}000\) rupees, or ₹10 lakh. With portfolio beta equal to 1, reducing exposure by 50% requires a short futures position worth ₹30 lakh. Selling three contracts provides that offset while retaining the shares and approximately ₹30 lakh of net equity-market exposure. Buying futures would increase exposure to the same market risk.

Answer choices explained:

A — Incorrect: Selling six contracts offsets approximately ₹60 lakh of market exposure, creating a full hedge rather than the intended 50% reduction.

B — Correct: Selling three contracts creates ₹30 lakh of short index exposure, offsetting half the portfolio’s ₹60 lakh long exposure.

C — Incorrect: Buying three contracts adds ₹30 lakh of long index exposure, increasing rather than reducing the portfolio’s sensitivity to a market decline.

D — Incorrect: Buying six contracts adds ₹60 lakh of long index exposure, approximately doubling market exposure instead of halving it.

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Question 105

Topic: Mutual Fund Distribution

An investor invests ₹1,20,000 in a mutual fund’s growth option at an NAV of ₹24 per unit. A monthly systematic withdrawal plan (SWP) subsequently processes these withdrawals:

There are no other cash flows. Ignore taxes and exit loads.

Immediately after the second withdrawal, which statement correctly reports the remaining units and overall investment gain, taking the withdrawn cash into account?

• A. 4,120 units remain, and the overall investment gain is ₹7,000.
• B. 4,000 units remain, and the overall investment gain is ₹4,000.
• C. 4,120 units remain, and the overall investment gain is ₹24,000.
• D. 4,200 units remain, and the overall investment gain is ₹9,000.

Best answer: A

Explanation: An SWP provides cash by redeeming units at the applicable NAV. It does not create a separate investment return. A fixed withdrawal consumes more units when the NAV is lower.

The initial investment buys 5,000 units. The first ₹12,000 withdrawal redeems 400 units at ₹30, leaving 4,600 units. The second redeems 480 units at ₹25, leaving 4,120 units.

At the final NAV of ₹25, the remaining holding is worth ₹1,03,000. Adding the ₹24,000 already withdrawn gives total value of ₹1,27,000. Compared with the original ₹1,20,000 investment, the overall gain is ₹7,000. The scheduled withdrawals are redemption proceeds, which include a return of invested capital, rather than automatically being income earned.

Answer choices explained:

A — Correct: Redeeming 400 and 480 units leaves units worth ₹1,03,000; adding ₹24,000 withdrawn gives ₹1,27,000 against the initial ₹1,20,000.

B — Incorrect: This uses the original NAV of ₹24 for both redemptions instead of the applicable NAVs of ₹30 and ₹25.

C — Incorrect: The unit balance is accurate, but ₹24,000 is redemption proceeds, not the investment gain; the remaining investment value must also be considered.

D — Incorrect: This applies the first withdrawal’s NAV of ₹30 to both redemptions; the second withdrawal actually redeems 480 units at ₹25.

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Question 106

Topic: Mutual Fund Distribution

A distributor reviews this fictional July 2026 expense disclosure for an Indian mutual fund scheme. Every figure is an annualised percentage of average daily net assets, measured over the same period.

Brokerage and transaction costs exclude the separately disclosed statutory levies. All expense components are shown.

What annualised total expense ratio (TER) should the distributor quote?

• A. 1.60% per annum.
• B. 1.05% per annum.
• C. 0.85% per annum.
• D. 0.95% per annum.

Best answer: B

Explanation: Under the current expense framework, TER includes BER, brokerage, transaction costs for trade execution and statutory levies, including GST. BER is therefore not the complete TER when additional components are disclosed separately.

The figures share the same measurement base, and the execution-cost figures exclude the separately reported levies:

\[ \text{TER} = 0.85\% + 0.06\% + 0.04\% + 0.10\% = 1.05\% \]

The management and advisory fee is a breakdown of BER, not an additional expense outside it. Adding that fee again would overstate the scheme’s total expenses.

Answer choices explained:

A — Incorrect: This counts the 0.55% management and advisory fee twice because that fee is already included in the disclosed BER.

B — Correct: Adding BER of 0.85%, brokerage of 0.06%, transaction costs of 0.04% and statutory levies of 0.10% gives TER of 1.05%.

C — Incorrect: This reports only BER, omitting the separately disclosed brokerage, trade-execution transaction costs and statutory levies that form part of TER.

D — Incorrect: This adds brokerage and transaction costs to BER but excludes the 0.10% statutory levies, which also form part of TER.

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Question 107

Topic: Mutual Fund Distribution

A client proposes investing ₹2 lakh after seeing publicity for a new fund offer (NFO). The new fund and an existing fund have the same diversified-equity mandate. Both regular-plan growth options suit the client’s long-term goal and risk profile.

For comparison, assume identical gross portfolio returns, no loads and unchanged annual TERs:

The client says:

Buying at ₹10 is a cheaper opportunity because I get four times as many units.

Which recommendation is justified under these assumptions?

• A. Prefer the new fund: the larger unit allotment increases the rupee gain from the same percentage portfolio return.
• B. Treat the funds as equivalent: their identical investment mandate makes the difference in TER irrelevant to the investor’s net return.
• C. Prefer the new fund: applying its TER to ₹10 units creates a smaller expense burden than applying the existing fund’s TER to ₹40 units.
• D. Prefer the existing fund: the lower unit price provides no return advantage, while the lower TER improves the investor’s net return.

Best answer: D

Explanation: A low NFO offer price is not evidence that a fund is cheap or offers greater return potential. ₹2 lakh buys 20,000 units at ₹10 or 5,000 units at ₹40, but both holdings initially represent the same investment value. More units alone create no additional return.

Scheme selection should consider the mandate, suitability and costs rather than launch publicity or unit price. Here, suitability and gross portfolio returns are assumed equal, so the existing fund’s lower TER provides the stronger financial case. Expenses are reflected in NAV and should not be deducted again when measuring returns from published NAVs.

Answer choices explained:

A — Incorrect: The larger unit count is offset by the lower value per unit, so equal invested amounts earn equal gross rupee returns.

B — Incorrect: An identical mandate does not eliminate expenses; the higher TER reduces net returns when gross portfolio returns are equal.

C — Incorrect: TER applies to scheme assets, not unit denomination; more low-priced units do not reduce the percentage expense burden on the investment.

D — Correct: With equal gross returns, the existing fund’s lower TER leaves a higher net return; the ₹10 denomination creates no offsetting advantage.

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Question 108

Topic: Mutual Fund Distribution

A distributor is reconciling stamp duty and STT for a resident individual.

Fictional AMC record, 15 September 2026 (FY 2026-27):

The allotment value excludes stamp duty, and redemption values are before STT. No loads or other charges apply. Use the supplied rates of 0.005% for stamp duty and 0.001% for STT, wherever each levy applies.

Which pair gives the total stamp duty and total STT for these transactions?

• A. Stamp duty: ₹65; STT: ₹9.
• B. Stamp duty: ₹20; STT: ₹9.
• C. Stamp duty: ₹20; STT: ₹6.
• D. Stamp duty: ₹65; STT: ₹6.

Best answer: C

Explanation: Stamp duty and securities transaction tax attach to different transaction events. A new issue of mutual fund units attracts stamp duty, including units of a debt fund. Redemption does not attract this issue-related stamp duty. STT applies to the redemption of equity-oriented mutual fund units, but not to the debt-fund redemption.

The stamp-duty base is therefore ₹4,00,000, giving ₹20 at 0.005%. The STT base is ₹6,00,000, giving ₹6 at 0.001%. The ₹3,00,000 debt-fund redemption contributes to neither levy. These transaction charges are separate from any capital-gains tax arising on redemption.

Answer choices explained:

A — Incorrect: This includes both redemptions in the stamp-duty base and the debt-fund redemption in the STT base, overstating both levies.

B — Incorrect: Including the debt-fund redemption in the STT base overstates STT; only the ₹6,00,000 equity-oriented fund redemption attracts this levy.

C — Correct: The ₹4,00,000 debt-fund allotment attracts ₹20 stamp duty, while the ₹6,00,000 equity-oriented fund redemption attracts ₹6 STT.

D — Incorrect: Stamp duty applies only to the ₹4,00,000 new unit allotment, not to the combined ₹13,00,000 value of allotment and redemptions.

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Question 109

Topic: Interest Rate Derivatives

An analyst values an illustrative futures contract on a single bond. It is quoted as a clean price per ₹100 face value, with a conversion factor of 1. Assume deterministic rates, no delivery options, and no transaction costs or margin cash-flow effects, so the cash-and-carry forward price can be used as the futures price.

Inputs: All amounts are per ₹100 face value, and all day counts use 30/360.

The purchase is financed to delivery at 6% p.a. simple interest. The coupon is reinvested from day 90 to delivery at the same simple rate. No other coupon is paid before delivery.

What is the theoretical clean futures price, rounded to the nearest ₹0.01?

• A. ₹100.86 per ₹100 face value
• B. ₹100.62 per ₹100 face value
• C. ₹94.35 per ₹100 face value
• D. ₹104.62 per ₹100 face value

Best answer: B

Explanation: Cash-and-carry valuation starts with the dirty spot price because the buyer must pay accrued interest when purchasing the bond. The initial outlay is therefore ₹108. Financing it for 270 days creates a ₹112.86 obligation at delivery.

The ₹8 coupon arrives 180 days before delivery. Reinvesting it produces ₹8.24, which reduces the amount required at delivery. Finally, subtract delivery-date accrued interest to obtain the clean quotation:

\[ (102 + 6)(1 + 0.06 \times 270/360) - 8(1 + 0.06 \times 180/360) - 4 = 100.62 \]

The theoretical clean futures price is ₹100.62 per ₹100 face value. Deducting only the coupon’s nominal amount would overlook its reinvestment income.

Answer choices explained:

A — Incorrect: This deducts only the ₹8 coupon, omitting the ₹0.24 earned by reinvesting it for the remaining 180 days.

B — Correct: The financed dirty price is ₹112.86; deducting the ₹8.24 reinvested coupon and ₹4 delivery accrued interest gives ₹100.62.

C — Incorrect: Financing the ₹102 clean price instead of the ₹108 dirty purchase price omits the initial accrued interest and produces ₹94.35.

D — Incorrect: This is the dirty delivery value; the contract’s clean quotation requires subtracting the ₹4 accrued interest at delivery.

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Question 110

Topic: Equity Derivatives

Two clients enter identical short positions in an equity-index futures contract expiring in one month. Their only relevant cash-market exposures are:

• Meera owns an index-tracking basket of shares and will sell the entire basket at expiry.
• Nikhil holds cash and must purchase an identical basket, in the same share quantities, at market prices at expiry.

Each futures position matches the index exposure of one basket. Assume perfect price tracking and ignore costs.

Which classification correctly reflects how these futures trades affect the clients’ cash-market price risks?

• A. Meera is hedging her sale proceeds; Nikhil is hedging his purchase cost.
• B. Meera is adding a speculative short exposure; Nikhil is hedging his purchase cost.
• C. Meera is adding a speculative short exposure; Nikhil is adding a speculative short exposure.
• D. Meera is hedging her sale proceeds; Nikhil is adding a speculative short exposure.

Best answer: D

Explanation: Hedging offsets an existing or firmly anticipated exposure; speculation adds directional price risk. Identical derivative trades can therefore serve different economic purposes.

Meera is exposed to falling share prices until she sells her basket. Her short futures gain when prices fall, offsetting the reduction in sale proceeds under the matching assumptions.

Nikhil faces the opposite risk: rising prices make his required purchase more expensive. His short futures also lose when prices rise, increasing that adverse exposure. The trade is a speculative overlay, not a purchase hedge. Long futures would provide the appropriate direction for hedging his anticipated purchase.

The classification depends on the combined exposure, not simply on whether the participant buys or sells futures.

Answer choices explained:

A — Incorrect: The short futures protect Meera against falling prices, but they increase rather than offset Nikhil’s exposure to a higher purchase cost.

B — Incorrect: Meera’s existing shares offset her short futures exposure; Nikhil would need long futures to hedge the rising-price risk of his planned purchase.

C — Incorrect: Nikhil’s trade adds speculative exposure, but Meera’s matching shareholding makes her short futures an offsetting hedge rather than an additional directional position.

D — Correct: Futures gains offset a decline in Meera’s basket value, while futures losses compound Nikhil’s higher purchase cost when prices rise.

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Question 111

Topic: Interest Rate Derivatives

A distributor reviews a corporate security with these contractual terms:

• It is issued at ₹970, with a face value of ₹1,000 repayable at the end of five years.
• Interest is paid annually on face value. The first year’s rate is 7%; each subsequent year’s rate resets to a published one-year benchmark rate plus 1.5 percentage points.
• Interest remains due irrespective of the issuer’s profits. In liquidation, holders rank below secured lenders but above equity shareholders.

How should the distributor classify this security?

• A. Zero-coupon debt security
• B. Equity ownership security
• C. Fixed-rate debt security
• D. Floating-rate debt security

Best answer: D

Explanation: Floating-rate debt pays contractual interest that resets periodically using a benchmark, usually with an added spread. Here, the first-year rate of 7% applies only until the next reset; it does not make the security fixed-rate over its five-year life.

Contractual interest, repayment of face value at maturity and priority over equity shareholders establish debt rights. Ranking below secured lenders affects recovery priority, not the distinction between debt and ownership. The issue discount also does not determine coupon classification: a zero-coupon security makes no periodic interest payments, whereas this security pays interest annually.

Answer choices explained:

A — Incorrect: The security pays annual interest, so issuance below face value does not make it a zero-coupon instrument.

B — Incorrect: The holder has contractual payment rights and priority over equity shareholders, rather than a residual claim on the company’s profits and assets.

C — Incorrect: The 7% rate applies only to the first year; subsequent contractual resets mean the interest rate is not fixed throughout the term.

D — Correct: Interest resets against a benchmark, while contractual interest and principal repayment establish creditor rights rather than residual ownership.

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Question 112

Topic: Mutual Fund Distribution

An AMC is checking completion of investor communication for an approved material change to a mutual fund scheme’s investment objective. All other requirements for the change are satisfied.

Required communication plan:

• Publish the revised Scheme Information Document (SID) on the AMC website and the notice in the prescribed newspapers.
• Notify each of the scheme’s 5,000 unitholders individually. Confirmed email delivery qualifies; unavailable or bounced email addresses require postal dispatch.
• Accept recorded postal dispatch as evidence of the fallback notification. Acknowledgement of reading is not required.

Complete communication record as at 7 August 2026:

• 30 July: Trustees approved the revised SID and investor notice.
• 3 August: Website publication and newspaper notices were completed.
• 4 August: Emails were sent to 4,900 unitholders; delivery was confirmed for 4,775, while 125 bounced.
• 5 August: Postal notices were dispatched to the 100 unitholders without registered email addresses.

Which conclusion about completion of the communication plan is supported?

• A. The plan is complete, with no unitholders requiring further individual notice.
• B. The plan is incomplete, with 225 unitholders still requiring individual notice.
• C. The plan is incomplete, with 100 unitholders still requiring individual notice.
• D. The plan is incomplete, with 125 unitholders still requiring individual notice.

Best answer: D

Explanation: Internal approval authorises a document update; it does not establish that investor disclosure has been completed. Each required communication route needs supporting evidence.

Website publication and newspaper notices are complete. Individual notification is evidenced for 4,775 unitholders through confirmed email delivery and another 100 through postal dispatch, totalling 4,875. The remaining 125 unitholders had bounced emails and have no recorded fallback dispatch.

The AMC must therefore complete postal notification for those 125 unitholders before closing the communication plan. Under the stated plan, it need not obtain proof that every investor read the notice. Completion of the prescribed notification process is distinct from proof of actual reading.

Answer choices explained:

A — Incorrect: Trustee approval and public publication do not replace the required individual notification for the 125 unitholders whose emails bounced.

B — Incorrect: This count combines both email-exception groups, overlooking that postal dispatch has already satisfied the plan for the 100 unitholders without email.

C — Incorrect: The 100 unitholders without email already have qualifying postal-dispatch records; the unresolved group comprises the 125 bounced-email recipients.

D — Correct: Confirmed email delivery covers 4,775 unitholders and postal dispatch covers another 100, leaving 125 without the required individual-notification evidence.

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Question 113

Topic: Mutual Fund Distribution

A client is comparing two open-ended equity schemes in the same category. The existing scheme has a current NAV of ₹50 and is open for ongoing purchases and redemptions.

NFO terms, from a fictional offer-document extract:

• Offer price: ₹10 per unit.
• Offer closes: 4 August 2026.
• Units allotted: 6 August 2026.
• Ongoing purchases and redemptions commence: 10 August 2026.

The client comments:

“The NFO is cheaper, and allotment should let me redeem immediately.”

Which assessment of relative value and NFO redemption availability is correct?

• A. The unit prices establish a valuation advantage for the NFO; its redemptions become available on 10 August 2026.
• B. The unit prices do not establish a valuation advantage; NFO redemptions become available on 10 August 2026.
• C. The unit prices establish a valuation advantage for the NFO; its redemptions become available on 6 August 2026.
• D. The unit prices do not establish a valuation advantage; NFO redemptions become available on 6 August 2026.

Best answer: B

Explanation: An NFO’s ₹10 offer price is not evidence that its portfolio is cheaper than an existing scheme with a ₹50 NAV. A lower unit price gives more units for the same investment, but does not itself improve percentage returns. Comparison should consider the investment mandate, portfolio, risks, expenses and suitability rather than the number of units received.

Allotment and the commencement of ongoing transactions are separate events. Here, units are allotted on 6 August, while ongoing purchases and redemptions begin on 10 August. Subsequent transactions use the applicable NAV, not a permanently fixed ₹10 price. The existing scheme already offers ongoing transactions.

Answer choices explained:

A — Incorrect: The redemption date follows the published terms, but a lower offer price does not establish that the NFO offers cheaper underlying investments.

B — Correct: Neither the ₹10 offer price nor the ₹50 NAV establishes relative cheapness, and the NFO’s stated redemption opening date is 10 August.

C — Incorrect: A lower unit price does not establish better value, and the allotment date is distinct from the opening of ongoing redemptions.

D — Incorrect: The valuation assessment is sound, but allotment on 6 August does not begin redemptions; ongoing transactions commence on 10 August.

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Question 114

Topic: Equity Derivatives

An investor buys 1,000 shares at ₹200 each and simultaneously buys puts covering all 1,000 shares. A trader writes these puts and takes no offsetting position.

• Put strike: ₹190 per share.
• Put premium: ₹6 per share.
• Share price at expiry: ₹160 per share.

The puts are exercised at expiry. Ignore transaction costs, taxes and the time value of money.

What is the net profit or loss for the investor’s combined share-and-put position and for the trader’s written puts?

• A. The investor loses ₹16,000, and the put writer loses ₹24,000.
• B. The investor loses ₹46,000, and the put writer gains ₹6,000.
• C. The investor loses ₹10,000, and the put writer loses ₹30,000.
• D. The investor loses ₹4,000, and the put writer loses ₹36,000.

Best answer: A

Explanation: A protective put transfers downside below the strike to the put writer; it does not make the underlying price risk disappear.

The shares lose ₹40,000, while exercising the puts provides a ₹30,000 benefit. After the ₹6,000 premium, the investor’s net loss is ₹16,000. The writer bears the ₹30,000 exercise loss against ₹6,000 premium received, giving a ₹24,000 net loss.

The two losses total ₹40,000, equal to the decline in the shareholding’s value. The investor retains the decline down to the strike and pays for protection below it. The unhedged writer accepts the transferred exposure.

Answer choices explained:

A — Correct: The investor’s ₹40,000 share loss is offset by ₹30,000 from the puts, less ₹6,000 premium; the writer loses ₹24,000 net.

B — Incorrect: These amounts include the premium but ignore the ₹30,000 exercise benefit received by the investor and funded by the writer.

C — Incorrect: These amounts omit the ₹6,000 premium, which increases the investor’s loss and reduces the put writer’s loss.

D — Incorrect: These amounts treat the premium as received by the investor and paid by the writer, reversing the actual cash flows.

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Question 115

Topic: Mutual Fund Distribution

A distributor reviews four new-folio applications for an Indian mutual fund. All individuals are resident adults. KYC and checks unrelated to signatures and payment-source ownership are complete. No third-party-payment exception applies.

Joint applicants appear in proposed folio-holder order. Pine Pvt Ltd is permitted to invest, and its board mandate requires two authorised signatories to sign jointly.

Which application can be accepted as submitted?

• A. The application from Arjun and Leela.
• B. The application from Nisha.
• C. The application from Dev and Tara.
• D. The application from Pine Pvt Ltd.

Best answer: C

Explanation: Opening a joint mutual fund folio requires all applicants’ signatures, even when the selected mode permits later operation by anyone or survivor. The operating mandate does not replace the initial application requirements.

Where no third-party-payment exception applies, the first-named mutual fund applicant must be a holder of the bank account funding the subscription. That applicant need not be the bank account’s first holder. Dev and Tara therefore satisfy both checks despite the reversed bank-holder order.

For a non-individual investor, signatures must comply with its valid authorisation. Payment from the entity’s own account does not compensate for a missing mandatory signatory.

Answer choices explained:

A — Incorrect: All joint applicants must sign the initial application even under anyone-or-survivor holding; Arjun’s signature alone is insufficient.

B — Incorrect: Payment from her spouse’s sole account is a third-party payment; marriage does not make Nisha an owner of that account.

C — Correct: Both applicants signed, and Dev, the first folio holder, owns the paying account jointly; he need not be its first holder.

D — Incorrect: The company-owned bank account satisfies the ownership check, but one signature does not meet the board mandate requiring two signatories jointly.

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Question 116

Topic: Mutual Fund Distribution

A family has ₹19 lakh available for a fixed ₹20 lakh education payment due in 12 months. No other funds are available for this payment. Its priority is to minimise the risk of a shortfall, rather than maximise investment returns.

A distributor compares four alternatives, each requiring ₹19 lakh today. The following are fictional investment quotes and cost assumptions:

• Residential plot: The purchase price includes stamp duty and registration. Resale normally takes three to four months, with selling costs of 3%.
• Gold ETF: Units can be sold on trading days. Estimated round-trip spreads and transaction charges total 0.5%.
• Diversified equity fund: Daily redemption is available, with no exit load at the planned redemption date.
• Government of India security: It matures seven days before the payment date, providing ₹20.10 lakh after applicable taxes and charges.

Which allocation best matches the family’s payment obligation?

• A. Invest in the government security and use its maturity proceeds for the payment.
• B. Invest in the residential plot and arrange its sale before the payment falls due.
• C. Invest in the equity fund and redeem the units before the payment falls due.
• D. Invest in the gold ETF and sell the units before the payment falls due.

Best answer: A

Explanation: A date-certain liability stated in rupees is best matched with sufficiently predictable net cash flows available before the due date. The government security provides ₹20.10 lakh against the ₹20 lakh obligation, leaving ₹10,000 after the stated taxes and charges.

Liquidity and value certainty are different characteristics. Gold ETFs and equity funds may be easy to sell, but their prices can fall when the money is needed. Real estate adds uncertain sale timing and substantial transaction costs. A fixed-income security sold before maturity can also face price risk; here, its maturity occurs before the payment, so an early market sale is unnecessary.

Answer choices explained:

A — Correct: The stated net maturity proceeds exceed the obligation and become available before its due date, matching both amount and timing.

B — Incorrect: The plot’s resale timing and price are uncertain, while selling costs further reduce the proceeds available for the payment.

C — Incorrect: Daily redemption and a nil exit load do not protect the investment from an equity-market decline before the payment date.

D — Incorrect: Gold’s trading liquidity and modest transaction costs do not ensure that its sale proceeds will cover the fixed rupee payment.

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Question 117

Topic: Mutual Fund Distribution

In July 2026, a distributor reviews this fictional mutual fund scheme’s expense disclosure. All rates are annualised using the same average daily net assets, and the categories do not overlap.

The published NAV is ₹25 and already reflects all listed expenses. A client holds 4,000 units.

Which reconciliation of the Total Expense Ratio (TER) and the client’s current holding value is correct?

• A. TER is 1.00%; the holding value is ₹1,00,000.
• B. TER is 1.00%; the holding value is ₹99,000.
• C. TER is 1.30%; the holding value is ₹98,700.
• D. TER is 1.30%; the holding value is ₹1,00,000.

Best answer: D

Explanation: TER includes BER, brokerage, trade-execution transaction costs and statutory levies, including GST. Because the disclosed categories do not overlap and use the same calculation basis, adding their rates gives an annualised TER of 1.30%.

The client’s 4,000 units at ₹25 each are worth ₹1,00,000. Scheme expenses reduce net assets and are already reflected in the published NAV. Neither BER nor TER should therefore be deducted again when valuing the holding. An annualised expense ratio is not an additional charge to subtract from an already expense-adjusted investment value.

Answer choices explained:

A — Incorrect: The holding value is correct, but treating BER as TER excludes the separately reported brokerage, transaction costs and statutory levies.

B — Incorrect: This excludes expenses outside BER and then deducts BER again, even though the published NAV already reflects those expenses.

C — Incorrect: ₹98,700 applies another 1.30% reduction to an already expense-adjusted holding value, counting expenses twice.

D — Correct: The non-overlapping expense rates total 1.30%, while 4,000 units at the expense-adjusted NAV of ₹25 are worth ₹1,00,000.

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Question 118

Topic: Mutual Fund Distribution

A distributor recommended a flexi-cap equity scheme as a diversified core holding for a client with an eight-year horizon. The client’s circumstances are unchanged.

Fictional AMC review note:

• A new lead manager has taken over.
• The documented process now targets 20-25 stocks instead of 45-55 and permits larger sector deviations.
• The published mandate and permitted investment universe are unchanged; the current portfolio remains compliant.

The scheme retains a strong five-year peer ranking, largely earned under the earlier process. The successor previously managed a highly ranked fund, but meaningful post-change performance history is not yet available.

Which basis should carry the most weight in reassessing the recommendation?

• A. The scheme’s strong five-year peer ranking as an indicator that its earlier risk-return characteristics will continue.
• B. The successor’s previous fund ranking as an indicator of the scheme’s future standing among its peers.
• C. The unchanged mandate and confirmed compliance as indicators that the scheme’s original suitability assessment remains valid.
• D. The revised process’s concentration and sector-risk implications relative to the client’s intended diversified core-equity role.

Best answer: D

Explanation: A manager change requires assessing what has changed in the investment process, rather than automatically switching schemes or predicting future rankings. Here, fewer holdings and larger sector deviations may alter portfolio risk even though the published mandate remains unchanged.

The distributor should assess whether the revised approach still fits the client’s diversified core-equity role. Relevant monitoring includes holdings concentration, sector exposures, implementation of the documented process and continued mandate compliance. The decision to retain or replace the scheme should follow that assessment. Historical scheme performance and the successor’s previous rankings provide context, but neither establishes continuing suitability or future relative performance.

Answer choices explained:

A — Incorrect: The five-year ranking largely reflects the former process and cannot establish continuity of risk-return characteristics after the documented changes.

B — Incorrect: A manager’s previous peer ranking does not establish how a different scheme using the revised process will rank in future.

C — Incorrect: Compliance confirms permitted activity, but an unchanged broad mandate does not establish that materially different portfolio construction still suits this client.

D — Correct: The documented changes may alter concentration and sector risk despite mandate compliance, directly affecting suitability for the client’s core-equity allocation.

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Question 119

Topic: Equity Derivatives

A client holds two lots of the call described in this fictional exchange contract-sheet extract dated 18 August 2026:

The client asks about exercise on 18 August and settlement if both lots are held through expiry. Assume the expiry settlement price is ₹1,250 per share. Any in-the-money position remaining at expiry is automatically exercised. The premium has already been paid; ignore fees and taxes.

Which interpretation of the client’s exercise rights and settlement is correct?

• A. Early exercise is unavailable; the client receives ₹40,000 in cash and no shares at settlement.
• B. Early exercise is permitted; the client receives 800 shares and pays ₹9.6 lakh at settlement.
• C. Early exercise is unavailable; the client receives 800 shares and pays ₹10 lakh at settlement.
• D. Early exercise is unavailable; the client receives 800 shares and pays ₹9.6 lakh at settlement.

Best answer: D

Explanation: A European option can be exercised only at expiry. Since the expiry settlement price exceeds the strike price, these calls are in the money and are automatically exercised under the stated terms.

Two lots represent 800 shares. Physical settlement means the client receives those shares and pays the strike price of ₹1,200 per share, giving a delivery payment of ₹9.6 lakh on 26 August. The premium already paid is separate from this payment.

The ₹50-per-share intrinsic value is not paid as a standalone cash settlement. Unlike a cash-settled index option, this stock-option contract specifies delivery of the underlying shares.

Answer choices explained:

A — Incorrect: ₹40,000 is the aggregate intrinsic value, but this contract requires physical delivery rather than cash settlement of that value.

B — Incorrect: European options permit exercise only at expiry, so the client cannot exercise on 18 August.

C — Incorrect: ₹10 lakh values the shares at the expiry settlement price, whereas exercising the call requires payment at the strike price.

D — Correct: European exercise is confined to expiry; physical settlement of 800 shares at the ₹1,200 strike requires payment of ₹9.6 lakh.

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Question 120

Topic: Equity Derivatives

On 7 July 2026, a mutual fund distributor reviews this fictional European-style equity-index option-chain snapshot. The index is at 25,000. All options expire on 28 July 2026, and annualised implied volatilities use the same pricing-model conventions.

A client asks what this pattern reveals about the index’s next move. Which interpretation is best supported?

• A. A downside skew: lower strikes have higher implied volatility; the next index direction remains undetermined from the pattern alone.
• B. An upside skew: higher strikes have higher implied volatility; the next index direction remains undetermined from the pattern alone.
• C. A downside skew: lower strikes have higher implied volatility; the pattern establishes a negative expected index return to expiry.
• D. A volatility smile: both out-of-the-money wings have higher implied volatility than at-the-money; the next index direction remains undetermined.

Best answer: A

Explanation: Implied volatility is the volatility input that makes an option-pricing model reproduce a quoted market premium. It is inferred from option prices, not a forecast of the underlying’s expected return. Comparing a common expiry avoids confusing cross-strike differences with differences across maturities.

Here, IV declines from 27% to 21% to 18% as the strike increases. This is a downside, or negative, volatility skew: lower-strike downside protection is relatively richer in volatility terms. The pattern can reflect demand for protection and the pricing of downside tail risk. It does not establish that the index’s next move will be down or quantify a future decline.

Answer choices explained:

A — Correct: IV falls from 27% at the lower strike to 18% at the higher strike, showing downside skew rather than establishing the next price direction.

B — Incorrect: IV decreases as strike increases, from 27% at 24,000 to 18% at 26,000, which is the opposite of upside skew.

C — Incorrect: Higher IV at lower strikes reflects option pricing and downside risk pricing; it does not establish a negative expected index return.

D — Incorrect: The higher-strike call has 18% IV, below the 21% at-the-money IV, so both out-of-the-money wings are not elevated.

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Question 121

Topic: Mutual Fund Distribution

A distributor reviews a fictional mutual fund’s valuation file for an illiquid corporate bond with face value ₹10 crore. No eligible current trade is available.

Applicable valuation policy:

Use the mean of the two designated valuation agencies’ current prices unless documented security-specific evidence supports an override.

All prices include accrued interest and are quoted per ₹100 face value.

Current comparable-bond evidence corroborates the agency valuations, with no evidence supporting an override. After weak recent returns, the reporting team proposes recognising half the markdown today and half tomorrow.

NAV inputs:

• Other net assets, after all liabilities and expenses: ₹90 crore.
• Units outstanding: 5 crore.
• Bond value before today’s update: ₹10 crore.

Which bond value and NAV should be reported today, rounded to two decimal places?

• A. Bond value ₹9.60 crore; NAV ₹19.92.
• B. Bond value ₹10.00 crore; NAV ₹20.00.
• C. Bond value ₹9.50 crore; NAV ₹19.90.
• D. Bond value ₹9.80 crore; NAV ₹19.96.

Best answer: A

Explanation: Fair valuation uses current market evidence and the applicable valuation methodology, not a target reported return.

The agency mean is \( (95 + 97)/2 = 96 \) per ₹100 face value. The bond value is therefore \( 10 \times 96/100 = 9.60 \) crore rupees. Adding other net assets gives ₹99.60 crore, so NAV is \( 99.60/5 = 19.92 \) rupees per unit.

The full ₹0.40 crore markdown belongs in today’s NAV. Deferring half would overstate today’s assets and could favour investors redeeming before the remaining loss is recognised. Weak recent performance does not justify smoothing a supported fair-value adjustment.

Answer choices explained:

A — Correct: The mean agency price is ₹96, producing a bond value of ₹9.60 crore and total net assets of ₹99.60 crore.

B — Incorrect: This retains the stale trade price of ₹100 despite current, corroborated agency valuations supporting a lower value.

C — Incorrect: This uses the lower agency price alone, although the policy requires their mean and no evidence supports an override.

D — Incorrect: This recognises only half the supported markdown, deferring a valuation loss to cushion reported performance rather than reflecting today’s fair value.

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Question 122

Topic: Interest Rate Derivatives

On 1 July 2026, an Indian company plans to draw a ₹6 crore loan on 1 September 2026 and repay it on 1 March 2027. The bank will fix the interest rate for the entire six-month loan on the drawdown date, using prevailing market rates and its lending spread.

For an illustrative hedge, the company can trade cash-settled futures on a specified 10-year fixed-rate Government of India bond. The futures are quoted as the bond price per ₹100 face value and expire on 31 March 2027. Assume appropriate sizing for interest-rate sensitivity and ignore transaction costs and margin funding.

Which plan best hedges a broad rise in rates before the loan rate is fixed while correctly identifying the remaining risk?

• A. Sell futures now and close on 1 September 2026; bank-loan versus government-bond basis risk remains.
• B. Sell futures now and close on 1 March 2027; bank-loan versus government-bond basis risk remains.
• C. Sell futures now and close on 1 September 2026; bank-loan versus government-bond basis risk is eliminated.
• D. Buy futures now and close on 1 September 2026; bank-loan versus government-bond basis risk remains.

Best answer: A

Explanation: A future borrower is exposed to rising rates until its borrowing rate is fixed. Higher market yields generally mean lower bond prices, so selling bond futures can produce gains that offset an increase in borrowing cost. The hedge should be closed on 1 September 2026, when the loan rate becomes fixed, rather than when the principal is repaid.

This is a cross-hedge, not a contractual lock of the bank’s lending rate. A six-month bank loan and a 10-year government bond respond differently to yield-curve movements and bank lending spreads. Appropriate interest-rate sensitivity sizing improves the hedge but does not remove this basis risk.

Answer choices explained:

A — Correct: A short bond futures position can offset rising borrowing rates until drawdown, but the bank’s lending rate need not track government-bond yields exactly.

B — Incorrect: Holding until repayment extends the futures exposure beyond rate fixing, although subsequent market-rate changes cannot alter the loan’s fixed interest cost.

C — Incorrect: Appropriate sensitivity sizing does not eliminate differences arising from bank lending spreads or movements between six-month rates and 10-year government-bond yields.

D — Incorrect: Rising market yields generally reduce bond futures prices, so a long position would lose value while the company’s borrowing cost increases.

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Question 123

Topic: Equity Derivatives

A client holds four long contracts of an illustrative cash-settled equity index future until expiry. Each contract has a lot size of 25 index units, so each one-point price movement is worth ₹25 per contract.

• Initial futures price: 22,450 points
• Final settlement price at expiry: 22,680 points
• Total transaction costs: ₹1,200

What is the aggregate expiry payoff before transaction costs?

• A. ₹5,750
• B. ₹23,000
• C. -₹23,000
• D. ₹21,800

Best answer: B

Explanation: A long futures position gains when the final settlement price exceeds the initial futures price. Multiply the price difference by the lot size and number of contracts to calculate the aggregate payoff.

\[ \text{Payoff} = (22{,}680 - 22{,}450) \times 25 \times 4 = 23{,}000 \]

The aggregate expiry payoff is therefore ₹23,000. Transaction costs are separate from payoff: deducting the ₹1,200 costs gives a net profit of ₹21,800. The calculation must cover all four contracts, not just one lot.

Answer choices explained:

A — Incorrect: Multiplying the 230-point increase by ₹25 gives the payoff for one contract, not the total for four contracts.

B — Correct: The 230-point increase, multiplied by ₹25 per point per contract and four contracts, produces a ₹23,000 payoff.

C — Incorrect: The increase in settlement price produces a gain for a long futures position; this amount reverses the payoff’s sign.

D — Incorrect: This is net profit after subtracting ₹1,200 in transaction costs from the ₹23,000 payoff, rather than the payoff before costs.

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Question 124

Topic: Mutual Fund Distribution

A client’s agreed long-term portfolio allocation is 60% equity mutual funds and 40% debt mutual funds. Her goals, investment horizon and capacity to bear risk remain unchanged.

A distributor’s review notes record these requests:

• After a weak equity quarter: reduce equity allocation to 30%.
• After the next, strong equity quarter: increase equity allocation to 80%.

The client explains:

What happened in the latest quarter is the best guide to returns over the next five years.

Which behavioral bias most directly explains her allocation requests?

• A. Loss aversion
• B. Anchoring bias
• C. Overconfidence bias
• D. Recency bias

Best answer: D

Explanation: Recency bias occurs when recent events receive disproportionate weight in decisions. The client treats each latest quarter as a reliable guide to five-year returns, requesting lower equity exposure after weakness and higher exposure after strength. This produces performance-chasing allocation changes even though her goals, horizon and risk capacity have not changed.

Recent performance can inform a review, but it does not by itself establish that a long-term allocation should change. A distributor should distinguish a genuine change in the client’s circumstances or investment outlook from a reaction to short-term market movements.

Answer choices explained:

A — Incorrect: Loss aversion concerns greater sensitivity to losses than equivalent gains; her requests follow recent performance in both directions.

B — Incorrect: Anchoring involves excessive reliance on a reference point; her allocation requests instead change sharply with the latest quarter’s performance.

C — Incorrect: Overconfidence involves excessive faith in personal judgment or forecasting ability; the documented pattern specifically shows excessive weighting of recent returns.

D — Correct: She gives the latest quarter disproportionate importance and projects its performance into a five-year horizon when requesting allocation changes.

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Question 125

Topic: Equity Derivatives

An investor sells two contracts of an illustrative cash-settled equity index future and holds them to expiry.

• Entry futures price: 20,000 index points.
• Contract multiplier: ₹50 per index point per contract.
• Initial margin deposited: ₹1,80,000 in total.
• Final settlement price: 22,500 index points.

The investor meets all daily mark-to-market obligations. Ignoring transaction costs and interest, what is the cumulative trading gain or loss on the position through expiry?

• A. A loss of ₹70,000.
• B. A loss of ₹2,50,000.
• C. A gain of ₹2,50,000.
• D. A loss of ₹1,80,000.

Best answer: B

Explanation: A short futures position gains when the settlement price falls and loses when it rises. Its cumulative trading payoff equals the entry futures price minus the final settlement price, multiplied by the contract multiplier and number of contracts.

Here, the adverse movement is 2,500 points. Across two contracts, each worth ₹50 per point, this produces a loss of ₹2,50,000.

Initial margin is collateral supporting performance of the contract, not an option premium or a maximum possible loss. Daily mark-to-market settlement changes when gains and losses are paid, but not their cumulative amount over the position’s life.

Answer choices explained:

A — Incorrect: Subtracting the initial margin from the trading loss gives ₹70,000, but margin deposited does not reduce the position’s total loss.

B — Correct: The short position loses 2,500 points multiplied by ₹50 per point and two contracts, giving a total loss of ₹2,50,000.

C — Incorrect: The magnitude is right, but a rise in the settlement price creates a loss for the seller of futures.

D — Incorrect: The initial margin is collateral, not a ceiling on losses; the adverse index movement produces a larger cumulative loss.

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Questions 126–150

Question 126

Topic: Mutual Fund Distribution

A client holds Fund Core, a domestic large-cap equity fund. She will retain 50% in Fund Core and invest the other 50% in one fund below. She wants the lowest expected portfolio volatility while keeping her entire investment in equity funds.

Each candidate is managed by an AMC different from Fund Core’s. All five funds have estimated annualised volatility of 18%. Correlations use monthly INR returns over the same period. Assume these estimates remain applicable and ignore costs and taxes.

Which fund should receive the remaining 50%?

• A. Invest the remaining 50% in Fund Overseas.
• B. Invest the remaining 50% in Fund Value.
• C. Invest the remaining 50% in Fund Smallcap.
• D. Invest the remaining 50% in Fund Index.

Best answer: A

Explanation: Diversification depends on underlying exposures and how returns move together, not simply on holding different fund names or using different AMCs. Funds holding different securities can still respond similarly to common market influences.

With equal allocation weights and identical standalone volatilities, the fund with the lowest correlation to Fund Core gives the greatest volatility reduction. Fund Overseas therefore provides the lowest expected portfolio volatility under the supplied assumptions:

\[ 18\% \times \sqrt{\frac{1+0.45}{2}} \approx 15.3\% \]

The absence of common holdings supports diversification, but correlation is decisive here. Diversification reduces risk; it does not eliminate equity-market risk.

Answer choices explained:

A — Correct: With equal fund volatilities and equal allocation weights, its lowest correlation of 0.45 produces the lowest combined portfolio volatility.

B — Incorrect: Its value mandate changes some holdings, but the 0.84 correlation indicates substantial shared return movements with Fund Core.

C — Incorrect: Having no common shares does not imply independent returns; its 0.72 correlation is not the lowest available.

D — Incorrect: Its 0.96 correlation provides little volatility reduction despite the different AMC and index mandate.

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Question 127

Topic: Equity Derivatives

Before maturity, a client adds a separate contract to an illustrative bespoke equity-forward position:

• Existing contract: Long 5,000 shares with Dealer A at ₹800 per share.
• New contract: Short 5,000 shares of the same company with Dealer B at ₹824 per share.

Both contracts are cash-settled on the same date using the same settlement-price fixing. Dealer A has not consented to early termination or transfer of the original contract. Ignore costs and discounting, and assume both dealers perform.

Which statement correctly describes the client’s combined maturity payoff and legal position?

• A. A ₹1,20,000 maturity gain is locked in; the client remains bound under both forward contracts.
• B. A zero net maturity payoff is locked in; the client remains bound under both forward contracts.
• C. A ₹1,20,000 maturity gain is locked in; the client’s original obligation to Dealer A is cancelled.
• D. A ₹1,20,000 maturity gain is locked in; Dealer B replaces the client under the original forward.

Best answer: A

Explanation: A matching opposite forward can close an exposure economically without extinguishing the original contract. Here, the underlying, quantity, maturity and settlement-price fixing match, so subsequent share-price movements cancel across the two positions.

Let \(S_T\) be the common settlement price in rupees per share. The combined maturity payoff, in rupees, is:

\[ 5{,}000(S_T - 800) + 5{,}000(824 - S_T) = 120{,}000. \]

The client therefore locks in a gross maturity gain of ₹1,20,000 under the stated assumptions. Nevertheless, both contracts remain enforceable. Ending the original obligation requires an agreed termination or a valid novation with the necessary parties’ consent. Entering a separate contract with another dealer achieves neither.

Answer choices explained:

A — Correct: The ₹24 per-share spread locks in ₹1,20,000 at maturity, while the separate offsetting trade leaves both bilateral contracts legally binding.

B — Incorrect: The opposite positions cancel settlement-price sensitivity, but their ₹24 per-share price difference leaves a fixed ₹1,20,000 maturity gain.

C — Incorrect: An offsetting trade removes net price sensitivity, not the original legal obligation; Dealer A has not agreed to cancel its contract.

D — Incorrect: The gain is correctly calculated, but a separate forward does not constitute novation or transfer the client’s original obligations to Dealer B.

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Question 128

Topic: Interest Rate Derivatives

A distributor reviews an illustrative one-day risk report for three long zero-coupon government-security positions.

PVBP is each position’s estimated rupee loss for a 1 basis point rise in its yield. Use the starting PVBP for a first-order estimate; ignore convexity and carry.

Which statement correctly describes the curve move and identifies the position with the largest estimated mark-to-market loss?

• A. A parallel level rise with unchanged curve shape; the 10-year position has the largest estimated loss.
• B. A level rise with a belly-led curvature change; the 5-year position has the largest estimated loss.
• C. A level rise with a belly-led curvature change; the 10-year position has the largest estimated loss.
• D. A level rise with a steeper 2-to-10-year slope; the 5-year position has the largest estimated loss.

Best answer: B

Explanation: The move can be viewed as a common 10 basis point upward shift plus an additional 30 basis point rise at the 5-year maturity. This raises the belly relative to both wings, changing curvature. The 2-to-10-year yield spread remains 80 basis points, so the endpoint slope is unchanged.

For a long position, the first-order estimate is \(\text{loss} \approx \text{PVBP} \times \text{yield rise in bp}\).

• 2-year: 10 basis point rise, giving a loss of ₹8,000.
• 5-year: 40 basis point rise, giving a loss of ₹24,000.
• 10-year: 10 basis point rise, giving a loss of ₹12,000.

The largest loss therefore occurs at 5 years. A higher PVBP alone does not imply the largest loss when yield changes differ across maturities.

Answer choices explained:

A — Incorrect: A parallel move requires equal yield changes, whereas the 5-year yield rises by 40 basis points and each wing rises by 10.

B — Correct: The belly rises 30 basis points relative to both wings, and the 5-year position’s 40 basis point rise produces a ₹24,000 loss.

C — Incorrect: The 10-year position’s higher PVBP produces only a ₹12,000 loss after its 10 basis point yield rise, below the 5-year loss.

D — Incorrect: The 10-year minus 2-year yield spread remains 80 basis points, so that slope does not steepen.

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Question 129

Topic: Mutual Fund Distribution

A distributor reviews a fictional mutual fund illustration dated 1 July 2026 that reports an annualised return of 4.88%.

Disclosed basis: Two-year compound annual growth rate (CAGR), assuming full, immediate reinvestment of all IDCW distributions.

Illustration data:

• 1 July 2024: Initial investment of 1,000 units at a NAV of ₹20.
• 1 July 2025: IDCW of ₹2 per unit, reinvested at the ex-distribution NAV of ₹20.
• 1 July 2026: Ending NAV of ₹22.

There were no other distributions. Ignore investor taxes and transaction charges. Scheme expenses are already reflected in the NAVs.

Which annualised return is consistent with the disclosed calculation basis?

• A. 4.88%
• B. 10.50%
• C. 9.54%
• D. 10.00%

Best answer: D

Explanation: A reinvestment-based CAGR must include the units acquired through distributions, not merely the change in NAV. The initial investment is ₹20,000. IDCW of ₹2 on 1,000 units provides ₹2,000, which buys 100 additional units at the ex-distribution NAV of ₹20. The resulting 1,100 units are worth ₹24,200 at the ending NAV of ₹22.

The two-year annualised return is:

\[ \mathrm{CAGR} = \left(\frac{24{,}200}{20{,}000}\right)^{1/2} - 1 = 10.00\% \]

IDCW does not create an additional return independently of NAV: the distribution reduces scheme assets and is reflected in the ex-distribution NAV. Tracking the reinvested units captures the investor’s total return under the disclosed convention.

Answer choices explained:

A — Incorrect: This annualises only the NAV increase from ₹20 to ₹22 and omits the additional units acquired through IDCW reinvestment.

B — Incorrect: This divides the 21% cumulative total return by two, producing a simple annual average rather than the disclosed compound annual growth rate.

C — Incorrect: This treats the ₹2,000 distribution as cash held outside the scheme, giving ₹24,000 rather than the reinvestment-based ending value of ₹24,200.

D — Correct: Reinvestment increases the holding to 1,100 units worth ₹24,200; growth from ₹20,000 to ₹24,200 over two years gives a 10.00% CAGR.

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Question 130

Topic: Mutual Fund Distribution

A distributor reviews a domestic equity fund holding 12 companies across several industries. The manager proposes expanding to 60 companies, lowering individual issuer weights while keeping total equity exposure and overall market sensitivity unchanged.

The distributor considers two separate scenarios:

• An unexpected economy-wide interest-rate rise causes a broad decline in share prices.
• Accounting fraud at one investee company causes its shares to fall while the broader market is stable.

Which statement best describes how the proposed diversification affects the fund’s risk from these scenarios?

• A. It leaves portfolio risk from both the economy-wide interest-rate shock and the isolated accounting-fraud event largely unchanged.
• B. It reduces portfolio risk from both the economy-wide interest-rate shock and the isolated accounting-fraud event.
• C. It reduces portfolio risk from the accounting-fraud event while leaving risk from the interest-rate shock largely unchanged.
• D. It reduces portfolio risk from the interest-rate shock while leaving risk from the accounting-fraud event largely unchanged.

Best answer: C

Explanation: Systematic risk arises from factors affecting the market broadly, such as an economy-wide interest-rate shock. Adding companies does not remove their shared exposure to those factors. Since the fund’s overall market sensitivity remains unchanged, its systematic risk is largely unchanged.

Issuer-specific, or unsystematic, risk arises from circumstances particular to a company, such as accounting fraud. Spreading the portfolio across more issuers at lower individual weights reduces the impact of an isolated company’s loss. Diversification does not prevent fraud or guarantee positive returns; it reduces the concentration of company-specific risk while leaving broad-market risk in place.

Answer choices explained:

A — Incorrect: Although market exposure remains unchanged, lower individual issuer weights reduce the concentration of losses from an isolated company event.

B — Incorrect: More holdings can dilute issuer-specific losses, but unchanged market sensitivity means the fund retains its exposure to the economy-wide shock.

C — Correct: Lower issuer weights reduce the portfolio impact of one company’s fraud, while unchanged market sensitivity preserves exposure to the broad rate shock.

D — Incorrect: This reverses the distinction: the broad rate shock is systematic, while the isolated accounting fraud creates diversifiable issuer-specific risk.

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Question 131

Topic: Interest Rate Derivatives

A portfolio manager sells three contracts of an illustrative cash-settled futures contract on a fixed-rate Government of India bond. Each contract represents ₹10 lakh face value. Futures prices are quoted in rupees per ₹100 face value.

After market yields rise, the manager buys back all three contracts of the same expiry:

Ignoring transaction costs, what is the aggregate futures trading gain or loss, rounded to the nearest rupee?

• A. A gain of ₹15,500.
• B. A gain of ₹46,500.
• C. A gain of ₹45,410.
• D. A loss of ₹46,500.

Best answer: B

Explanation: A short bond-futures position gains when the futures price falls. The observed decline following the rise in yields is consistent with the inverse relationship between fixed-rate bond prices and yields.

The quotation is per ₹100 face value, so the price change must be multiplied by the number of ₹100 face-value blocks represented by the contracts:

\[ \text{Gain} = 3 \times (102.40 - 100.85) \times \frac{10{,}00{,}000}{100} = 46{,}500 \]

Each contract gains ₹15,500, producing a total gain of ₹46,500. The opening futures quotation is not the denominator: the conversion uses the stated ₹100 quotation basis.

Answer choices explained:

A — Incorrect: ₹15,500 is the gain on one contract; the aggregate result must include all three contracts sold and subsequently bought back.

B — Correct: The 1.55-point decline produces ₹15,500 per contract, giving an aggregate gain of ₹46,500 across three short contracts.

C — Incorrect: This treats the decline as a percentage of the opening quote; the contract instead requires conversion from price per ₹100 face value.

D — Incorrect: A short futures position gains when the closing purchase price is below the opening sale price, so the sign is reversed.

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Question 132

Topic: Equity Derivatives

A buyer and seller have an outstanding, uncollateralised, cash-settled equity forward covering 1,000 shares. The buyer originally agreed to a delivery price of ₹1,250 per share.

Current market details:

• Three months remain until settlement.
• The current forward price for the same shares and settlement date is ₹1,170 per share.
• The discount factor from settlement to today is 0.98.
• There is no collateral, netting or interim settlement. Ignore transaction costs.

Which party has positive current counterparty exposure, and what is its amount?

• A. The seller has positive current counterparty exposure of ₹80,000.
• B. The seller has positive current counterparty exposure of ₹78,400.
• C. The buyer has positive current counterparty exposure of ₹80,000.
• D. The buyer has positive current counterparty exposure of ₹78,400.

Best answer: B

Explanation: Current counterparty exposure on an uncollateralised forward is its positive replacement value, not its full notional amount or a negative mark-to-market value.

The seller contracted to receive ₹1,250 per share, while an equivalent new forward offers only ₹1,170. If the buyer defaults, replacing the favourable original agreement would therefore disadvantage the seller.

The seller’s current value, in rupees, is:

\[ V_{\text{seller}} = (1{,}250 - 1{,}170) \times 1{,}000 \times 0.98 = 78{,}400. \]

The seller consequently has positive current counterparty exposure of ₹78,400. The buyer has an equal negative contract value and no positive replacement-cost exposure at this date. These exposures can change as the forward price changes.

Answer choices explained:

A — Incorrect: ₹80,000 is the seller’s replacement advantage at settlement; its current value must be discounted using the factor of 0.98.

B — Correct: The seller’s contracted delivery price exceeds the replacement forward price, creating a positive claim worth ₹80,000 multiplied by 0.98 today.

C — Incorrect: ₹80,000 represents the buyer’s undiscounted disadvantage under the original agreement, not a positive current claim against the seller.

D — Incorrect: The buyer’s contract has a negative current value of ₹78,400; this market loss is not positive exposure to the seller’s default.

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Question 133

Topic: Mutual Fund Distribution

A distributor reviews a fictional fund of funds holding only two domestic equity ETFs: one tracking a large-cap index and the other tracking a mid-cap index. Its factsheet states:

Performance benchmark: a 60:40 blend of the two indices. ETF weights are varied according to the manager’s valuation views.

Which description correctly separates the scheme’s investment universe from its management approach?

• A. Equity exposure with passive allocation at the fund-of-funds level.
• B. Equity exposure with active allocation at the fund-of-funds level.
• C. Multi-asset exposure with active allocation at the fund-of-funds level.
• D. Multi-asset exposure with passive allocation at the fund-of-funds level.

Best answer: B

Explanation: Investment universe describes the assets providing exposure; management approach describes how holdings and weights are determined. Large-cap and mid-cap stocks both belong to equity, so combining their ETFs does not create multi-asset exposure.

A fund of funds is an investment structure, not a management style. Its underlying ETFs can track indices passively while its own manager actively allocates between them. Here, valuation-based weight changes make allocation active. The 60:40 benchmark provides a performance comparison; it does not establish that the scheme replicates that allocation. Neither an equity label nor ownership of index-tracking funds determines the overall management approach.

Answer choices explained:

A — Incorrect: The underlying ETFs track indices, but discretionary changes in their weights make allocation active at the fund-of-funds level.

B — Correct: Both ETFs provide equity exposure, while valuation-based changes in their weights constitute active allocation by the fund-of-funds manager.

C — Incorrect: Large-cap and mid-cap equities are segments of the same asset class, so combining them does not create multi-asset exposure.

D — Incorrect: Holding two equity ETFs neither introduces another asset class nor makes the manager’s discretionary allocation decisions passive.

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Question 134

Topic: Mutual Fund Distribution

A debt mutual fund scheme has net assets of ₹200 crore and holds:

• ₹24 crore in Narmada Metals.
• ₹12 crore in Narmada Engineering.

The issuers belong to the same corporate group. The manager proposes purchasing another ₹8 crore of Narmada Engineering securities through an AMC-affiliated broker.

Fictional AMC policy extract, effective 7 July 2026:

• Aggregate exposure to issuers in one corporate group must not exceed 20% of scheme net assets. This internal ceiling cannot be waived.
• An AMC-affiliated broker may be used on arm’s-length terms after documented conflict disclosure and prior trustee approval.

The broker’s disclosure and approval requirements are complete, and the proposed execution terms are arm’s-length. Assume net assets remain unchanged and all other applicable requirements are satisfied.

Which assessment correctly applies both controls?

• A. Allow the ₹8 crore purchase and retain the affiliated broker, since trustee approval of the intermediary also permits the group-exposure excess.
• B. Cap the purchase at ₹4 crore and retain the affiliated broker, since its separate conflict-disclosure and approval requirements have been met.
• C. Cap the purchase at ₹4 crore and replace the affiliated broker, since holdings in related issuers make affiliated execution ineligible.
• D. Allow the ₹8 crore purchase and retain the affiliated broker, since the 20% ceiling applies to each issuer separately.

Best answer: B

Explanation: Issuer-group exposure controls concentration risk, while affiliated-intermediary controls address conflicts of interest. They operate separately.

The scheme’s group ceiling is 20% of ₹200 crore, or ₹40 crore. Existing holdings in the two related issuers total ₹36 crore, leaving capacity for only ₹4 crore. Investing the proposed ₹8 crore would increase group exposure to ₹44 crore, or 22% of net assets. Splitting holdings between related issuers does not avoid aggregation.

The affiliated broker remains eligible because the required disclosure, prior approval and arm’s-length terms are satisfied. That approval does not increase investment capacity, and replacing the broker would not change the scheme’s exposure to the issuers.

Answer choices explained:

A — Incorrect: Approval addresses the intermediary’s conflict, not issuer concentration, and cannot authorise a breach of the binding internal exposure ceiling.

B — Correct: Existing group exposure is ₹36 crore against a ₹40 crore ceiling, leaving ₹4 crore capacity; the approved affiliated broker remains eligible.

C — Incorrect: The ₹4 crore capacity is correct, but related-issuer holdings do not disqualify a broker whose separate conflict requirements are satisfied.

D — Incorrect: The ceiling aggregates both related issuers; the proposed purchase would raise their combined exposure to ₹44 crore, exceeding ₹40 crore.

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Question 135

Topic: Interest Rate Derivatives

A trader establishes a calendar spread on 3 August 2026 using hypothetical cash-settled futures on the same Government of India bond:

• Long 8 contracts expiring in September 2026.
• Short 8 contracts expiring in December 2026.

Each contract has a face value of ₹10 lakh and is quoted in rupees per ₹100 face value. Both positions are closed on 18 August 2026 at the prices shown.

Total transaction costs for opening and closing the entire spread are ₹2,400. Ignore interest on daily settlement cash flows.

What is the net profit or loss on the entire calendar spread?

• A. A net profit of ₹69,600.
• B. A net loss of ₹16,000.
• C. A net profit of ₹13,600.
• D. A net loss of ₹18,400.

Best answer: D

Explanation: A calendar spread’s result depends on the relative price movement of its two expiries. Each one-point price change is worth ₹10,000 per contract because the contract represents ₹10 lakh quoted per ₹100 face value.

The September long gains 0.35 points, producing ₹28,000 across eight contracts. The December short loses 0.55 points, producing a ₹44,000 loss. The net result after transaction costs is:

\[ 28,000 - 44,000 - 2,400 = -18,400 \]

The September-minus-December price spread falls from -0.30 to -0.50, hurting the long-September, short-December position. Equal parallel price changes would cancel across the equally sized legs before costs.

Answer choices explained:

A — Incorrect: ₹69,600 treats both price increases as gains before deducting costs; the December position is short and loses when its price rises.

B — Incorrect: ₹16,000 is the combined loss before transaction costs; the stated ₹2,400 must also be deducted.

C — Incorrect: A ₹13,600 profit results from reversing the specified long and short positions; the actual positions produce a loss before costs.

D — Correct: The September long gains ₹28,000 and the December short loses ₹44,000; including ₹2,400 costs produces a net loss of ₹18,400.

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Question 136

Topic: Equity Derivatives

A distributor evaluates a reverse cash-and-carry trade using an illustrative, physically settled stock-futures contract covering 1,000 shares. The plan is to short 1,000 borrowed shares now and take futures delivery in 90 days.

Executable terms:

• Cash-market bid: ₹1,000 per share; futures ask: ₹990 per share.
• Borrowing of all 1,000 shares is confirmed and non-recallable through futures delivery. The total stock-borrow fee is ₹12,000, payable at closure.
• Other transaction costs total ₹3,000, payable at closure.
• Short-sale proceeds are blocked and earn no interest. At expiry, the broker applies them directly towards futures delivery and closing charges. The client pays any shortfall, and the delivered shares repay the stock loan.

Unrestricted cash could earn 8% per annum simple interest, using a 90/360 year fraction. Assume no dividends, taxes, margin-funding costs or additional cash flows.

Which assessment of the proposed trade is correct?

• A. It offers an arbitrage profit: the locked-in net result is a gain of ₹7,000.
• B. It offers an arbitrage profit: the locked-in net result is a gain of ₹15,000.
• C. It offers no arbitrage profit: the locked-in net result is a loss of ₹25,000.
• D. It offers no arbitrage profit: the locked-in net result is a loss of ₹5,000.

Best answer: D

Explanation: Reverse cash-and-carry combines a borrowed-stock short sale with a long futures position that supplies shares to repay the stock loan. Feasibility depends on executable prices, borrowing availability, borrowing costs and restrictions on sale proceeds.

Here, confirmed non-recallable borrowing covers futures delivery, so stock availability is not an obstacle. The short sale generates ₹10 lakh, while futures delivery costs ₹9.90 lakh. This leaves ₹10,000 before costs. Deducting the ₹12,000 stock-borrow fee and ₹3,000 transaction costs produces a ₹5,000 loss.

The quoted 8% reinvestment rate cannot be applied because the sale proceeds are blocked at zero interest. The trade can be completed operationally, but the apparent price discrepancy does not provide an arbitrage profit.

Answer choices explained:

A — Incorrect: Deducting only ₹3,000 of transaction costs from the ₹10,000 gross difference omits the confirmed ₹12,000 stock-borrow fee.

B — Incorrect: This adds ₹20,000 of interest to the short-sale proceeds, although the broker blocks those proceeds at zero interest.

C — Incorrect: This reverses the price difference: selling shares at ₹1,000 and obtaining replacement shares at ₹990 creates a gross gain, not a gross loss.

D — Correct: The ₹10,000 gross price difference is less than the combined ₹15,000 stock-borrow fee and transaction costs, with no interest earned.

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Question 137

Topic: Mutual Fund Distribution

On 1 July 2026, a resident individual holds ₹10,00,000 in an equity-oriented scheme at AMC A, acquired on 1 January 2025. She is considering redeeming it fully and investing in a comparable scheme at AMC B. Her seven-year goal, risk capacity and target equity allocation are unchanged; both schemes remain suitable.

Immediate switching outflows:

• Applicable exit load: ₹10,000.
• Capital-gains tax estimated by her tax adviser: ₹30,000.
• Both amounts will be paid from the redemption proceeds. Ignore other transaction charges.

Forecasts to the review date, 1 July 2028:

These cumulative returns already allow for scheme expenses and tax on liquidation at the review date, but exclude today’s switching outflows.

Using the higher projected after-tax liquidation value at the review date as the decision criterion, which assessment is supported?

• A. Switch to AMC B: switching would increase the projected after-tax value by ₹8,800.
• B. Retain AMC A: switching would reduce the projected after-tax value by ₹24,800.
• C. Switch to AMC B: switching would increase the projected after-tax value by ₹20,000.
• D. Retain AMC A: switching would reduce the projected after-tax value by ₹13,600.

Best answer: B

Explanation: An inter-AMC switch involves redemption and a fresh investment. Compare expected benefits using the amount available after exit load and immediate tax, rather than the original holding value.

Retaining AMC A produces a projected after-tax value of ₹11,00,000. Switching leaves ₹9,60,000 to invest. AMC B’s projected cumulative after-tax return of 12% increases this to ₹10,75,200, which is ₹24,800 less.

The higher forecast return therefore does not support switching under the stated criterion. Client needs are unchanged, and neither scheme has a suitability advantage. These are forecasts, not guaranteed outcomes; tax on final liquidation is already included and must not be deducted again.

Answer choices explained:

A — Incorrect: The ₹8,800 gain results from deducting only the exit load; the ₹30,000 immediate capital-gains tax also reduces the amount reinvested.

B — Correct: Retaining projects ₹11,00,000, while investing the net proceeds of ₹9,60,000 in AMC B projects ₹10,75,200, a shortfall of ₹24,800.

C — Incorrect: The ₹20,000 gain assumes the entire ₹10,00,000 is reinvested, ignoring both the exit load and immediate capital-gains tax.

D — Incorrect: The ₹13,600 shortfall results from deducting tax but omitting the exit load, which also reduces the capital earning AMC B’s forecast return.

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Question 138

Topic: Interest Rate Derivatives

A distributor is valuing a five-year fixed-rate corporate bond. Investors discount its promised cash flows at a required annual return of 8.00%, while the same-maturity Government of India reference yield is 6.50%.

During an immediate market repricing:

• The government reference yield falls to 6.00%.
• The required credit spread over that reference widens by 1.00 percentage point.

The promised cash flows, remaining maturity and all other valuation factors are unchanged. Which combination of investors’ required annual return and the bond’s market-price movement follows?

• A. Required return of 6.00%; market price rises.
• B. Required return of 9.00%; market price falls.
• C. Required return of 7.50%; market price rises.
• D. Required return of 8.50%; market price falls.

Best answer: D

Explanation: A government yield provides a maturity-matched reference rate; it is not the entire required return on a credit-risky corporate bond. Investors also require compensation for credit exposure.

Initially, the corporate bond’s yield exceeds the reference by 1.50 percentage points. With other factors unchanged, the spread widens to 2.50 percentage points. Adding this to the new 6.00% reference yield gives an 8.50% required return.

Unchanged promised cash flows have a lower present value when discounted at a higher required rate. The bond’s market price therefore falls despite the decline in government yields. Credit compensation does not eliminate risk, and fixed coupons do not protect the bond’s resale value from changing market-required returns.

Answer choices explained:

A — Incorrect: Using the government reference yield alone omits the credit compensation required for the corporate bond.

B — Incorrect: This adds the credit-spread increase to the original required return but overlooks the decline in the government reference yield.

C — Incorrect: This incorporates the lower government yield but ignores the additional credit compensation investors now require.

D — Correct: The 1.00 percentage-point spread increase outweighs the 0.50 percentage-point benchmark decline, raising the discount rate and lowering the price.

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Question 139

Topic: Equity Derivatives

A portfolio manager holds a short position of four contracts in an illustrative single-stock futures contract.

• Lot size: 1,200 shares per contract.
• Minimum price increment: ₹0.05 per share.

The futures price falls by exactly one tick. Ignoring transaction costs, what is the resulting mark-to-market gain or loss on the entire position?

• A. A loss of ₹240.
• B. A gain of ₹60.
• C. A gain of ₹240.
• D. A loss of ₹60.

Best answer: C

Explanation: Tick value equals the minimum price increment multiplied by the lot size. Here, one tick is worth ₹60 per contract: \(0.05 \times 1{,}200 = 60\).

For four contracts, the monetary effect is ₹240: \(60 \times 4 = 240\). A short futures position gains when the futures price falls, so the one-tick fall produces a ₹240 mark-to-market gain. The ₹60 figure applies only to one contract. Neither the full contract notional nor the initial margin is used to calculate tick value.

Answer choices explained:

A — Incorrect: The magnitude is correct for four contracts, but a fall in the futures price creates a gain for a short position.

B — Incorrect: ₹60 is the value of one tick for one contract; the four-contract position gains four times that amount.

C — Correct: Each contract gains ₹60 for the one-tick fall, so four short contracts generate a ₹240 mark-to-market gain.

D — Incorrect: ₹60 applies to one contract, and the short position gains rather than loses when the futures price falls.

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Question 140

Topic: Interest Rate Derivatives

A distributor reviews an illustrative six-month futures contract on a single specified bond. The delivery invoice equals the futures quote, expressed per ₹100 face value. Assume futures and forward prices are equal; ignore transaction costs, taxes and margin-funding costs.

Market facts:

• Dirty spot price: ₹100.00 per ₹100 face value.
• Coupon: ₹3.00 per ₹100 face value payable in three months, with no other payments through delivery.
• Borrowing and locked-in coupon reinvestment rates: 8% p.a., simple interest. Use 0.50 year to delivery and 0.25 year from coupon payment to delivery.

An analyst expects yields to fall and forecasts a dirty spot price of ₹102.00 at delivery.

Which assessment correctly identifies the carry-based fair futures price?

• A. Fair futures value is ₹104.00, using financed spot cost with the coupon already included in today’s dirty price.
• B. Fair futures value is ₹102.00, using the expected dirty spot price at delivery as the contract’s pricing anchor.
• C. Fair futures value is ₹100.94, using financed spot cost less the coupon’s accumulated value at delivery.
• D. Fair futures value is ₹101.00, using financed spot cost less the coupon’s cash amount received before delivery.

Best answer: C

Explanation: Carry-based pricing starts from the current dirty bond price, adds funding cost to delivery and deducts the delivery-date value of coupons received meanwhile. Here, both financing and coupon reinvestment use simple interest.

The fair futures quote, \(F_0\), per ₹100 face value is:

\[ F_0 = 100(1+0.08\times0.50)-3(1+0.08\times0.25)=100.94. \]

The financed purchase costs ₹104.00 at delivery, while the coupon and its reinvestment provide ₹3.06. The analyst’s ₹102.00 forecast instead depends on a view about future yields and bond prices. That forecast can differ from carry-based fair value; it does not change the cash flows and financing terms available today. A yield view alone does not establish an arbitrage.

Answer choices explained:

A — Incorrect: The bondholder receives the coupon before delivery, so its accumulated value must reduce financed spot cost even when dirty prices are used.

B — Incorrect: The ₹102.00 figure reflects a forecast of future yields, not the cash-and-carry relationship determined by current spot, coupon and funding terms.

C — Correct: The financed purchase costs ₹104.00 at delivery, and the coupon accumulates to ₹3.06, leaving a carry-based value of ₹100.94.

D — Incorrect: Subtracting only ₹3.00 omits ₹0.06 of reinvestment income earned between the coupon payment and delivery.

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Question 141

Topic: Interest Rate Derivatives

A portfolio writes one illustrative European, cash-settled call option on the price of a Government of India bond. Prices and premium are quoted per ₹100 face value.

Trade details:

• Bond face value covered: ₹1 crore (₹100 lakh).
• Strike price: ₹100.
• Premium received: ₹0.40.
• Cash collateral posted as margin: ₹1.50 lakh.

In a stress scenario, the final settlement price at expiry is ₹104, and the holder exercises. Ignore collateral interest, funding costs, taxes and fees.

What are the writer’s total exercise obligation before applying collateral and net trading loss after including the premium?

• A. Exercise obligation of ₹3.60 lakh and net loss of ₹3.60 lakh.
• B. Exercise obligation of ₹1.50 lakh and net loss of ₹1.10 lakh.
• C. Exercise obligation of ₹4 lakh and net loss of ₹3.60 lakh.
• D. Exercise obligation of ₹4 lakh and net loss of ₹5.10 lakh.

Best answer: C

Explanation: A written call obliges the writer to meet the contractual settlement when the holder exercises. Here, the underlying is the bond price, and the call expires ₹4 in the money per ₹100 face value. On ₹1 crore face value, the settlement obligation is therefore ₹4 lakh.

The premium received is ₹40,000, reducing the net trading loss to ₹3.60 lakh. Margin collateral secures payment; it is neither an additional expense nor a ceiling on loss. Applying collateral toward settlement reduces the additional cash the writer must provide, but does not change the total settlement obligation or trading loss.

Answer choices explained:

A — Incorrect: The premium reduces the net trading loss, not the exercise obligation, which remains based on the strike and final settlement price.

B — Incorrect: Posted collateral does not cap the writer’s exercise obligation; the liability is determined by the option’s payoff on the covered face value.

C — Correct: The ₹4 price difference on ₹1 crore face value creates a ₹4 lakh obligation; deducting the ₹40,000 premium leaves a ₹3.60 lakh loss.

D — Incorrect: The settlement amount is ₹4 lakh, but adding the ₹1.50 lakh collateral to the loss incorrectly treats security as an additional expense.

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Question 142

Topic: Interest Rate Derivatives

A distributor compares two theoretical call options during a client review. The bond-price contract uses clean prices in rupees per ₹100 face value. The rate contract is defined directly on an annual reference interest rate, not on a 100-minus-rate quotation.

How should the distributor classify their current moneyness?

• A. The bond-price call is in the money, and the rate call is in the money.
• B. The bond-price call is in the money, and the rate call is out of the money.
• C. The bond-price call is out of the money, and the rate call is in the money.
• D. The bond-price call is out of the money, and the rate call is out of the money.

Best answer: C

Explanation: A call is in the money when its specified underlying quotation exceeds the strike and out of the money when it is below the strike. Here, ₹98.60 is below ₹99.00, so the bond-price call is out of the money. The directly quoted interest rate of 7.20% exceeds 7.00%, so the rate call is in the money.

Bond prices generally move inversely to yields, but that relationship does not change which underlying each contract uses. Moneyness also differs from profitability: the premium paid affects net profit, not whether the option is in the money.

Answer choices explained:

A — Incorrect: The rate exceeds its strike, but the bond price is below its strike, so the bond-price call is out of the money.

B — Incorrect: Both classifications are reversed: the bond price is below its call strike, while the directly quoted rate is above its call strike.

C — Correct: The bond price of ₹98.60 is below ₹99.00, while the directly quoted rate of 7.20% exceeds 7.00%.

D — Incorrect: The bond-price classification is accurate, but the rate call is in the money because 7.20% exceeds its 7.00% strike.

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Question 143

Topic: Equity Derivatives

A client bought a put option for ₹24 per share and continues to hold it. Before expiry, the underlying share trades at ₹475, the strike price is ₹500, and the put’s current quoted premium is ₹38 per share. Ignore transaction costs.

What is the remaining time value per share in the current quoted premium?

• A. ₹13 per share
• B. ₹14 per share
• C. ₹38 per share
• D. ₹25 per share

Best answer: A

Explanation: A put’s intrinsic value is the amount by which its strike price exceeds the current underlying price, with a minimum of zero. Here, intrinsic value is \( \max(500 - 475, 0) = 25 \), or ₹25 per share.

Time value is the quoted premium less intrinsic value: \( 38 - 25 = 13 \), or ₹13 per share. The original ₹24 purchase premium does not determine the current premium’s decomposition. It is relevant to the client’s gain or loss: the ₹14 increase in quoted value remains unrealised because the client has not sold the option.

Answer choices explained:

A — Correct: Subtracting the ₹25 intrinsic value from the ₹38 quoted premium leaves ₹13 of time value per share.

B — Incorrect: ₹14 is the increase over the purchase premium, representing an unrealised gain while the client continues to hold the option.

C — Incorrect: ₹38 is the full quoted premium, which includes both intrinsic value and time value.

D — Incorrect: ₹25 is the put’s intrinsic value, calculated as the ₹500 strike price less the ₹475 underlying share price.

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Question 144

Topic: Interest Rate Derivatives

A distributor checks a fixed-income fund’s risk report for the following bond holding.

The report defines rupee duration as modified duration multiplied by full market value, with yield expressed as a decimal. PVBP is reported as a positive first-order sensitivity. Ignore convexity.

What are the rupee duration and PVBP for the entire holding, respectively?

• A. Rupee duration: ₹10.00 crore; PVBP: ₹10,000.
• B. Rupee duration: ₹9.90 crore; PVBP: ₹99,000.
• C. Rupee duration: ₹9.90 crore; PVBP: ₹9,900.
• D. Rupee duration: ₹9.80 crore; PVBP: ₹9,800.

Best answer: C

Explanation: Rupee duration converts modified duration into monetary sensitivity using the holding’s full (dirty) market value. Add accrued interest to the clean price before valuing the position.

• Full price: ₹98 + ₹1 = ₹99 per ₹100 face value.
• Full market value: \(2 \times 99/100 = 1.98\) crore rupees.
• Rupee duration: \(5.0 \times 1.98 = 9.90\) crore rupees.
• PVBP: \(9{,}90{,}00{,}000 \times 0.0001 = 9{,}900\) rupees.

PVBP is the magnitude of the approximate value change for a one-basis-point yield movement. A one-basis-point yield increase implies a loss of approximately ₹9,900; an equivalent decrease implies a similar gain, ignoring convexity.

Answer choices explained:

A — Incorrect: These amounts result from applying modified duration to face value rather than the holding’s full market value.

B — Incorrect: ₹99,000 represents the first-order sensitivity to ten basis points; one basis point is a decimal yield change of 0.0001.

C — Correct: The full market value is ₹1.98 crore, giving rupee duration of ₹9.90 crore and a one-basis-point sensitivity of ₹9,900.

D — Incorrect: Using the clean market value of ₹1.96 crore omits accrued interest; the duration calculation requires full market value.

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Question 145

Topic: Mutual Fund Distribution

A mutual fund distributor is assessing Meera’s risk profile for a non-deferrable education payment of ₹12 lakh due in 24 months.

• She has ₹10 lakh earmarked for the payment and is willing to accept a loss of up to 25% of this corpus.
• Her stable take-home income is ₹1 lakh per month. Loan EMIs are ₹35,000 and essential household spending for herself and two dependants is ₹55,000 per month.
• She will save her entire monthly surplus towards the payment. No other funds or borrowing are available for this goal.

Assume income and expenses remain unchanged, there are no investment gains, and all 24 monthly savings remain intact.

What is the maximum loss on the earmarked corpus consistent with both her stated risk tolerance and her financial capacity to meet this goal?

• A. ₹2.4 lakh
• B. ₹2 lakh
• C. ₹40,000
• D. ₹2.5 lakh

Best answer: C

Explanation: Risk tolerance is willingness to accept losses; risk capacity is the financial ability to absorb them without compromising a goal. Stable income alone does not establish high capacity when debt and dependant expenses absorb most income and the goal cannot be delayed.

Meera’s monthly surplus is ₹10,000 after EMIs and essential spending. Over 24 months, this adds ₹2.4 lakh to her existing ₹10 lakh, giving total funding of ₹12.4 lakh before losses. Against the required ₹12 lakh, the loss-absorbing cushion is only ₹40,000.

Although she is willing to lose ₹2.5 lakh, her financial capacity is much lower. The distributor must respect this tighter funding constraint when recommending the goal allocation.

Answer choices explained:

A — Incorrect: This treats all future savings as a loss buffer, although ₹2 lakh of those savings is needed to complete the goal funding.

B — Incorrect: A ₹2 lakh loss would leave only ₹10.4 lakh after adding future savings, below the non-deferrable ₹12 lakh requirement.

C — Correct: Her monthly surplus totals ₹2.4 lakh over 24 months, leaving only ₹40,000 above the required ₹12 lakh payment.

D — Incorrect: This reflects her willingness to lose 25%, but such a loss would leave only ₹9.9 lakh available for the goal.

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Question 146

Topic: Mutual Fund Distribution

A client makes three monthly SIP investments of ₹6,000 each in a mutual fund at the following applicable NAVs.

Each instalment is fully invested. There are no distributions or other transactions. At a later review, the NAV is ₹18.

Which statement correctly gives the client’s total units, average acquisition cost per unit and unrealised gain or loss at review? Round non-integer results to two decimals.

• A. 830.77 units; average cost ₹21.67 per unit; unrealised loss ₹3,046.15.
• B. 1,200 units; average cost ₹15.00 per unit; unrealised gain ₹3,600.
• C. 1,000 units; average cost ₹18.00 per unit; no unrealised gain or loss.
• D. 900 units; average cost ₹20.00 per unit; unrealised loss ₹1,800.

Best answer: D

Explanation: Average acquisition cost equals total investment divided by total units, not the arithmetic mean of the purchase NAVs. The three instalments buy 200, 300 and 400 units, respectively, giving 900 units. Dividing the total investment of ₹18,000 by 900 gives an average cost of ₹20 per unit.

At the review NAV of ₹18, the holding is worth ₹16,200, producing an unrealised loss of ₹1,800. Equal cash instalments buy more units at lower NAVs, which is rupee cost averaging. This does not guarantee profit: although the NAV has risen since the third purchase, it remains below the average acquisition cost.

Answer choices explained:

A — Incorrect: Using the arithmetic mean NAV incorrectly treats all ₹18,000 as invested at one price instead of calculating each instalment’s units separately.

B — Incorrect: Applying the final purchase NAV of ₹15 to all contributions ignores the earlier purchases at higher NAVs and overstates the units held.

C — Incorrect: Dividing contributions by the review NAV incorrectly resets the unit balance; a NAV change alters investment value, not units already held.

D — Correct: The instalments buy 200, 300 and 400 units; the resulting 900 units cost ₹18,000 and are worth ₹16,200 at review.

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Question 147

Topic: Mutual Fund Distribution

An investor holds mutual fund units in dematerialised form. She wants future scheme payouts credited to a new bank account in her own name and gives her distributor a signed request with supporting bank documents. She wishes to retain all units, with no change in ownership.

Which servicing route should the distributor advise?

• A. Submit it to the KYC registration agency to update the bank details in the KYC record.
• B. Submit it to the AMC/RTA to update the bank mandate in the scheme’s folio records.
• C. Submit it to the distributor to update the bank details in its client-registration record.
• D. Submit it to the depository participant to update the bank details in the demat account.

Best answer: D

Explanation: The holding mode determines where a bank-account change must be registered. For mutual fund units held in demat form, the investor submits the request and required supporting documents to the depository participant, which updates the bank details in the depository account.

For statement-of-account holdings, bank-mandate changes are serviced through the AMC/RTA instead. Updating a KYC record or the distributor’s internal records does not replace updating the applicable holding record. A bank-account change is a non-financial service request: it does not require redemption or alter unit ownership.

Answer choices explained:

A — Incorrect: Updating KYC records does not amend the registered bank mandate attached to the investor’s demat holdings.

B — Incorrect: The AMC/RTA route applies to bank-mandate changes for statement-of-account holdings; these units are held in demat form.

C — Incorrect: The distributor’s internal client record does not control the registered payout bank account for units held in demat form.

D — Correct: For demat holdings, the bank-change request must go through the depository participant to amend the depository account’s bank details.

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Question 148

Topic: Equity Derivatives

A client holds five long stock-futures contracts. The contract is quoted in rupees per share, and the following details apply:

What is the current total notional value of the futures position?

• A. ₹3,84,000
• B. ₹5,12,000
• C. ₹25,60,000
• D. ₹25,00,000

Best answer: C

Explanation: A futures position’s current notional value equals its current quoted price multiplied by the underlying units per contract and the number of contracts. The quotation and lot-size units must be consistent.

Here, five contracts of 400 shares each represent 2,000 shares. The notional value is \( 1{,}280 \times 400 \times 5 = 25{,}60{,}000 \) rupees.

This amount measures the position’s reference exposure, not the cash deposited as margin or its trading profit. The spot price would value the underlying shares in the cash market; the futures position’s notional value uses the futures quote.

Answer choices explained:

A — Incorrect: The blocked margin is collateral supporting the position, not the total notional value represented by the futures contracts.

B — Incorrect: This is the notional value of one contract, calculated as ₹1,280 multiplied by 400 shares, rather than five contracts.

C — Correct: Multiplying the current futures quote of ₹1,280 by 400 shares per contract and five contracts gives ₹25,60,000.

D — Incorrect: This uses the spot price of ₹1,250 rather than the current futures quote to value the 2,000-share position.

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Question 149

Topic: Interest Rate Derivatives

A portfolio manager holds bonds with ₹10 lakh face value and will sell them at expiry. The manager compares two alternative hedges using illustrative contracts covering the entire holding:

• Buy a cash-settled European put on the bond, with a strike of ₹100 and an upfront premium of ₹0.80, both per ₹100 face value.
• Short bond futures, with variation margin settled daily in cash.

The bond and futures follow the same price path. All prices below are in rupees per ₹100 face value.

Ignore coupons, interest and costs other than the put premium. Initial futures margin is refunded after settlement.

What are the put-hedged holding’s net gain from inception through expiry and the short futures position’s variation-margin debit on expiry day?

• A. Put-hedged gain of ₹30,000; futures variation-margin debit of ₹70,000.
• B. Put-hedged gain of ₹22,000; futures variation-margin debit of ₹70,000.
• C. Put-hedged loss of ₹8,000; futures variation-margin debit of ₹70,000.
• D. Put-hedged gain of ₹22,000; futures variation-margin debit of ₹30,000.

Best answer: B

Explanation: A bought put provides a right, not an obligation, to sell at the strike. With the bond price at 103 and the strike at 100, the put expires unexercised, preserving the bond’s upside. The premium is not refunded.

The holding contains 10,000 blocks of ₹100 face value. Its three-point appreciation produces ₹30,000, while the premium costs ₹8,000. The put-hedged net gain is therefore ₹22,000.

A short futures position requires daily settlement rather than an exercise decision. On expiry day, the futures price rises seven points, from 96 to 103, producing a ₹70,000 variation-margin debit. The earlier fall from 100 to 96 had produced a ₹40,000 credit. Thus, the cumulative futures loss is ₹30,000, but the expiry-day debit is ₹70,000. Refundable initial margin is collateral, not an additional trading loss.

Answer choices explained:

A — Incorrect: ₹30,000 is the bond’s appreciation before deducting the ₹8,000 premium, which remains a cost when the put expires unexercised.

B — Correct: The ₹30,000 bond gain less ₹8,000 premium leaves ₹22,000, while the final seven-point futures rise requires a ₹70,000 debit.

C — Incorrect: The put need not be exercised when the bond price exceeds its strike, so the holding retains its ₹30,000 appreciation.

D — Incorrect: ₹30,000 is the cumulative futures loss from inception; the expiry-day debit reflects the rise from 96 to 103 and equals ₹70,000.

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Question 150

Topic: Mutual Fund Distribution

A distributor reviews a multi-asset mutual fund with a strategic allocation of 50% equity, 30% debt and 20% gold. Its benchmark combines the corresponding total-return indices in these weights, rebalanced at the start of each half-year. Ignore rebalancing costs.

The indices produced these returns during the review year, with distributions reinvested:

The fund’s net total return for the full year was 9.00%. Which comparison is correct? Round the benchmark return and performance difference to two decimal places.

• A. The benchmark returned 8.30%; the fund outperformed by 0.70 percentage points.
• B. The benchmark returned 9.32%; the fund underperformed by 0.32 percentage points.
• C. The benchmark returned 9.40%; the fund underperformed by 0.40 percentage points.
• D. The benchmark returned 8.00%; the fund outperformed by 1.00 percentage point.

Best answer: B

Explanation: A blended benchmark should reflect the fund’s strategic exposures and the specified rebalancing rule. Resetting the weights at each half-year means the 50:30:20 allocation applies to both periods.

The first-half benchmark return is \(0.50(20\%) + 0.30(4\%) + 0.20(-5\%) = 10.20\%\). The second-half return is \(0.50(-10\%) + 0.30(4\%) + 0.20(15\%) = -0.80\%\).

Compounding gives the full-year return:

\[ (1.102)(0.992) - 1 = 0.093184 = 9.3184\% \]

The fund’s 9.00% return therefore trails the benchmark by 0.3184 percentage points, rounded to 0.32. Weighting each constituent’s full-year return would describe an unrebalanced basket. Using only the equity index would disregard the benchmark’s debt and gold exposures.

Answer choices explained:

A — Incorrect: Weighting the constituents’ full-year returns by their initial allocations gives 8.30%, representing a buy-and-hold basket rather than half-yearly rebalancing.

B — Correct: Compounding the blended half-year returns of 10.20% and -0.80% gives 9.32%, placing the fund 0.32 percentage points behind.

C — Incorrect: Adding the blended half-year returns gives 9.40%, but the annual return must compound them because the second-half return applies to changed capital.

D — Incorrect: The 8.00% figure compounds only the equity-index returns, omitting the benchmark’s debt and gold allocations.

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