Futures
Level 1 — Recognition (MCQ, Matching, True/False with Justification)
Time Limit: 20 minutes Total Marks: 30
Section A — Multiple Choice Questions (1 mark each) — 10 marks
Choose the single best answer.
Q1. A futures contract is best described as: a) A right but not an obligation to buy an asset b) A standardised, exchange-traded agreement to buy/sell an asset at a fixed price on a future date c) A private, customisable agreement traded over-the-counter d) A loan taken against shares
Q2. The "lot size" of a futures contract refers to: a) The margin required per contract b) The number of contracts allowed per trader c) The fixed quantity of the underlying per contract d) The expiry day of the contract
Q3. On the NSE, equity futures contracts typically expire on the: a) First Monday of the month b) Last Thursday of the month c) 15th of every month d) Last Friday of the month
Q4. SPAN margin is best defined as: a) A fixed flat fee charged by the broker b) A margin computed using a portfolio-risk model based on worst-case scenarios c) The profit locked at settlement d) An additional buffer above the exposure margin only
Q5. Mark-to-market (MTM) settlement means: a) Profits/losses are settled only at expiry b) Daily gains and losses are credited/debited based on the day's settlement price c) The contract is cancelled if price moves adversely d) Margins never change during the contract life
Q6. A market is in contango when: a) Futures price < spot price b) Futures price > spot price c) Futures price = spot price exactly d) There is no expiry
Q7. Basis is defined as: a) Futures price + spot price b) Spot price − futures price c) Margin − exposure d) Lot size × price
Q8. Rollover refers to: a) Closing a near-month position and opening the same in the next-month contract b) Converting a future into an option c) Withdrawing margin from the account d) Cancelling the trade before expiry with no new position
Q9. A trader who holds shares and sells futures to protect against a price fall is: a) Speculating b) Hedging c) Arbitraging d) Rolling over
Q10. Compared to stock futures, index futures: a) Carry higher single-company risk b) Are based on a basket/index and are cash-settled c) Always have smaller lot values d) Cannot be traded on exchanges
Section B — Matching (1 mark each) — 8 marks
Match each term in Column X with its correct description in Column Y. Write the pair (e.g., 1–c).
| Column X | Column Y |
|---|---|
| 1. Cost of carry | a) Futures below spot price |
| 2. Backwardation | b) Financing/storage cost linking spot and futures |
| 3. Exposure margin | c) Daily profit/loss settlement |
| 4. MTM | d) Additional margin over SPAN to cover volatility |
| 5. Expiry | e) Fixed number of units per contract |
| 6. Lot size | f) Last day the contract is valid for trading |
| 7. Speculation | g) Taking a directional position to profit from price moves |
| 8. Hedging | h) Reducing risk of an existing exposure |
Section C — True/False WITH Justification (2 marks each) — 12 marks
State True or False (1 mark) and give a one-line justification (1 mark).
Q11. In contango, the futures price is typically higher than the spot price because of positive cost of carry. (2)
Q12. At expiry, the basis of a futures contract tends towards zero (futures converges to spot). (2)
Q13. SPAN margin is charged only after the position makes a loss. (2)
Q14. Rollover cost is negative when the next-month future trades at a premium to the near-month future for a long position. (2)
Q15. Index futures are generally cash-settled while stock futures in India are cash-settled as well. (2)
Q16. A speculator and a hedger both aim primarily to reduce their existing risk. (2)
End of Paper
Answer keyMark scheme & solutions
Section A — MCQ (1 mark each)
Q1. b) — A future is standardised and exchange-traded (unlike a forward which is OTC; unlike an option which is a right, not an obligation). (1)
Q2. c) — Lot size is the fixed quantity of the underlying per contract, set by the exchange. (1)
Q3. b) — NSE equity futures expire on the last Thursday of the expiry month. (1)
Q4. b) — SPAN uses a portfolio-based worst-case-scenario risk model to set initial margin. (1)
Q5. b) — MTM credits/debits daily gains/losses using the day's settlement price. (1)
Q6. b) — Contango: futures price > spot price. (1)
Q7. b) — Basis = Spot − Futures (convention used here). (1)
Q8. a) — Rollover = close near-month + open same position in next month. (1)
Q9. b) — Holding shares and selling futures = hedging against a fall. (1)
Q10. b) — Index futures track a basket and are cash-settled. (1)
Section B — Matching (1 mark each)
1–b, 2–a, 3–d, 4–c, 5–f, 6–e, 7–g, 8–h (1 each = 8)
Section C — True/False with Justification (2 marks each)
Q11. True (1). Justification: In contango, futures = spot + cost of carry, so positive carry pushes futures above spot. (1)
Q12. True (1). Justification: As expiry nears, arbitrage forces futures to converge to spot, so basis → 0. (1)
Q13. False (1). Justification: SPAN (initial) margin is blocked upfront when the position is taken, not after a loss. (1)
Q14. False (1). Justification: For a long roll, paying a higher next-month price is a positive (costly) rollover cost, not negative. (1)
Q15. False (1). Justification: Index futures are cash-settled, but Indian stock futures are physically settled (delivery-based) at expiry. (1)
Q16. False (1). Justification: A hedger reduces existing risk; a speculator willingly takes on risk to profit from price moves. (1)
Worked numeric checks (concept illustrations)
- Cost of carry / contango: If Spot = 100 and carry = 2, Futures = 102 → Futures > Spot (contango). Basis = 100 − 102 = −2.
- Convergence: At expiry Futures = Spot → Basis = 0.
[
{"claim":"Contango: futures > spot when carry positive (spot=100, carry=2 -> F=102)","code":"spot=100; carry=2; F=spot+carry; result = (F > spot)"},
{"claim":"Basis = spot - futures = -2 in contango example","code":"spot=100; F=102; basis=spot-F; result = (basis == -2)"},
{"claim":"At expiry basis converges to 0 (futures=spot)","code":"spot=100; F=100; basis=spot-F; result = (basis == 0)"},
{"claim":"Long rollover cost positive when next-month at premium (near=100,next=103 -> cost=3>0)","code":"near=100; nxt=103; roll_cost=nxt-near; result = (roll_cost > 0)"}
]