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NISM Certifications · NISM-Series-VIII: Equity Derivatives · Introduction to Clearing and Settlement System

A trader sold 3 lots of a stock option with a lot size of 400 at a premium of ₹12. The option is exercised at expiry by the buyer, and the stock option is physically settled. Which statement is correct under the current framework for stock derivatives in India?

Stock derivatives in India are physically settled, so shares are delivered or received through the clearing corporation at expiry for in-the-money positions. Index derivatives are cash settled. Settlement is never bilateral between buyer and seller because the clearing corporation is the counterparty.

  1. ASettlement is always in cash at the closing price
  2. BSettlement is by physical delivery of shares for stock derivatives, with the obligation to deliver or take delivery through the clearing corporationCorrect
  3. CSettlement is in cash only if the option is out-of-the-money
  4. DSettlement is bilateral between the buyer and the seller

Explanation

Stock derivatives in India are physically settled, so in-the-money stock options at expiry result in delivery of shares through the clearing corporation, not bilaterally. The cash-settled claim is wrong because index derivatives are cash settled, not stock derivatives. Settlement is never bilateral because of novation.

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