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NISM Certifications · NISM-Series-VII: Securities Operations and Risk Management · Risk Management

In the context of a stock broker's risk management, what is the primary purpose of collecting an upfront margin from a client before allowing a fresh trade?

Upfront margin is collected to cover potential losses from adverse price movements before settlement, protecting the broker and the clearing system from client default. It is a risk-control deposit, not a fee, account charge or return guarantee.

  1. ATo cover potential losses arising from adverse price movements before settlementCorrect
  2. BTo pay the broker's brokerage and GST in advance
  3. CTo fund the client's demat account opening charges
  4. DTo guarantee the client a fixed return on the trade

Explanation

Margins act as a security against the risk that the client defaults after prices move adversely. They are not a fee, not an account charge and do not assure returns. Hence the first option is correct.

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