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NISM Certifications · NISM-Series-VIII: Equity Derivatives · Basics of Derivatives

In the context of derivatives, which of the following best describes the 'underlying' of an equity index futures contract?

The underlying of an equity index futures contract is the stock index itself. The contract's value is derived from the index level, so its price moves as the index moves. The clearing corporation, margin and expiry are contract features rather than the underlying asset.

  1. AThe clearing corporation guaranteeing the contract
  2. BThe stock index whose value determines the contract's priceCorrect
  3. CThe margin deposited by the buyer
  4. DThe expiry date of the contract

Explanation

A derivative derives its value from an underlying asset. For index futures the underlying is the stock index, and the futures price moves with the index level. The clearing corporation, margin and expiry date are features of the contract, not the underlying.

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