Skip to content

NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Understanding Derivatives

In the context of exchange-traded equity index futures, what is the main purpose of the initial margin collected from a position holder?

Initial margin is collected to cover the potential loss on a futures position from an adverse price movement over a short period. It acts as a performance guarantee protecting the clearing system, and is not a fee, dividend guarantee or a determinant of settlement price.

  1. ATo cover potential loss on the position over a likely adverse price move for a short periodCorrect
  2. BTo pay the brokerage and statutory charges on the trade
  3. CTo guarantee the dividend on the underlying index stocks
  4. DTo fix the final settlement price of the contract

Explanation

Initial margin is a performance deposit set to cover the potential loss from an adverse price move over a short horizon, typically computed using a risk model. It is not a fee, nor does it relate to dividends or fixing the settlement price.

Did you get it right without looking?

One question tells you little. A timed set on Understanding Derivatives shows your real accuracy, how long you take and where you lose marks.

Practise Understanding DerivativesFree diagnostic mock

More Understanding Derivatives questions