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NISM Certifications · NISM-Series-VIII: Equity Derivatives · Sales Practices and Investors Protection Services

Which of the following is a correct sales practice for a member recommending equity derivatives to a retail client?

A member should assess the client's suitability and explain risks, including the potentially unlimited loss on short option positions, before recommending derivatives. Assuring returns, ignoring risk profiles or discouraging reading of the risk disclosure document are improper sales practices.

  1. AAssuring the client of a minimum return on a futures position to encourage trading
  2. BAssessing the client's suitability and explaining the risk of unlimited loss in short option positions before recommending themCorrect
  3. CRecommending the same strategy to all clients irrespective of their risk profile
  4. DAdvising the client to avoid reading the risk disclosure document to save time

Explanation

Suitability assessment and clear disclosure of risks, such as unlimited loss on short options, are core requirements of fair sales practice. Guaranteeing returns is misleading. A uniform recommendation ignores the client's risk profile. Discouraging reading of the risk disclosure document is improper.

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