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      Question

      In the context of index futures traded in India, which

      statement is most accurate?
      A Index futures eliminate all systematic risk through daily mark-to-market settlement. Correct Answer Incorrect Answer
      B Index futures prices are independent of spot index movements due to arbitrage restrictions. Correct Answer Incorrect Answer
      C Index futures are cash-settled and their fair value is determined using the cost-of-carry model. Correct Answer Incorrect Answer
      D During high volatility, index futures invariably trade at a discount to the spot index. Correct Answer Incorrect Answer
      E Margin requirements are fixed permanently by the issuing entity and do not change till expiry. Correct Answer Incorrect Answer

      Solution

      Index futures in India (Nifty 50, Bank Nifty, etc.) are cash-settled there is no delivery of underlying securities; profit/loss is settled in cash at expiry. Their theoretical fair value is calculated using the Cost-of-Carry (CoC) model: Futures Price = Spot Price x (1 + r - d)^t, where r is risk-free rate and d is dividend yield. Option A is wrong futures hedge systematic risk but do not eliminate it. Option B is wrong futures and spot prices are strongly linked through arbitrage. Option D is wrong high volatility can push futures to a premium, not just a discount. Option E is wrong SEBI mandates dynamic margin recalculation based on volatility (VaR + ELM framework).

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