UPSC Prelims Practice Questions — SEBI to partly reverse derivative settlement rules

Q1. With reference to the methods by which stock exchanges discover prices, consider the following statements: Which of the statements given above is/are correct?

  1. In a continuous trading session, orders received through the session are held back and executed together at one common price when the session ends.
  2. In a call auction, buy and sell orders collected over a window are matched and executed at a single common price.
  3. A closing auction is intended to produce a closing price at which investors can actually transact, rather than an average of earlier trades.
  • A. 2 and 3 only
  • B. 1 and 2 only
  • C. 1 and 3 only
  • D. 1, 2 and 3

Q2. Other things remaining equal, consider the following changes to the way a settlement price is computed from the cash market. Which of the changes given above would make it harder for one large order placed just before the close to move the settlement price?

  1. Lengthening the window over which the volume-weighted average price is computed from 5 minutes to 30 minutes of active trading.
  2. Replacing a volume-weighted average over continuous trading with the single price discovered in a short closing auction that has thin participation.
  3. Computing the volume-weighted average price from the underlying stock's trades on all stock exchanges instead of on a single exchange.
  • A. 1 only
  • B. 2 and 3 only
  • C. 1 and 3 only
  • D. 1, 2 and 3

Q3. With reference to clearing corporations in Indian securities markets, consider the following statements: Which of the statements given above is/are correct?

  1. A clearing corporation becomes the counterparty to every trade, so a trader's settlement obligation is owed to it rather than to the original party on the other side.
  2. The Core Settlement Guarantee Fund is a fund against which clearing members are given trading exposure so that they can take larger positions.
  3. Because clearing corporations are part of an exchange's trading platform, settlement prices of expiring stock derivatives are computed only from trades on that one exchange.
  • A. 1, 2 and 3
  • B. 2 and 3 only
  • C. 1 and 2 only
  • D. 1 only

Q4. Consider the following statements regarding 'settlement' in Indian securities markets: Which of the statements given above is/are correct?

  1. The 'settlement price' of an expiring derivative is the reference price at which open positions are closed out, whereas the 'settlement cycle' is the time lag between a cash-market trade and the delivery of funds and securities.
  2. SEBI's 2026 shift to a last-30-minute VWAP for settling expiring derivatives replaced the T+1 settlement cycle of the equity cash market with same-day settlement.
  • A. 1 only
  • B. 2 only
  • C. Both 1 and 2
  • D. Neither 1 nor 2

Q5. Consider the following statements: Which of the following is correct in respect of the above statements?

  1. Even after moving derivatives settlement back to a volume-weighted average price, SEBI retained the closing auction for determining the closing price of eligible cash-equity securities.
  2. A single-price closing auction cannot accommodate limit orders, which makes it unsuitable for setting closing prices in the cash market.
  • A. Both Statement-I and Statement-II are correct and Statement-II explains Statement-I
  • B. Both Statement-I and Statement-II are correct, but Statement-II does not explain Statement-I
  • C. Statement-I is correct, but Statement-II is incorrect
  • D. Statement-I is incorrect, but Statement-II is correct

Q6. Consider the following facts: (i) On an expiry day in September 2026, the indicative Sensex close fell about 2.5% during the closing auction, while premiums of some Sensex put options jumped 400–500%. (ii) SEBI later decided to settle expiring stock and index derivatives on the VWAP of the last 30 minutes of continuous trading, while keeping the closing auction for the closing price of cash-equity securities. Which of the following inferences can validly be drawn from the above?

  1. Swings in the reference price on expiry day can transfer large gains and losses between holders and writers of expiring options.
  2. SEBI concluded that the closing auction was unsuitable for every purpose in the cash market.
  3. On an expiry day, the settlement price of a stock's derivatives and that stock's official cash-market closing price may differ.
  4. The fall in the indicative index during the auction proves that the auction had been deliberately manipulated.
  • A. 1, 3 and 4 only
  • B. 1 and 3 only
  • C. 2 and 4 only
  • D. 1, 2, 3 and 4

Q7. Consider the following assertion: Settling an expiring stock derivative on the underlying stock's volume-weighted average price computed across all stock exchanges gives a sounder reference price than one exchange's own price. Which of the statements given above support/supports the assertion?

  1. Combining trades from every venue widens the volume base, so trading on any one venue carries less weight in the final figure.
  2. A single consolidated price prevents contracts on the same underlying from being closed out at different prices on different exchanges.
  3. A consolidated volume-weighted average necessarily equals the closing auction price discovered on each individual exchange.
  • A. 1 and 2 only
  • B. 1, 2 and 3
  • C. 2 and 3 only
  • D. 1 only

Q8. Suppose a late surge in the constituent stocks pushes up the final settlement price of an index on the expiry day of its options. Which of the following is most directly changed as a result?

  • A. The strike prices at which the expiring option series were originally made available
  • B. The premiums that buyers had already paid when they first entered those option contracts
  • C. The amounts paid to holders of in-the-money call options and owed by their writers
  • D. The number of days taken to credit shares bought in the cash market on that day