NISM XVI – COMMODITY

DERIVATIVES EXAM
 NISM XVI – COMMODITY DERIVATIVES
LAST DAY REVISION TEST . 1

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 NISM XVI – COMMODITY DERIVATIVES
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Question1 When the currency of a particular country appreciates against the USD, the price of the
commodity in that particular country .
(a) becomes expensive
(b) becomes cheaper
(c) remains constant
(d) equal chances of it becoming expensive or cheaper

Correct Answer becomes cheaper

Answer Comparative movement in the value of a currency of a country in relation to the major global
Explanation currencies is very important for prices of commodities in that particular country. Most of the
commodities globally are denominated in the US dollar (USD). Hence, when the currency of a
particular country appreciates against the USD, the price of the commodity in that particular
country becomes cheaper and vice versa.

Question2 During the process of physical deliveries in the Commodity Pay-in mechanism, the clearing
member of the seller will transfer to the clearing corporation.
(a) The GST paid note
(b) The Contract note
(c) The Warehouse receipt
(d) The funds

Correct Answer The Warehouse receipt

Answer In the commodity Pay in process the clearing member will transfer the warehouse receipt to
Explanation the clearing corporation.
(A Warehouse Receipt is a document of title to goods issued by a warehouse service provider
to a person depositing commodities in the warehouse, evidencing storage of goods.)
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Question3 the process of adjusting financial positions of the parties to the trade transactions
to reflect the net amounts due to them or due from them.
(a) Mark-to-Margin
(b) Risk Management
(c) Settlement
(d) Clearing

Correct Answer Settlement

Answer Settlement process involves matching the outstanding buy and sell instructions, by
Explanation transferring the commodities ownership against funds between buyer and seller.
In other words, settlement refers to the process of adjusting financial positions of the parties
to the trade transactions to reflect the net amounts due to them or due from them.

Question4 Credit risk is directly related to the credit worthiness of the buyer and seller and their ability and
willingness to honour the contract. Hence, counter-party credit risk exists and settlement failure
is a possibility in case of .
(a) Future contracts
(b) Exchange traded spot contracts
(c) Exchange traded options contracts
(d) Forward contracts

Correct Answer Forward contracts

Answer In a forward contract, the terms of the contract is tailored to suit the needs of the buyer and the
Explanation seller. Generally, no money changes hands when the contract is first negotiated and it is settled
at maturity. These forward contracts, many a times are not honored by either of the contracting
parties due to price changes and market conditions. Hence, counter-party credit
risk exists and settlement failure is a possibility in case of forwards contracts.
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Question5 gives SEBI the jurisdiction over stock exchanges / commodity exchanges through
recognition and supervision and also gives SEBI the jurisdiction over contracts in securities and
listing of securities on such exchanges.
(a) Stock Exchange Regulation Act 1992
(b) Commodity Exchange regulation Act 1986
(c) The Securities Contract (Regulation) Act, 1956
(d) Forward Contracts (Regulation) Act, 1952

Correct Answer The Securities Contract (Regulation) Act, 1956

Answer The Securities Contract (Regulation) Act, 1956 (SCRA) gives SEBI the jurisdiction over stock
Explanation exchanges through recognition and supervision. It also gives SEBI the jurisdiction over contracts
in securities and listing of securities on stock exchanges.

Question6 On 1st March, a bank enters into a forward contract for sale of 60 kilograms of Gold to a jeweler
at Rs 3900 per gram for delivery on 31st May. In order to save financial and storage costs, the
bank is unwilling to buy physical gold immediately. Though the bank is expecting a decline in
gold prices in the next three months and wants to profit from such decline, it wants to avoid the
risk of unforeseen price rise. What can the bank do in this situation?
(a) Bank can take long position in call options equivalent to 60 kilograms of gold
(b) Bank can take short position in put options equivalent to 60 kilograms of gold
(c) Bank can take short position in call options equivalent to 60 kilograms of gold
(d) Bank can take long position in put options equivalent to 60 kilograms of gold

Correct Answer Bank can take long position in call options equivalent to 60 kilograms of gold
Answer By selling gold in forward contract, the bank has already gone short. Now it has to hedge its
Explanation position to avoid losses in case price of gold rises.
Buy buying a Call option, it will protect itself against any rise in gold prices by paying the
option premium. In case the prices fall, it will benefit as it has already sold gold in the forward
contract. The only loss in this will be the small call option premium it has paid.
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Question7 What is the relationship between volatility and option premium?

(a) When there is low volatility in the underlying stock, the Call premium will be lower but Put
premium will be higher
(b) When there is low volatility in the underlying stock, the Call premium will be higher but Put
premium will be lower
(c) When there is low volatility in the underlying stock, the Call premium as well as the Put
premium will be lower
(d) Volatility has no effect on the option premium

Correct Answer When there is low volatility in the underlying stock, the Call premium as well as the Put
premium will be lower
Answer Volatility is the magnitude of movement in the underlying asset’s price, either up or down. It
Explanation affects both call and put options in the same way.
Higher volatility = Higher premium, Lower volatility = Lower premium (for both call and put
options).

Question8 are a subset of speculators who keep overnight positions, for weeks or months to
get favourable movement in commodity futures prices.
(a) Delta traders
(b) Market Makers
(c) Day traders
(d) Position Traders

Correct Answer Position Traders

Answer Position Traders are the subset of speculators who maintain overnight positions, which may run
Explanation into weeks or even months, in anticipation of favourable movement in the commodity futures
prices.
They may hold positions in which they run huge risks and with a possibility to earn big profits if
their directional call proved to be correct.
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Question9 An investor gives an instruction to his broker to buy a certain number of contracts at the
prevailing market price. This instruction is known as .
(a) a market order
(b) a stop loss order
(c) a limit order
(d) an 'immediate or cancel' order

Correct Answer a market order

Answer In a market order, the trade is executed at the immediately available current market price,
Explanation prevailing at the time of placing the order.

Question10 Ms. Sanika instructs her broker to to buy a certain number of contracts at or below a specific
price. This instruction is called as .
(a) A limit order
(b) A market order
(c) An Stop loss order
(d) A hedge order

Correct Answer A limit order

Answer In a limit order, the buyer or seller specifies the price at which the trade should be executed.
Explanation For a buyer, the limit order generally remains below the on-going asking price and for a seller
the limit order remains above the then bid price.
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Question11 SCORES is a web based centralized grievance redress system of which organisation?
(a) RBI
(b) SEBI
(c) NSE/BSE
(d) NISM

Correct Answer SEBI

Answer SEBI Complaints Redress System (SCORES) is a web based centralized grievance redress system
Explanation of SEBI. Complaints can be made online and acknowledgement is generated instantaneously
acknowledging the receipt of complaint.

Question12 A commodity’s current market price is Rs 600 and the Put premium for the 850 strike is Rs 400.
The option expires in three months time and the risk-free interest rate is currently 6%. Calculate
the theoretical premium for the Rs 850 strike Call option.
(a) Rs. 0
(b) Rs. 788.66
(c) Rs. 162.57
(d) Rs. 243.08

Correct Answer Rs. 162.57

Answer The formula for calculating a premium is -
Explanation
C - P = S - (K / 1 + r * t)
where C is Call Premium, P is Put Premium, S is Underlying Price, K is Strike Price, r is rate of
interest and t is time period. Here time is 3 months ie. 3/12 = .25
C – 400 = 600 – 850 / 1+ (0.06 ∗ 0.25)
C – 400 = 600 – 850 / 1.015
C – 400 = 600 – 837.43
C – 400 = - 237.43
C = – 237.43 + 400
C = 162.57
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Question13 is part of algorithmic trading that comprises latency-sensitive trading strategies and
deploys technology including high speed networks to connect and trade on the trading
platform.
(a) Enclosed Server Trading
(b) TCP/IP trading
(c) High Frequency Trading (HFT)
(d) Robotic Process Automation

Correct Answer High Frequency Trading (HFT)

Answer Algo trading is permitted in commodity exchanges subject to the broad SEBI guidelines dated
Explanation 27th September 2016.
High Frequency Trading (HFT) is part of algorithmic trading that comprises latency- sensitive
trading strategies and deploys technology including high speed networks to connect and trade
on the trading platform.

Question14 All the other factors remaining constant, increase in strike price of option the intrinsic
value of the put option
(a) increases
(b) decreases
(c) remains constant
(d) Strike price and intrinsic value has no relationship

Correct Answer increases

Answer With all the other factors remaining constant, increase in strike price of option increases the
Explanation intrinsic value of the put option which in turn increases its option value.
For a put option which is in-the-money, intrinsic value is the excess of strike price (X) over the
spot price.
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Question15 In the , both buyer and seller having an open position during the tender/delivery
period of the contract are obligated to take/give delivery of the commodity.
(a) Buyer's option
(b) Seller's option
(c) Both option
(d) Compulsory delivery option

Correct Answer Compulsory delivery option

Answer Basically, three delivery options are available in the commodity market:
Explanation
- Compulsory delivery
- Both option
- Seller’s option
In the compulsory delivery option, both buyer and seller having an open position during the
tender/delivery period of the contract are obligated to take/give delivery of the commodity.

Question16 Two traders Suresh and Mahesh have traded in Gold futures. Suresh has gone long and bought
one lot at Rs 38000 per 10 grams. Mahesh has gone short on one lot. On expiry, the Gold prices
were Rs. 40000 per 10 grams. Which of the following statement is true for the given information.
(The lot size of gold futures is 1 Kg)
(a) Mahesh made a profit of Rs 200000 on this futures position
(b) Suresh made a profit of Rs 200000 on this futures position
(c) Suresh incurred a loss of Rs 2000 on this futures position
(d) Mahesh incurred a loss of Rs 2000 on this futures position

Correct Answer Suresh made a profit of Rs 200000 on this futures position

Answer Suresh has purchased and Mahesh has sold Gold futures. The prices have risen from Rs 38000 to
Explanation Rs 40000. So Suresh will make a profit on his long position and Mahesh will make a loss on his
short position.
The lot size is 1 kg i.e. 1000 grams. The price quoted is for 10 grams.
So the amount will be Rs 2000 x 1000 / 10 = Rs 200000
The correct option from the above is - Suresh made a profit of Rs 200000 on this futures
position.
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Question17 A buyer of a derivatives contract backed out from executing the contract on maturity as he
was able to get the commodity at a cheaper price from the spot market. Such risks are
generally associated with which type of contracts?
(a) Futures contracts
(b) Arbitrage contracts
(c) Forwards contracts
(d) Exchange traded spot contracts

Correct Answer Forwards contracts

Answer Forward contracts, more often than not, were not honored by either of the contracting parties
Explanation due to price changes and market conditions. A buyer also backed out from executing the contract
on maturity if he was able to get the commodity at a cheaper price from the spot market.

Futures emerged as an alternative financial product to address these concerns of counterparty

default, as the Exchange guaranteed the performance of the contract in case of the Futures.

Question18 is an example of commodity contracts being traded in various commodity markets

globally.
(a) Power derivatives
(b) Carbon credits trading
(c) Weather derivatives
(d) All of the above

Correct Answer All of the above

Answer Globally, exchange-traded commodity derivatives have emerged as an investment productoften
Explanation used by institutional investors, hedge funds, sovereign wealth funds besides retail investors.
There has been a growing sophistication of commodities investments with the introduction of
exotic products such as weather derivatives, power derivatives
and environmental emissions trading (carbon credits trading).
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Question19 In commodity exchanges in India, a short put position on exercise shall devolve into .
(a) long position in the underlying spot contract
(b) short position in the underlying spot contract
(c) long position in the underlying futures contract
(d) short position in the underlying futures contract

Correct Answer long position in the underlying futures contract

Answer On exercise, option position shall devolve into underlying futures position as follows:
Explanation
- long call position shall devolve into long position in the underlying futures contract
- long put position shall devolve into short position in the underlying futures contract
- short call position shall devolve into short position in the underlying futures contract
- short put position shall devolve into long position in the underlying futures contract

Question20 In futures contract the cost of carry diminishes with each passing day and on the date of delivery,
the cost of carry becomes zero and the spot and futures price converge. This is known as .

(a) Conclusion
(b) Contraction
(c) Divergence
(d) Convergence

Correct Answer Convergence

Answer As the cost of carry determines the differential between spot and futures price and is associated
Explanation with costs involved in holding the commodity till the date of delivery, it follows that the cost of
carry diminishes with each passing day and the differential must narrow and on the date of
delivery, the cost of carry becomes zero and the spot and futures price converge. This is
known as Convergence.
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Question21 If all other factors affecting an option’s price remain same, the time value portion of an
option’s premium will with the passage of time.
(a) increase
(b) decrease
(c) remain constant
(d) first increase and then decrease

Correct Answer decrease

Answer If all other factors affecting an option’s price remain same, the time value portion of an
Explanation option’s premium will decrease with the passage of time. This is known as time decay.
Options are known as ‘wasting assets’, due to this property where the time value gradually
falls to zero by the time the contract reaches the expiry.

Question22 If the cost of 10 grams of Gold in the spot market is Rs 40,000 and the cost-of-carry is 12% per
annum, the theoretical fair value of a 4-month futures contract would be .
(a) Rs. 42300
(b) Rs. 42950
(c) Rs. 41430
(d) Rs. 41600

Correct Answer Rs. 41600

Answer Futures Price = Spot Price + Cost of carry
Explanation
(The cost of carry is the Spot price + interest cost for 4 months)
= 40000 + ( 40000 x 12% x 4/12)
= 40000 + ( 40000 x .12 x 0.33333)
= 40000 + (40000 x 0.04)
= 40000 + 1600
= 41600
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Question23 When the commodity options contracts devolve into underlying asset, a put option is said to
be Out of the Money, when .
(a) Spot price is higher than strike price
(b) Spot price is lower than strike price
(c) Spot price is equal to strike price
(d) Spot price is equal to OTC price

Correct Answer Spot price is higher than strike price

Answer Out of the money (OTM) option is one with strike price worse than the spot price for the holder
Explanation of option. In other words, this option would give the holder a negative cash flow if it were
exercised immediately. A call option is said to be OTM, when spot price is lower than strike price.
And a put option is said to be OTM when spot price is higher than strike price.

Question24 A hedger plans to buy a commodity in the spot market at a future date. Identify which should
be his first step in setting up a hedge to protect himself from any price rise?
(a) He buys and sells spot contract simultaneously
(b) He buys and sells futures contract simultaneously
(c) He sells futures contract
(d) He buys futures contract

Correct Answer He buys futures contract

Answer Buy buying a futures contract, he will lock his buying price. Any rise in prices will not affect
Explanation him.
At the future date when he wants to buy the commodity in the spot market, he will sell the
future contract and buy in the spot market.
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Question25 Commodities Transaction Tax (CTT) is applicable only on .

(a) purchase transactions of commodity futures, except for exempted agricultural commodities.
(b) both purchase and sale transactions of commodity futures, except for exempted agricultural
commodities.
(c) sale transactions of commodity futures, except for exempted agricultural commodities.
(d) both purchase and sale transactions of commodity futures

Correct Answer sale transactions of commodity futures, except for exempted agricultural commodities.
Answer Commodities Transaction Tax (CTT) is applicable on sale transactions of commodity
Explanation futures, except for exempted agricultural commodities.

Question26 Commodities, especially agricultural commodities, have a because they form part of
production processes.
(a) Market yield
(b) Production yield
(c) Current yield
(d) Convenience yield

Correct Answer Convenience yield

Answer Agricultural commodities, have a convenience yield because they form part of production
Explanation processes and having them readily available helps in the uninterrupted production process.
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Question27 Client level and Member level are set by the exchange to avoid concentration risk and
market manipulation by a trading member or group acting in concert.
(a) Circuit limits
(b) Circuit filters
(c) Position limits
(d) Margins

Correct Answer Position limits

Answer Position Limits are set at the client level and member level to prevent any members and clients
Explanation from building up large position on the buy side or sell side to manipulate short-term price
movements to their advantage. Numerical position limits are set both for agricultural and
nonagricultural commodities as per the guidelines of the regulator.

Question28 Commodity derivatives markets play an important role in the commodity market value chain
as they perform which of the following key economic function ?
(a) Price discovery
(b) Risk transfer
(c) Price protection
(d) All of the above

Correct Answer All of the above

Answer Commodity derivatives markets play an increasingly important role in the commodity
Explanation market value chain by performing key economic functions such as risk management through
risk reduction and risk transfer, price discovery and transactional efficiency.
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Question29 On expiry, option series having strike price closest to the Daily Settlement Price of Futures shall
be termed as At the Money (ATM) option series. This ATM option series and two option series
having strike prices immediately above this ATM strike and two option series having strike prices
immediately below this ATM strike shall be referred as option series.
(a) Near the money (NTM)
(b) In the money (ITM)
(c) Out of the money (OTM)
(d) Close to the money (CTM)

Correct Answer Close to the money (CTM)

Question30 When the price of the underlying commodity falls, the seller of future contract will tend to
on that position.
(a) make a profit
(b) make a loss
(c) make neither profit nor loss
(d) This cannot be concluded as there is no strong relation between spot price and futures price

Correct Answer make a profit

Answer Generally there is a direct relationship between spot and future prices. If the spot prices rise,
Explanation the future prices will also tend to rise and if spot prices fall the future prices will also tend to
fall.
So a seller of a future contract will make money if the spot prices fall as the future prices will
also fall and he will be able to square up his position at a lower price. (Eg. Sold at Rs 100 and
bought back at Rs 90 - profit of Rs 10)
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Question31 A trader who is having a short position is inherently .

(a) Long on Vega
(b) Short on Vega
(c) Delta neutral
(d) Vega neutral

Correct Answer Short on Vega

Answer Volatility refers to the range to which the price of a commodity may increase or decrease.
Explanation
A trader who is with short positions anticipates a decrease in volatility and are having short
positions in volatility / vega.
Similarly, Investors with Long options anticipates an increase in volatility and they are long on
vega i.e., volatilities.

Question32 is the change in option price given a one-day decrease in time to expiration
(a) Delta
(b) Theta
(c) Vega
(d) Rho

Correct Answer Theta

Answer Theta is a measure of an option’s sensitivity to time decay. It is the change in option price
Explanation given a one-day decrease in time to expiration.
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Question33 The cost of 10 grams of gold in the spot market is Rs 33000 and the cost of financing is 12
percent per annum and this is compounded semi annually. Calculate the theoretical futures
price (Fair value) of a 1-year futures contract.
(a) Rs. 37078.80
(b) Rs. 36840.50
(c) Rs. 38148.75
(d) Rs. 34330.00

Correct Answer Rs. 37078.80

Answer Fair Value of a Futures Contract = Spot Price ( 1 + Interest Rate / No. of times compounding)^
Explanation No. of compounding in a year X Number of years
In the above question, Spot price is Rs. 33000, Interest Rate is 12% = .12, Compounding is semi
annually which means 2 times a year, Number of years = 1
Substituting -
33000 ( 1 + .12 / 2) ^ 2x1
33000 ( 1 + .06 ) ^ 2
33000 (1.06) ^ 2
On the Scientific Calculator of your computer, enter 1.06 , X^Y, 2 and you will get 1.1236
33000 x 1.1236 = 37078.80

Question34 What is the objective of Retrospective effectiveness testing?

(a) To demonstrate that the hedging relationship has been highly loss making
(b) To demonstrate that the hedging relationship has been highly profitable
(c) To demonstrate that the hedging relationship has been highly effective
(d) To demonstrate that the hedging position has generated higher profits than the unhedged
position in all possible scenarios

Correct Answer To demonstrate that the hedging relationship has been highly effective
Answer To qualify for hedge accounting, the accounting standards require the hedge to be
Explanation highly effective. There are separate tests to be applied prospectively and retrospectively.
Retrospective effectiveness testing is performed at each reporting date throughout the life of
the hedge following a methodology set out in the hedge documentation. The objective is to
demonstrate that the hedging relationship has been highly effective by showing that actual
results of the hedge are within the range of 80-125%.
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Question35 In the case of an In The Money (ITM) CALL option, the intrinsic value is .
(a) Excess of underlying assets price over the strike price
(b) Excess of strike price over the underlying assets price
(c) One
(d) Zero

Correct Answer Excess of underlying assets price over the strike price
Answer For call option which is in-the-money, intrinsic value is the excess of the assets spot price over
Explanation the strike price.
For put option which is in-the-money, intrinsic value is the excess of strike price over the assets
spot price.

Question36 When the currency of a particular country depreciates against the USD, the price of the
commodity in that particular country .
(a) becomes cheaper
(b) becomes expensive
(c) remains constant
(d) Price of USD will have no effect

Correct Answer becomes expensive

Answer Comparative movement in the value of a currency of a country in relation to the major global
Explanation currencies is very important for prices of commodities in that particular country. Most of the
commodities globally are denominated in the US dollar (USD). Hence, when the currency of a
particular country depreciates against the USD, the price of the commodity in that particular
country becomes expensive and vice versa.
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Question37 Black-Scholes option pricing model is used to calculate a theoretical price of options using
which of the following determinants?
(a) Volatility
(b) Time to expiration
(c) Underlying asset price
(d) All of the above

Correct Answer All of the above

Answer Black-Scholes option pricing model is used to calculate a theoretical price of options using the
Explanation five key determinants of an option’s price: underlying price, strike price, volatility, time to
expiration, and short-term (risk free) interest rate.

Question38 Mr. Mehta bought a Gold PUT option of strike price Rs. 39000 (per 10 grams) for a premium of
Rs. 250 (per 10 grams). The lot size is 1 Kg. This option expired at a settlement price of Rs. 37000
per 10 grams. Calculate the profit or loss to Mr. Mehta on this position. (Do not consider any tax
or transaction costs)
(a) Loss of Rs 200000
(b) Loss of Rs 75000
(c) Profit of Rs 175000
(d) Profit of Rs 200000

Correct Answer Profit of Rs 175000

Answer Mr. Mehta has bought a Put Option which means he is expecting the gold prices to fall (Bearish
Explanation view). His view proved to be correct the prices have fallen from Rs.39000 to Rs. 37000. This
means he has made a profit of Rs 2000.
Rs 2000 is for 10 grams. So for 1 kg i.e. 1000 grams, the profit is 2000 x 1000 / 10
= Rs 2,00,000. This is Gross Profit
When a person buys a Put Option, he pays a premium.
Mr. Mehta has paid a premium of Rs 250 per 10 gram. So for a lot of 1 kg ie. 1000 grams he
pays a premium of 250 x 1000 / 10 = 25000
So his Net Profit will be Gross Profit less Premium paid = 200000 - 25000 = Rs. 175000
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Question39 In India, the commodity options, on exercise, devolve into the underlying futures contracts. All
such devolved futures positions are considered to be acquired at the , on the expiry
date of options, during the end of the day processing.
(a) Last traded price of the exercised options
(b) Spot price of the underlying commodity
(c) Strike price of exercised options
(d) Last traded price in the futures exchange

Correct Answer Strike price of exercised options

Answer Commodity options, on exercise, devolve into the underlying futures contracts. All such
Explanation devolved futures positions are considered to be acquired at the strike price of exercised options,
on the expiry date of options, during the EOD processing.

Question40 The unmatched portion of an 'Immediate or Cancel' order will be .

(a) executed the next trading day
(b) cancelled immediately
(c) executed after the market hours if there are buyers / sellers
(d) added to the order book as a limit order

Correct Answer cancelled immediately

Answer Immediate or Cancel (IOC) is an order requiring all or part of the order to be
Explanation executed immediately after it has been placed. Any portion not executed immediately is
automatically cancelled. Such orders will not remain in the order book.
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Question41 are those who sell futures first and expect the price to decrease from current level.
(a) Long hedgers
(b) Short hedgers
(c) Long speculators
(d) Short speculators

Correct Answer Short speculators

Answer Speculation is a practice of engaging in trading to make quick profits from fluctuations in
Explanation prices.
Short speculators are those who sell first and expect the price to decrease from current level.
Long speculators are those who buy first and expect the price to increase from current level.

Question42 A seller of a derivatives contract backed out from executing the contract on maturity as the spot
price was more profitable for him than the contracted price. Such risks are generally associated
with which type of contracts?
(a) Delta Trading
(b) Exchange traded options
(c) Futures contracts
(d) Forwards contracts

Correct Answer Forwards contracts

Answer Forward contracts, more often than not, were not honored by either of the contracting parties
Explanation due to price changes and market conditions. A seller pulled out of the contract if the spot price
was more profitable for him than the contracted price. A buyer also backed out from executing
the contract on maturity if he was able to get the commodity at a cheaper price from the spot
market.
Futures emerged as an alternative financial product to address these concerns of counterparty
default, as the Exchange guaranteed the performance of the contract in case of the Futures.
 NISM XVI – COMMODITY DERIVATIVES
LAST DAY REVISION TEST . 1

Question43 High Frequency Trading (HFT) is part of that comprises latency-sensitive trading
strategies and deploys technology including high speed networks to connect and trade on the
trading platform.
(a) Algorithmic trading
(b) Robotic trading
(c) Server trading
(d) Auto trading

Correct Answer Algorithmic trading

Answer Algo trading is permitted in commodity exchanges subject to the broad SEBI guidelines dated
Explanation 27th Sept 2016.
High Frequency Trading (HFT) is part of algorithmic trading that comprises latency-
sensitive trading strategies and deploys technology including high speed networks to connect
and trade on the trading platform.

Question44 In September, two traders P and Q entered into a futures contract on Gold at Rs 39000 per 10
grams expiring in November. Trader P was ‘long’ on this contract and trader Q went ‘short’. On
the day of expiry of this contract in November, Gold spot prices closed at Rs 38500 per 10 grams.
Contract size of Gold futures contract is 1 Kg. Which of the following is TRUE given this
information?
(a) Trader P incurred a loss of Rs 5000 on this futures position
(b) Trader Q incurred a loss of Rs 5000 on this futures position
(c) Trader P made a profit of Rs 50000 on this futures position
(d) Trader Q made a profit of Rs 50000 on this futures position

Correct Answer Trader Q made a profit of Rs 50000 on this futures position

Answer Trader P has purchased and Trader Q has sold Gold futures. The prices have fallen from Rs 39000
Explanation to Rs 38500. So trader P will make a loss on his long position and trader Q will make a profit on
his short position.
The lot size is 1 kg i.e. 1000 grams. The price quoted is for 10 grams.
The fall in price is of Rs 500
So the amount will be Rs 500 x 1000 / 10 = Rs 50000
The correct option from the above is - Trader Q made a profit of Rs 50000 on this futures
position.
 NISM XVI – COMMODITY DERIVATIVES
LAST DAY REVISION TEST . 1

Question45 As per guidelines of ICAI’s, when sales of the hedged inventory occur in the future, the hedging
related fair value adjustment to inventory will be .
(a) released to the statement of profit and loss (P/L) and can be classified as part of ‘cost of
goods sold'
(b) released to the Balance Sheet and can be classified as part of ‘cost of goods sold'
(c) released to the profit and loss (P/L) statement and can be classified as part of depreciation
(d) released to the Cashflow statement and can be classified as part of cash outflows

Correct Answer released to the statement of profit and loss (P/L) and can be classified as part of ‘cost of goods
sold'
Answer As per the Guidance Note of ICAI - When sales of the hedged inventory occur in the future, the
Explanation hedging related fair value adjustment to inventory will be released to the statement of profit
and loss and can be classified as part of ‘cost of goods sold’.

Question46 In the contract specification for castor seed futures contract, the quality specification for oil is
mentioned as follows:
-From 45 percent to 47 percent accepted at discount of 1:2 or part thereof.
-Below 45 percent rejected.
If the contracted price of castor seeds is Rs 9000 per ton with a quality specification of 47
percent, and on actual delivery, the quality content is found to be 46 percent, then the price
payable is
(a) Rs. 8730
(b) Rs. 8820
(c) Rs. 7840
(d) Rs. 8690

Correct Answer Rs. 8820

Answer The above question implies that if the oil content in castor seed is below 47 percent but within
Explanation 45 percent, the contracted price will attract discount. For every 1 percent decrease in oil content
or part thereof, there will be a discount of 2 percent or part thereof in price.

Contracted price of castor seeds i.e., Rs 9000 will be discounted by 2 percent because the
quality content has decreased by 1 percent (from 47 percent to 46 percent).

Contracted price of castor seeds (at discount) = 9000 - 2% of 9000 = 9000 - 180 = Rs. 8820
 NISM XVI – COMMODITY DERIVATIVES
LAST DAY REVISION TEST . 1

Question47 If all the other factors remain constant but the strike price of option increases, intrinsic value
of the call option will .
(a) increase
(b) decrease
(c) remain constant
(d) Strike price has no influence on the intrinsic value

Correct Answer decrease

Answer If all the other factors remain constant but the strike price of option increases, intrinsic value
Explanation of the call option will decrease and hence its value will also decrease.
For eg. The Spot price is Rs. 100 and the Strike Price is Rs 90. Here the Intrinsic value for a call
option is Rs 10 ( 100 - 90)
The Intrinsic value for a Rs 95 strike price will be Rs 5. ( 100 - 95) .
So as the Strike price increase, the intrinsic value decreases for a Call option.

Question48 Traders with short positions are inherently .

(a) Delta neutral
(b) Vega neutral
(c) Long on Vega
(d) Short on Vega

Correct Answer Short on Vega

Answer Volatility refers to the range to which the price of a commodity may increase or decrease.
Explanation
Investors with Long options anticipates an increase in volatility and they are long on vega i.e.,
volatilities. Similarly, one who is with short positions anticipates a decrease in volatility and are
having short positions in volatility / vega.
 NISM XVI – COMMODITY DERIVATIVES
LAST DAY REVISION TEST . 1

Question49 Retrospective effectiveness testing is performed at .

(a) at inception of the hedge and at each subsequent reporting date during the life of the hedge.
(b) each reporting date throughout the life of the hedge
(c) once at the inception of the hedge and once the hedge is over
(d) the termination of the hedge

Correct Answer each reporting date throughout the life of the hedge
Answer To qualify for hedge accounting, the accounting standards require the hedge to be
Explanation highly effective. There are separate tests to be applied prospectively and retrospectively.
Retrospective effectiveness testing is performed at each reporting date throughout the life of
the hedge following a methodology set out in the hedge documentation.

Question50 is a measure of time decay.

(a) Rho
(b) Gamma
(c) Delta
(d) Theta

Correct Answer Theta

Answer Theta is the change in option price given a one-day decrease in time to expiration. It is a measure
Explanation of time decay. Theta is generally used to gain an idea of how time decay is affecting your option
positions.

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