NISM XVI – COMMODITY

DERIVATIVES EXAM
 NISM XVI – COMMODITY DERIVATIVES
PRACTICE TEST . 2

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 NISM XVI – COMMODITY DERIVATIVES
PRACTICE TEST . 2

PRACTICE TEST . 2

Question1 Identify the true statement with respect to 'Trading Member'.

(a) A Trading Member cannot trade in his own account but is allowed to provide trading services
to any clients
(b) A Trading Member cannot trade either on their own account nor on behalf of the clients
(c) A Trading Member can trade either on their own account or on behalf of the clients
(d) A Trading Member is allowed to trade in his own account but is not allowed to provide trading
services to any clients

Correct Answer A Trading Member can trade either on their own account or on behalf of the clients
Answer A Trading Member can trade either on their own account or on behalf of the clients. This
Explanation category of membership entitles a member to execute trades on his own account as well as for
clients registered with him.

Question2 Which type of orders remain passive and enter the exchange system only when the trigger
price is breached?
(a) Immediate or Cancel orders
(b) Stop Loss orders
(c) Arbitrage orders
(d) Limit orders

Correct Answer Stop Loss orders

Answer A stop loss order is generally placed after entering into a trade. This is used in order to limit a
Explanation probable loss if the price moves in the opposite direction.
Stop loss orders are passive until the trigger price is breached. Once this trigger price is
reached, the stop loss feature gets activated.
 NISM XVI – COMMODITY DERIVATIVES
PRACTICE TEST . 2

Question3 Which ratio indicates the number of lots/contracts that the hedger is required to buy or sell in
the futures market to cover his risk exposure in the physical / spot market?
(a) Risk Ratio
(b) Exposure Ratio
(c) Hedge Ratio
(d) Neutral Ratio

Correct Answer Hedge Ratio

Answer Hedge ratio indicates the number of lots/contracts that the hedger is required to buy or sell
Explanation in the futures market to cover his risk exposure in the physical / spot market.
It helps to neutralize the volatility difference between Spot and Futures.

Question4 can be generated because of the benefit from ownership of a physical asset
(a) Premium Yield
(b) Spot Yield
(c) Convenience Yield
(d) Yield To Maturity

Correct Answer Convenience Yield

Answer Convenience yield indicates the benefit of owning a commodity rather than buying a
Explanation futures contract on that commodity. Convenience yield can be generated because of the
benefit from ownership of a physical asset.
 NISM XVI – COMMODITY DERIVATIVES
PRACTICE TEST . 2

Question5 Mr. Amit has entered in a forward contract to sell 1000 kgs of Cotton to Mr. Ketan at Rs. 100
per kg for delivery after 3 months. To save on storage costs, Mr. Amit does not buy any physical
cotton immediately. Mr. Amit is confident of a fall in cotton prices in the next three months and
wants to profit from it. However he also wants to void the risk of a price rise. Which option
strategy should Mr. Amit use?

(a) Mr. Amit should take a short position in call options equivalent to 1000 kgs of Cotton
(b) Mr. Amit should take a short position in put options equivalent to 1000 kgs of Cotton
(c) Mr. Amit should take a long position in call options equivalent to 1000 kgs of Cotton
(d) Mr. Amit should take a long position in put options equivalent to 1000 kgs of Cotton

Correct Answer Mr. Amit should take a long position in call options equivalent to 1000 kgs of Cotton
Answer Mr. Amit has sold Cotton and to hedge his position he has to go long on Cotton (Buy)
Explanation When he buys a Call option, he will benefit if prices rise. And if prices fall, he will benefit from
his forward sale position. So, by buying a Call option, he will create a good hedge.

Note -
Buy Call Option - View is bullish / Prices to rise. Maximum profit unlimited and maximum loss
limited to premium paid
Buy Put Option - View is bearish / Prices to fall - Maximum profit unlimited and maximum loss
limited to premium paid
Sell Call Option - View is bearish / Prices to fall - Maximum profit limited to premium received
and maximum loss is unlimited
Sell Put Option - View is bullish / Prices to rise - Maximum profit limited to premium received
and maximum loss is unlimited

Question6 Which of these is an option strategy for a person who has commodity selling requirement in
the near future?
(a) Buy calls for protection against rising prices
(b) Sell calls to increase your selling price in a stable market
(c) Sell puts to lower your purchase price in a stable market
(d) Buy calls for protection against falling prices

Correct Answer Sell calls to increase your selling price in a stable market
Answer When a person is selling a call, he will receive the option premium.
Explanation
If the prices rise, he gains on his commodity stock but loses on the option
If the prices falls, he loses on his commodity stock but gains on the option
So in both the cases he is not affected by the price rise or fall. But he will gain by the option
premium he has received thus increasing his selling price.
 NISM XVI – COMMODITY DERIVATIVES
PRACTICE TEST . 2

Question7 Identify the true statement with respect to the relation between Strike Price and Option
Premium. (Assume all other factors remain the same)
(a) Call options with higher strike price would have a higher option premium
(b) Call options with lower strike price would have a higher option premium
(c) All call options will have the same option premium
(d) For a given strike price, the premium of call option and put options will be the same

Correct Answer Call options with lower strike price would have a higher option premium
Answer Option premium consists Intrinsic value + Time value
Explanation
Intrinsic value is the excess of spot price over the strike price. So if the strike price is lower, the
intrinsic value will be higher leading to higher option premium.

Question8 measures the sensitivity of the option value to a given small change in the price of
the underlying asset.
(a) Rho
(b) Theta
(c) Gamma
(d) Delta

Correct Answer Delta

Answer The most important of the ‘Greeks’ is the option’s “Delta”. This measures the sensitivity of
Explanation the option value to a given small change in the price of the underlying asset.

It may also be seen as the speed with which an option moves with respect to price of the
underlying asset.
 NISM XVI – COMMODITY DERIVATIVES
PRACTICE TEST . 2

Question9 is defined as trading in financial instruments where a computer algorithm

automatically determines individual parameters of orders such as initiation of order, timing,
price or quantity, managing the order post submission with / without limited human
intervention.
(a) Delta Arbitrage trading
(b) Robotic process automation
(c) Algorithmic trading
(d) Screen Based Trading

Correct Answer Algorithmic trading

Answer Any order that is generated using automated execution logic is known as algorithmic trading.
Explanation Algorithmic trading permits the use of programs and computers to generate and execute orders
in markets with electronic access and do not require human intervention.
Algo trading employs defined set of instructions on timing, price, quantity or any mathematical
model for placing orders at a faster pace and with higher frequency.

Question10 In case of a , the buyer of the option contract has a right to exercise it.
(a) Call Option
(b) Put Option
(c) Both Call and Put option
(d) Neither Call nor Put option

Correct Answer Both Call and Put option

Answer The buyer of an option, both Call and Put, is one who has a right but not the obligation in the
Explanation contract. He has the right to exercise it.
 NISM XVI – COMMODITY DERIVATIVES
PRACTICE TEST . 2

Question11 Which category of membership entitles a member to execute trades on his own account as
well as for his clients and also to clear and settle trades executed by himself as well as of his
clients ?
(a) Trading Member
(b) Professional Clearing Member
(c) Authorised Persons
(d) Self Clearing Members

Correct Answer Self Clearing Members

Answer Self Clearing Members (SCM) / Trading cum Clearing Member (TCM): This category
Explanation of membership entitles a member to execute trades on his own account as well as for his clients
and also to clear and settle trades executed by himself as well as of his clients.
Clearing members are members of the clearing corporation. They carry out risk management
activities and confirmation/inquiry of trades through the trading system.

Question12 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 fair value of a 4-month futures contract will be .
(a) Rs. 41900
(b) Rs. 42500
(c) Rs. 42100
(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 0.3333)
= 40000 + (40000 x 0.04)
= 41600
 NISM XVI – COMMODITY DERIVATIVES
PRACTICE TEST . 2

Question13 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 6000 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. 5950
(b) Rs. 5880
(c) Rs. 5730
(d) Rs. 5900

Correct Answer Rs. 5880

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 6000 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) = 6000 - 2% of 6000 = 6000 - 120 = Rs. 5880

Question14 Which type of strategy is adopted to benefit the trader when the near-month contract is over
priced or the far-month contract is under priced and the trader of the above strategy sells the
near-month contract and buys the far-month contract when the spread is not fair and squares
off the positions when the spread corrects and the contracts are traded at fair spread ?
(a) Buying a Spread
(b) Selling a Spread
(c) Cash and carry arbitrage
(d) Reverse Cash and carry arbitrage

Correct Answer Selling a Spread

Answer Spread refers to the difference in prices of two futures contracts.
Explanation
Selling a spread is also an intra-commodity spread strategy. It means selling a near- month
contract and simultaneously buying a far-month contract. This strategy is adopted when the
near-month contract is overpriced or the far-month contract is underpriced.

A trader of the above strategy sells the near-month contract and buys the far-month contract
when the spread is not fair and squares off the positions when the spread corrects and the
contracts are traded at fair spread.
 NISM XVI – COMMODITY DERIVATIVES
PRACTICE TEST . 2

Question15 Fair Value of the Futures Contract = Spot Price + .

(a) Strike Price
(b) Premium
(c) Cost of Carry
(d) Impact cost

Correct Answer Cost of Carry

Answer Fair Value of the Futures Contract = Spot Price + Cost of Carry
Explanation
The futures price is based on the relevant spot market price that is adjusted for the ‘cost of
carry’ associated with the specific commodity.

Question16 What is 'Mandi' with respect to commodity markets?

(a) Mandi is commodity futures market
(b) Mandi is commodity spot market
(c) Mandi is commodity options market
(d) Mandi is commodity forwards market

Correct Answer Mandi is commodity spot market

Answer In a Mandi, the farmers bring their produce, and the traders or middlemen known as
Explanation commission agents inspect the quality and bid for the same. The buyer with the highest bid
acquires the produce.
Thus mandis are physical spot markets in which the commodities are physically bought and
sold by the buyers and sellers respectively for immediate delivery.
 NISM XVI – COMMODITY DERIVATIVES
PRACTICE TEST . 2

Question17 Which of these spreads are implemented by buying and selling options with the same strike
price but different expiry months?
(a) Vertical Spreads
(b) Horizontal Spreads
(c) Super Spreads
(d) Diagonal Spreads

Correct Answer Horizontal Spreads

Answer Horizontal spreads, also known as calendar spreads, attempt to profit from expected moves
Explanation in volatility.
Horizontal spreads are implemented by buying and selling options with the same strike price
but different expiry months.

Question18 The extra margin applied to all open positions once they enter the tender period (usually the
last 5-10 days before the expiry date of the contract) is known as .
(a) Mark-To-Market Margin
(b) Delivery Period Margin
(c) Initial Margin
(d) Additional / Special Margin

Correct Answer Delivery Period Margin

Answer The tender period starts on11th of every month in which the contract is due to expire. The extra
Explanation margins during the tender and delivery period are collected from those who have an open
position in the market as the exchange faces the risk of delivery defaults.
The extra margin applied to all open positions once they enter the tender period or delivery
period (usually the last 5-10 days before the expiry date of the contract) is known as tender
period/delivery period margin.
 NISM XVI – COMMODITY DERIVATIVES
PRACTICE TEST . 2

Question19 Who does the clearing and settlement of trades of a Trading cum Clearing ?
(a) Authorised Persons
(b) A Market Maker
(c) The Trading cum Clearing member himself
(d) Professional Trading member

Correct Answer The Trading cum Clearing member himself

Answer Trading cum Clearing Member (TCM): This category of membership entitles a member to
Explanation execute trades on his own account as well as for his clients and also to clear and settle trades
executed by himself as well as of his clients.
Clearing members are members of the clearing corporation. They carry out risk management
activities and confirmation/inquiry of trades through the trading system.

Question20 facilitates efficient price discovery.

(a) Auction based commodity markets
(b) Traditional ‘Mandi’ system
(c) OTC commodity markets
(d) Exchange traded commodity markets

Correct Answer Exchange traded commodity markets

Answer Exchange traded commodity markets facilitates efficient price discovery as the market brings
Explanation together buyers and sellers of divergent needs in a transparent online system.
 NISM XVI – COMMODITY DERIVATIVES
PRACTICE TEST . 2

Question21 As per the SEBI guidelines for brokers with respect to execution of clients orders. the broker
should .
(a) promptly inform its client about the execution or non-execution of an order
(b) inform about the execution or non execution of an order by the end of the day
(c) inform about the execution or non execution of an order by T+2 days from the order execution
(d) inform about the execution or non execution of an order within two hours of deal execution

Correct Answer promptly inform its client about the execution or non-execution of an order
Answer As per SEBI guidelines for execution of an order - The broker shall faithfully execute the orders
Explanation for buying and selling of securities at the best available market price and not refuse to deal with
a small investor merely on the ground of the volume of business involved.
A stock-broker also shall promptly inform its client about the execution or non-execution of an
order, and make prompt payment in respect of securities sold and arrange for prompt delivery
of securities purchased by clients.

Question22 are those who buy first and expect the price to increase from current level.
(a) Short speculators
(b) Long speculators
(c) Short hedgers
(d) Long hedgers

Correct Answer Long speculators

Answer Speculation is a practice of engaging in trading to make quick profits from fluctuations in
Explanation prices.
Long speculators are those who buy first and expect the price to increase from current level.
Short speculators are those who sell first and expect the price to decrease from current level.
 NISM XVI – COMMODITY DERIVATIVES
PRACTICE TEST . 2

Question23 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) Forward Contracts (Regulation) Act, 1952
(b) The Securities Contract (Regulation) Act, 1956
(c) Stock Exchange Regulation Act 1992
(d) Commodity Exchange regulation Act 1986

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.

Question24 The Time Priority of an order will not change .

(a) if the order price is increased
(b) if the order price is decreased
(c) if the disclosed quantity is decreased
(d) Time priority will not change irrespective to any modifications in that order

Correct Answer if the disclosed quantity is decreased

Answer On a Screen based computerised trading system, the order matching is done on a price-time
Explanation priority basis. This means that all the orders received are sorted on ‘best-price’ basis

A Member is permitted to modify or cancel his orders. The order can be modified by effecting
changes in the order input parameters. Time priority for an order modification will not change
due to decrease in its quantity or decrease in disclosed quantity. In other circumstances, the
time priority of the order will change.
 NISM XVI – COMMODITY DERIVATIVES
PRACTICE TEST . 2

Question25 On expiry, option series having strike price closest to the Daily Settlement Price (DSP) of
Futures shall be termed as option series.
(a) In the Money (ITM)
(b) At the Money (ATM)
(c) Out of the money (OTM)
(d) Close to the money (CTM)

Correct Answer At the Money (ATM)

Answer According to SEBI regulations, on expiry, option series having strike price closest to the Daily
Explanation Settlement Price (DSP) of the underlying futures is called At the Money (ATM) series.

Question26 In the option strategy, the trader sells a call and a put with same expiry dates but with
different strike prices.
(a) Long Straddle
(b) Short Straddle
(c) Long Strangle
(d) Short Strangle

Correct Answer Short Strangle

Answer If a trader is expecting a large decrease in volatility, he will try to gain from it by selling a call
Explanation and a put with same expiry dates but with different strike prices. This is known as Short
Strangle.
 NISM XVI – COMMODITY DERIVATIVES
PRACTICE TEST . 2

Question27 Calculate the Tick Value of a Silver Futures contract if the Quotation factor for Silver is 'Rupees
per 1 Kilogram', lot size for regular Silver contract = 40 kg and tick size is Rs. 1.
(a) Rs 400
(b) Rs 40
(c) Rs 4
(d) Rs 4000

Correct Answer Rs 40
Answer The quotation for Silver = Rupees per 1 Kilogram
Explanation
Lot size = 40 kgs
Tick size = Rs 1
The formula for calculating tick value is : Ticket Value = (Lot size / Quotation factor) X Tick size
Tick value = (40 / 1) * 1 = Rs 40

Question28 Why does Contango like situation happen in Agricultural commodities?

(a) Weak monsoon forecasts which can create expected demand-supply gap in that commodity
(b) Due to expected quality related issues in goods lying in warehouses
(c) Due to expected quality related issues in goods that are expected to come into warehouses
(d) All of the above

Correct Answer All of the above

Answer Contango refers to a market condition when the price of the commodity for future delivery is
Explanation higher than the spot price of the commodity and reflects normal market conditions.

In Agricultural commodity derivatives, Contango like situation may also arise due to expected
quality related issues in goods lying in warehouses or are expected to come into warehouses,
which the traders expect that may not be deliverable and may be rejected. This may create a
run on the short sellers or genuine sellers who want to deliver and scarcity is created for
exchange quality goods, in the markets. Similarly, weak monsoon forecasts may also create
expected demand-supply gap in commodity and increase contango effect.
 NISM XVI – COMMODITY DERIVATIVES
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Question29 Arvind has a physical exposure of 500 kilograms to the underlying commodity and the lot size
of the futures contract on this underlying is 10 kilograms. The hedge ratio between the spot and
futures price is 0.80. Calculate how many futures contract he should trade to set up an optimal
hedge?
(a) 80
(b) 40
(c) 8
(d) 25

Correct Answer 40
Answer The formula for calculating the contracts to hedge is :
Explanation
No of contracts to be hedged = (Physical Exposure X Hedge ratio) / Lot size
= 500 x .80 / 10
= 40 lots

Question30 is a part of Goods and Service s Tax (GST) structure.

(a) IGST
(b) SGST
(c) CGST
(d) All of the above

Correct Answer All of the above

Answer The GST levied by the Centre on intra-State supply of goods and/or services is called the
Explanation Central GST (CGST) and that levied by the States is called the State GST (SGST).

Similarly, Integrated GST (IGST) is levied and administered by the Centre on every inter-state
supply of goods and services.
 NISM XVI – COMMODITY DERIVATIVES
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Question31 Which of the following are the risks generally faced by the Commodity exporters ?
(a) Foreign exchange rate risk
(b) Geopolitical risk
(c) Commodity price risk
(d) All of the above risks

Correct Answer All of the above risks

Answer Exporters face risk from the time lag between order received and receipt of export proceeds
Explanation from sales, as well as political risk where compliance, regulation or availability can adversely
impact sales price.
Further, exporters face foreign exchange risk as most commodities are priced and traded in US
dollars (USD) and any adverse movement in the foreign currency carry foreign exchange rate risk
that impacts revenue and profits.

Question32 In India, deep in the money commodity call options on exercise gives the option buyer
.
(a) Long position in the underlying physical commodity
(b) Long position in the underlying commodity futures
(c) Short position in the underlying commodity futures
(d) Short position in the underlying physical commodity

Correct Answer Long position in the underlying commodity futures

Answer Commodity options in India devolve into Commodity Futures. That means, buyers of
Explanation commodity options would get a right to have a position in underlying commodity futures.
So a buying position in a call option will devolve into long position in the underlying
commodity futures on exercise.
 NISM XVI – COMMODITY DERIVATIVES
PRACTICE TEST . 2

Question33 With each passing day, the cost of carry of a futures contract .
(a) Increases
(b) Decreases
(c) Increases initially and then decrease
(d) Decreases initially and then increase

Correct Answer Decreases

Answer Cost of Carry is made up of - Cost of storage, insurance, transportation, cost of financing and
Explanation other costs associated with carrying the commodity until a future date.
As the cost of carry determines the differential between spot and futures price and is associated
with costs involved in holding the commodity till the date of delivery, it follows that the cost of
carry diminishes with each passing day as the cost of finance, storage etc. decreases with each
passing day.

Question34 If the cost of 10 grams of Gold in the spot market is Rs 25,000 and the cost-of-carry is 12% per
annum, the theoretical fair value of a 3-month futures contract would be .
(a) Rs 25,750
(b) Rs 26,000
(c) Rs 28,000
(d) Rs 25,000

Correct Answer Rs 25,750

Answer Futures Price = Spot Price + Cost of carry
Explanation
(The cost of carry is the Spot price + interest cost for 3 months)
= 25000 + ( 25000 x 12% x 3/12)
= 25000 + ( 25000 x .12 x 0.25)
= 25000 + (25000 x 0.03)
= 25750
 NISM XVI – COMMODITY DERIVATIVES
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Question35 As per SEBI Regulations, can be used by Warehouse Service Providers (WSP) for
storing goods which are meant for settlement of trades on the Exchanges.
(a) Only Exchange-owned warehouses
(b) Only WSP-owned warehouses
(c) Only SEBI registered warehouses
(d) Only WDRA registered warehouses

Correct Answer Only WDRA registered warehouses

Answer The National commodity exchanges do not own or hire any warehouse for the purpose of
Explanation settlement of the contracts that require to be settled by the physical delivery of commodities.
Exchanges set the criteria for the warehouses and empanel warehouse service providers (WSPs)
who arrange warehousing facilities on the basis of the criteria laid down by the exchanges.

As per SEBI Regulations, only WDRA (Warehousing Development and Regulatory Authority)
registered warehouses can be used by exchange-empanelled WSPs for storing goods which are
meant for settlement of trades on exchanges.

Question36 A can trade either on their own account or on behalf of the clients.
(a) Trading member
(b) Market maker
(c) Clearing member
(d) Professional clearing member

Correct Answer Trading member

Answer A Trading Member can trade either on their own account or on behalf of the clients. This
Explanation category of membership entitles a member to execute trades on his own account as well as for
clients registered with him. The clearing and settlement of the trades is done through a
clearing member.
 NISM XVI – COMMODITY DERIVATIVES
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Question37 Spot market trade in commodities particularly agriculture commodities fall under the
jurisdiction of .
(a) Central government
(b) Local bodies such as municipalities and gram panchayats
(c) Individual state governments
(d) Supreme court

Correct Answer Individual state governments

Answer The Central Government formulates the broad policy with regard to the recognitionof
Explanation commodity exchanges and the list of commodities that are permitted for futures/forward
trading.

The subject of forward market is under the Union List in Schedule VII of the Constitution of India,
whereas the spot market trade in commodities particularly agriculture commodities are the
subjects within the jurisdiction of States.

Question38 Which of the following macroeconomic factors have an impact on the commodity prices?
(a) Per capita income
(b) Growth in industrial production
(c) GDP growth rate
(d) All of the above

Correct Answer All of the above

Answer The domestic and global macroeconomic conditions can have an impact on commodity prices.
Explanation The GDP growth rate, consumption pattern, per capita income, industrial production,
employment rate, inflation rate, etc. are very important factors in deciding the price trend of a
commodity both in the short term as well as in the long term.
 NISM XVI – COMMODITY DERIVATIVES
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Question39 Which one of these complaints against a trading member can an Exchange take up for
redressal?
(a) Claims regarding notional loss for the disputed trade
(b) Complaints relating to land dealings between a client and a broker
(c) Claims regarding notional loss for the disputed trade
(d) Non receipt of funds or commodities in case of physical settlement

Correct Answer Non receipt of funds or commodities in case of physical settlement

Answer Complaints against trading members on account of the following can be taken by an Exchange
Explanation for redressal :
- Non-receipt of funds / securities
- Non- receipt of documents such as member client agreement, contract notes, settlement of
accounts, order trade log etc.
- Non-Receipt of Funds / Securities kept as margin
- Trades executed without adequate margins
- Delay /non – receipt of funds
- Squaring up of positions without consent
- Unauthorized transaction in the account
- Excess Brokerage charged by Trading Member / Sub-broker
- Unauthorized transfer of funds from commodities account to other accounts etc.

Question40 are those who sell first and expect the price to decrease from current level.
(a) Long speculators
(b) Short speculators
(c) Short hedgers
(d) Long hedgers

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.
 NISM XVI – COMMODITY DERIVATIVES
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Question41 Buying a commodity futures contract in expectation of an increase in price before the expiry of
the contract without any corresponding short positions in the spot market is called a .
(a) Long hedge transaction
(b) Short hedge transaction
(c) Long speculative transaction
(d) Short speculative transaction

Correct Answer Long speculative transaction

Answer Taking a long position (i.e. buying) in a commodity futures contract in expectation of an increase
Explanation in price before the expiry of the contract without any corresponding short positions in the spot
market is called a long speculative transaction.

If the price of the futures contract increases before the expiry of the contract, then the trader
makes a profit by squaring off the position, and if the price of the futures contract decreases
then the trader incurs a loss.

Question42 Which of the following are the risks generally faced by the Commodity Exporters?
(a) Commodity price risk
(b) Geopolitical risk
(c) Foreign exchange rate risk
(d) All of the above

Correct Answer All of the above

Answer Importers and exporters of commodities face -
Explanation
1. Foreign exchange rate risk - Most commodities are priced and traded in US dollars (USD) and
any adverse movement in the foreign currency carry foreign exchange rate risk that impacts
revenue and profits.
2. Commodity price risk - arises on account of adverse fluctuations in the prices of
commodities.
3. Geopolitical risk - Commodities that have a global demand (e.g., crude oil) are prone to price
fluctuations due to political tensions in some parts of the globe and these may lead to
disruptions in supply.
 NISM XVI – COMMODITY DERIVATIVES
PRACTICE TEST . 2

Question43 contracts give the buyer the right to sell a specified quantity of an asset at a
particular price on or before a certain future date.
(a) Call Option
(b) Put Option
(c) Both Call and Put Options
(d) None of the above

Correct Answer Put Option

Answer Put option contracts give the buyer the right to SELL a specified quantity of an asset at a
Explanation particular price on or before a certain future date.
Call option contracts give the purchaser the right to BUY a specified quantity of an asset at a
particular price on or before a certain future date.

Question44 Which of these statements is/are CORRECT with respect to the relation between strike price
and option premium? (Assume other factors remaining constant)
(a) A Call option with higher strike price would have lower intrinsic value than call option with
lower strike price
(b) A Put option with higher strike price would have a higher option premium
(c) A Call option with lower strike price would have a higher option premium
(d) All of the above

Correct Answer All of the above

Answer For call option which is in-the-money, intrinsic value is the excess of spot price (S) over the
Explanation strike price (X) = S - X
Option premium is basically the sum of intrinsic value and time value. So for a in the money call
option with a lower strike price, will have a higher intrinsic value and so a higher option
premium. Similarly a call option with higher strike price will have a lower intrinsic value.
For a put option which is in-the-money, intrinsic value is the excess of strike price (X) over the
spot price (S). Thus, intrinsic value of put option can be calculated as X-S. So a put option with
with higher strike price would have a higher option premium.
 NISM XVI – COMMODITY DERIVATIVES
PRACTICE TEST . 2

Question45 The physical markets for commodities deal in cash (spot) transactions for .
(a) immediate payment and future delivery
(b) immediate delivery and future payment
(c) immediate payment and immediate delivery
(d) As decided by the buyer of the commodity

Correct Answer immediate payment and immediate delivery

Answer The commodities are physically bought or sold on a negotiated basis in the spot market, where
Explanation immediate delivery takes place. The physical markets for commodities deal in cash (spot)
transactions for ready delivery and payment.

Question46 You have bought a CALL of Ambuja Cements of Strike price of Rs 200 of January. To close the
position, you will Sell a CALL of same strike price of January. True or False ?
(a) TRUE
(b) FALSE
(c) Depends on the trader
(d) Insufficient data

Correct Answer TRUE

Answer When you buy a CALL option, it can only be squared up by selling the same CALL option.
Explanation
 NISM XVI – COMMODITY DERIVATIVES
PRACTICE TEST . 2

Question47 Which strategy works for some body who is already naturally long on the underlying asset and
must sell the underlying in futures?
(a) Long Hedge
(b) Short Hedge
(c) Best Hedge
(d) Risk Free Hedge

Correct Answer Short Hedge

Answer In case a person owns an asset and wants to protect against falling prices in future, he will
Explanation adopt the strategy of Short Hedge.
Short hedge involves sale of futures to offset potential losses from the falling prices.

Question48 A commodity’s current market price is Rs 300 and the Put premium for the 250 strike is Rs 4. The
option expires in three months time and the risk-free interest rate is currently 6%. Calculate the
theoretical premium for the Rs 250 strike Call option.
(a) Rs. 45.50
(b) Rs. 57.70
(c) Rs. 48.30
(d) Rs. 52.80

Correct Answer Rs. 57.70

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 – 4 = 300 – 250 / 1+ (0.06 ∗ 0.25)
C – 4 =300 – 250 / 1.015
C – 4 = 300 – 246.30
C – 4 = 53.70
C = 53.70 + 4
C = 57.70
 NISM XVI – COMMODITY DERIVATIVES
PRACTICE TEST . 2

Question49 emerged as an alternative financial product to address the concerns of

counterparty default, as the Exchange guaranteed the performance of the contract
(a) Bilateral contracts
(b) Forward contracts
(c) Futures contracts
(d) OTC contracts

Correct Answer Futures contracts

Answer Many forward contracts are not honored by either of the contracting parties due to price
Explanation changes and market conditions.

Futures Contracts or Exchange traded derivatives 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.

Question50 arises when the buyer/seller has not received the goods/funds but has fulfilled his
obligation of making payment/delivery of goods.
(a) Replacement-cost risk
(b) Systemic risk
(c) Rollover risk
(d) Principal risk

Correct Answer Principal risk

Answer Principal risk arises when the buyer/seller has not received the goods/funds but has fulfilled
Explanation his obligation of making payment/delivery of goods.

This is eliminated by having a central counterparty such as clearing corporation

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