Commodity Derivatives Mock Test 1: 50 Free Practice MCQs

Q1. In commodity future trading, _____ is the price used for calculating the "delivery default penalty" in case of non delivery of short sell quantity.

a) Exercise price of the related option contract
b) Final settlement price of the futures contract
c) Daily price range of that futures contract
d) Closing price of the underlying commodity in the spot market

Show Answer & Explanation

Correct Answer: b) Final settlement price of the futures contract

Explanation: In commodities futures, there are two types of settlement price: one is the daily settlement price (DSP) that is known as closing price and the other is the final settlement price (FSP) that is known as Due Date Rate (DDR). Daily settlement price is used to calculate the daily mark-to-market profit or loss. Final settlement price is the price used for "delivery default penalty" in case of nondelivery of short sell quantity. There are prescribed methodologies to arrive at delivery default penalty and working out compensation to the buyer in such case, using FSP.

Q2. Volatility is the magnitude of movement in the underlying asset's price in the _____ direction.

a) Upward
b) Downward
c) Upward and downward
d) flat

Show Answer & Explanation

Correct Answer: c) Upward and downward

Explanation: Volatility is the magnitude of movement in the underlying asset's price, either up or down. It affects both call and put options in the same way. Higher the volatility of the underlying stock, higher the premium.

Q3. _____ arises when the buyer/seller has not received the goods/funds but has fulfilled his obligation of making payment/delivery of goods.

a) Operational Risk
b) Surveillance related risks
c) Principal risk
d) Obligation risk

Show Answer & Explanation

Correct Answer: c) Principal risk

Explanation: Principal risk arises when the buyer/seller has not received the goods/funds but has fulfilled his obligation of making payment/delivery of goods. This is eliminated by having a central counterparty such as clearing corporation.

Q4. _____ opportunity arises when the futures price of the commodity is more than the sum of spot price and the cost of carrying it till the expiry date.

a) Algorithm arbitrage
b) Cash and Carry arbitrage
c) Reverse Cash and Carry Arbitrage
d) Spot versus spot arbitrage

Show Answer & Explanation

Correct Answer: b) Cash and Carry arbitrage

Explanation: Cash-and-carry arbitrage refers to buying of a physical commodity with borrowed funds and simultaneously selling the futures contract. The physical commodity is delivered upon the expiry of the contract. This opportunity arises when the futures price of the commodity is more than the sum of spot price and the cost of carrying it till the expiry date.

Q5. Sticking to the _____ helps to neutralize the volatility difference between Spot and Futures.

a) Volatility Ratio
b) Exposure Ratio
c) Risk Return Ratio
d) Hedge Ratio

Show Answer & Explanation

Correct Answer: d) Hedge Ratio

Explanation: Hedge 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. It helps to neutralize the volatility difference between Spot and Futures.

Q6. When an option contract devolve into underlying asset, a PUT option is said to be In The Money (ITM), when _____

a) Spot price is lower than strike price
b) Spot price is higher than strike price
c) Spot price is equal to Futures price
d) Spot price is equal to strike price

Show Answer & Explanation

Correct Answer: a) Spot price is lower than strike price

Explanation: An 'In the Money' (ITM) option would give holder a positive cash flow, if it were exercised immediately. A put option is said to be ITM when spot price is lower than strike price. A call option is said to be ITM, when spot price is higher than strike price.

Q7. _____ is NOT considered as financial futures.

a) Gold Futures
b) Currency Futures
c) Bond Futures
d) Stock Futures

Show Answer & Explanation

Correct Answer: a) Gold Futures

Explanation: Futures relating to currency rates (currency futures), interest rates (bond futures) and equity prices (stock or equity index futures) are known as financial futures. Futures on crude oil, metals like Gold etc., agriculture products, etc are known as Commodity futures.

Q8. What can an option seller do?

a) An option seller can exercise the option once the expiration date has passed
b) An option seller can ask to exercise the option on the expiration date
c) An option seller can square off the option in the Exchange before the expiration date
d) All of the above

Show Answer & Explanation

Correct Answer: c) An option seller can square off the option in the Exchange before the expiration date

Explanation: An option seller cannot demand an exercise of the option. He can only square off his position before the expiry date. Only an option buyer can exercise the option.

Q9. On May 25, a trader agreed to sell rice for delivery on a future specified date (say one month from May 25 i.e., on June 25) irrespective of the actual price prevailing on June 25. This agreement is an example of _____

a) Commodity delivery contract
b) Commodity future contract
c) Commodity forward contract
d) Commodity cash contract

Show Answer & Explanation

Correct Answer: c) Commodity forward contract

Explanation: A forward contract is an agreement for delivery of goods or the underlying asset on a specific date in future at a price agreed on the date of contract.

Q10. If the closing price for Aluminum futures contract was Rs. 300 yesterday and Daily Price Range is 7 percent as per the contract specification. What would be the price range for this contract today?

a) Rs. 279 to Rs.321
b) Rs. 290 to Rs.321
c) Rs. 283 to Rs.311
d) Rs. 300 to Rs.330

Show Answer & Explanation

Correct Answer: a) Rs. 279 to Rs.321

Explanation: The Daily Price Range is 7%. 7% of Rs. 300 is Rs. 21. So the price range will be 300-21 and 300+21 = Rs. 279 to Rs. 321.

Q11. A hedger plans to buy a commodity in the spot market at a future date. What should be his first step in setting up a hedge to protect himself from any price rise?

a) He buys futures contract
b) He sells futures contract
c) He buys and sells spot contract simultaneously
d) He buys and sells futures contract simultaneously

Show Answer & Explanation

Correct Answer: a) He buys futures contract

Explanation: By buying a futures contract, he will lock his buying price. Any rise in prices will not affect 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.

Q12. While introducing derivatives contracts on a particular commodity, the commodity exchange will consider which of the following factors?

a) Price volatility of the commodity
b) Political sensitivity of commodity
c) Demand for introduction of a particular commodity from the market players
d) All of the above

Show Answer & Explanation

Correct Answer: d) All of the above

Explanation: A commodity exchange will introduce a commodity having due regard to key factors such as demand for introduction of a particular commodity from the market players, demand and supply dynamics, price volatility, inventory level, stock utilization, price elasticity, liquidity level of commodity markets, production of commodity, political sensitivity of commodity, homogenous nature, durability/expiry period of commodity, storability, government regulation and control, etc.

Q13. Calculate the total cost of carry from the following data - Spot price of the commodity Rs 35000; Time period 180 days: Cost of interest 9% and Cost of storage 2%.

a) Rs. 1677.36
b) Rs. 1749.22
c) Rs. 1898.43
d) Rs. 1955.49

Show Answer & Explanation

Correct Answer: c) Rs. 1898.43

Explanation: The cost of carry has two components Interest cost (for 180 days) and storage cost (for 180 days). Interest Cost = 35000 x .09 x (180/365) = 1553.20. Storage Cost = 35000 x .02 x (180/365) = 345.17. So the total cost of carry will be 1553.26 + 345.17 = 1898.43.

Q14. Which price is used to calculate the mark-to-market profit or loss at the end of each trading day for commodity futures trading?

a) Due date rate of the respective futures contract
b) Closing price of the underlying commodity in the spot market
c) The daily price range of the respective futures contract
d) Daily settlement price of the respective futures contract

Show Answer & Explanation

Correct Answer: d) Daily settlement price of the respective futures contract

Explanation: Daily settlement price is used to calculate the daily mark-to-market profit or loss. MTM profit/loss is calculated by marking all the positions in the futures contracts to the daily settlement price (DSP) of the futures contracts at the end of each trading day.

Q15. Ms. Reshma has entered a short speculative position in commodity futures. Which of the following would be a possible outcome for Ms. Reshma at the expiry of the contract?

a) Ms. Reshma incurs a loss if the price of futures contract decreases
b) Ms. Reshma incurs a loss if the price of futures contract increases
c) Ms. Reshma would neither make a profit nor a loss in this position for any price of futures
d) Ms. Reshma will always makes profit irrespective of whether the futures prices increases or decreases

Show Answer & Explanation

Correct Answer: b) Ms. Reshma incurs a loss if the price of futures contract increases

Explanation: Short position means Ms. Reshma has sold the futures contract expecting the prices to fall. She can only make a profit if the futures prices fall or make a loss if future prices rise. For eg. Ms. Reshma sells a futures contract at Rs 100. The price rise and on expiry the price is Rs. 120. Here she will make a loss of Rs. 20.

Q16. A person who is long on a Call Option has _____

a) A right to buy without any obligation to buy
b) A right to sell with an obligation to sell
c) A right to buy with an obligation to buy
d) A right to sell without any obligation to sell

Show Answer & Explanation

Correct Answer: a) A right to buy without any obligation to buy

Explanation: Buyer of an option: The buyer of an option is one who has a right but not the obligation in the contract. For owning this right, he pays a price to the seller of this right called 'option premium' to the option seller. Buyer of an option is said to be "long on option". He/she would have a right and no obligation with regard to buying (in case of call)/selling (in case of put) the underlying asset in the contract.

Q17. Identify the true statement with respect to the relation between Time to Expiration and Option Premium. (Assume all other factors remain the same)

a) When the time to expiration is higher, higher is the put option premium but lower is the call option premium
b) When the time to expiration is higher, higher is the call option premium but lower is the put option premium
c) When the time to expiration is higher, the premiums of both call option and put option is higher
d) Time to expiration does not affect the option premium

Show Answer & Explanation

Correct Answer: c) When the time to expiration is higher, the premiums of both call option and put option is higher

Explanation: Generally, longer the maturity of the option i.e. higher the time to expiry, greater is the uncertainty and hence the higher premiums for both call and put options.

Q18. Which type of strategy is adopted to benefit the trader when the near-month contract is under priced or the far-month contract is overpriced and the trader of the above strategy buys the near-month contract and sells 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) Inter commodity spread
b) Long hedge
c) Selling a Spread
d) Buying a Spread

Show Answer & Explanation

Correct Answer: d) Buying a Spread

Explanation: Buying a spread is an intra-commodity spread strategy. It means buying a near-month contract and simultaneously selling a far-month contract. This strategy is adopted when the near-month contract is underpriced or the far-month contract is overpriced.

Q19. How does an arbitrageurs make riskless profits?

a) Arbitrageurs are specialist traders and make profits irrespective of market conditions
b) His selling price of an asset in one market should be lower than his buying price in another market after adjusting for transaction costs etc.
c) His selling price of an asset in one market should be higher than his buying price in another market after adjusting for transaction costs etc.
d) His selling price of an asset in one market should be exactly equal to his buying price in another market after adjusting for transaction costs etc.

Show Answer & Explanation

Correct Answer: c) His selling price of an asset in one market should be higher than his buying price in another market after adjusting for transaction costs etc.

Explanation: Arbitrageurs simultaneously buy and sell in two markets where their selling price in one market is higher than their buying price in another market by more than the transaction costs, resulting in riskless profit to the arbitrager.

Q20. Since the _____ is paying the premium to the seller, he has the right to exercise the option when it is favourable to him but no obligation to do so.

a) Writer
b) Buyer
c) Seller
d) Arbitrageur

Show Answer & Explanation

Correct Answer: b) Buyer

Explanation: Premium is the cost of the option paid by the buyer to the seller and is non-refundable. Since the buyer is paying the premium to the seller, he has the right to exercise the option when it is favourable to him but no obligation to do so.

Q21. Mr. Amit is working with a commodity broking house and is an expert in Gold prices movements. As per his view, Gold should appreciate in the next 3 months and accordingly he advised some of his clients to take a long position in gold futures and as he was very confident, he also guaranteed against any losses. The senior manager takes an action against Mr. Amit for violating some trading guidelines. What should Mr. Amit have done to avoid the punishment?

a) Mr. Amit should not have guaranteed against any losses
b) Mr. Amit should have advised the clients correctly to take long position for 1 month and not 3 months as 3 month is a long period
c) Mr. Amit should have advised the clients correctly to take long position for 6 months and not 3 months as 3 month is a short period
d) Mr. Amit should have advised the clients to take short position

Show Answer & Explanation

Correct Answer: a) Mr. Amit should not have guaranteed against any losses

Explanation: Exchange regulations specify codes of conduct related to the commodity derivatives segment. All trading members must comply with these. One of the code of conduct is: No Trading Member or person associated with the Trading Member shall guarantee a client against a loss in any transactions effected by the Trading Member for such client.

Q22. During the commodity payout process, _____ with the help of clearing banks transfer the funds (sale proceeds) to the clearing member of the seller.

a) Clearing Corporation
b) The Commodity Exchange
c) SEBI
d) Commodity Broker

Show Answer & Explanation

Correct Answer: a) Clearing Corporation

Explanation: Clearing Corporation with the help of clearing banks transfer the funds equivalent to the contract value to the clearing member.

Q23. The regulatory framework for commodity markets in India consist of three tiers. Which are these three tiers?

a) Forward Markets Commission, Securities and Exchange Board of India and Government of India
b) Forward Markets Commission, Securities and Exchange Board of India and Exchanges
c) Forward Markets Commission, Exchanges and Government of India
d) Securities and Exchange Board of India, Exchanges and Government of India

Show Answer & Explanation

Correct Answer: d) Securities and Exchange Board of India, Exchanges and Government of India

Explanation: The main objective of commodity market regulation is to maintain and promote the fairness, efficiency, transparency and growth of commodity markets and to protect the interests of the various stakeholders of the commodity market and to reduce systemic risks and ensure financial stability. The three-tiered regulatory framework for commodity markets comprises Government of India, Securities and Exchange Board of India (SEBI) and Exchanges.

Q24. When the futures price is _____ than the spot price, it is known as Backwardation.

a) higher
b) lower
c) more volatile
d) less volatile

Show Answer & Explanation

Correct Answer: b) lower

Explanation: When the futures price is less than the spot price, the basis is a positive number. This is known as the backwardation market.

Q25. Which one of these complaints against a trading member can an Exchange take up for redressal?

a) Claims regarding unauthorized transaction in the client's account
b) Claims regarding notional loss for the disputed trade
c) Complaints in respect of transactions which are already subject matter of Arbitrage proceedings
d) Complaints regarding land dealings between a client and trading member

Show Answer & Explanation

Correct Answer: a) Claims regarding unauthorized transaction in the client's account

Explanation: Complaints against trading members on account of the following can be taken by an Exchange for redressal: Non-receipt of funds/securities, Unauthorized transaction in the account, Excess Brokerage charged by Trading Member/Sub-broker, Unauthorized transfer of funds from commodities account to other accounts etc.

Q26. Which of the following are the risks generally faced by the Commodity importers?

a) Foreign exchange rate risk
b) Commodity price risk
c) Geopolitical risk
d) All of the above

Show Answer & Explanation

Correct Answer: d) All of the above

Explanation: Importers and exporters of commodities face Foreign exchange rate risk, Commodity price risk, and Geopolitical risk.

Q27. What will be the theoretical futures price of the futures contract, if the Spot price of a commodity is Rs 40000, the time period is 90 days, the interest rate is 6% and storage costs is 1%?

a) 40466.35
b) 41800.50
c) 41233.80
d) 40688.80

Show Answer & Explanation

Correct Answer: d) 40688.80

Explanation: Interest Cost = 40000 x .06 x (90/365) = 590.4. Storage Cost = 40000 x .01 x (90/365) = 98.4. Total cost of carry = 590.4 + 98.4 = 688.80. Future Price = Spot Price + Cost of Carry = 40000 + 688.80 = 40688.80.

Q28. Which act gives SEBI the power to prohibit undesirable speculation in Indian securities market?

a) Stock Exchange (Regulation) Act, 1992
b) Securities Contracts (Regulation) Act, 1956
c) Futures Contracts (Regulation) Act, 1952
d) Anti Speculation (Regulation) Act, 2001

Show Answer & Explanation

Correct Answer: b) Securities Contracts (Regulation) Act, 1956

Explanation: The Securities Contracts (Regulation) Act, 1956 (SC(R)A), provides for direct and indirect control of virtually all aspects of securities trading and the running of stock exchanges. It prevents undesirable transactions in securities by regulating the business of securities dealing and trading.

Q29. _____ are fully standardized and their contract terms are specified by the derivatives exchanges.

a) OTC Contracts
b) Exchange Traded Derivatives
c) Forwards Contracts
d) Multi-lateral Contracts

Show Answer & Explanation

Correct Answer: b) Exchange Traded Derivatives

Explanation: Exchange Traded Derivatives (Futures) are standardized in terms of size, quantity, grade and time, so that each contract traded on the exchange has the same specification.

Q30. _____ is the change in option price given a one percentage point change in the risk-free interest rate.

a) Gamma
b) Rho
c) Theta
d) Vega

Show Answer & Explanation

Correct Answer: b) Rho

Explanation: Rho is the change in option price given a one percentage point change in the risk-free interest rate. Rho measures the change in an option's price per unit increase in the cost of funding the underlying.

Q31. Which of the following Acts are repealed?

a) SEBI's Stock Exchange and Clearing Corporation Regulation, 2012
b) Forward Contract Regulation Act, 1952
c) SARFESI Act, 2002
d) SEBI's (Vault Mangers) Regulation, 2021

Show Answer & Explanation

Correct Answer: b) Forward Contract Regulation Act, 1952

Explanation: The Parliament passed the Forward Contracts Regulation Act in 1952 to regulate the forward contracts in commodities across the country. However, the Forward Contracts Regulation Act was repealed and regulation of commodity derivatives market was shifted to the Securities and Exchange Board of India (SEBI) under Securities Contracts Regulation Act (SCRA) 1956 with effect from 28th September, 2015.

Q32. When can the Buyer or Seller of a commodity derivatives contract, express their intention to give or take delivery?

a) Anytime during the contract's life
b) Only on the last trading day of the contract
c) Only during the tender marking period
d) Only after the expiry of the contract

Show Answer & Explanation

Correct Answer: c) Only during the tender marking period

Explanation: Under the staggered delivery mechanism, the seller has an option of marking an intention of delivery on any day during the last 10 days of the expiry of the contract.

Q33. Identify the advantage(s) of Commodity Futures in comparison to Commodity Forwards?

a) There is efficient price discovery in commodity futures
b) There is transparency of pricing in commodity futures
c) There is higher liquidity due to standardization of contracts in commodity futures
d) All of the above

Show Answer & Explanation

Correct Answer: d) All of the above

Explanation: Advantages of commodity futures over commodity forwards: Efficient price discovery as the market brings together buyers and sellers of divergent needs, Elimination of counterparty credit risk, Access to all types of market participants, Standardized products, Transparent trading platform.

Q34. The difference between the prices of two future contracts is known as _____

a) Premium
b) Basis
c) Spread
d) Margin

Show Answer & Explanation

Correct Answer: c) Spread

Explanation: Spread refers to the difference in prices of two futures contracts.

Q35. In case of a Call Option, time decay will work in favour of _____

a) Option Writer (Seller)
b) Option Buyer
c) Both option buyer and seller
d) Neither option buyer nor option seller

Show Answer & Explanation

Correct Answer: a) Option Writer (Seller)

Explanation: If all other factors affecting an option's price remain same, the time value portion of an option's premium will decrease with the passage of time. Thus, option sellers are at a fundamental advantage as compared to option buyers as there is an inherent tendency in the price to go down.

Q36. ICAI's guidance note requires that all derivatives are recognised on the _____ and measured at fair value.

a) Cashflow statement
b) Balance sheet
c) Speculative statement
d) Income statement

Show Answer & Explanation

Correct Answer: b) Balance sheet

Explanation: The guidance note issued by the Institute of Chartered Accountants of India (ICAI) comes into effect in respect of accounting periods beginning on or after April 1, 2015. This guidance note requires that all derivatives are recognised on the balance sheet and measured at fair value since a derivative contract represents a contractual right or an obligation.

Q37. Under the staggered delivery mechanism, the buyer who is randomly assigned a delivery obligation by the trading system of the exchange has to take the delivery from the delivery centre _____

a) On the same day
b) On T+2 day
c) On the next day
d) On the expiry date

Show Answer & Explanation

Correct Answer: b) On T+2 day

Explanation: Under the staggered delivery mechanism, the seller has an option of marking an intention of delivery on any day during the last 10 days of the expiry of the contract. The corresponding buyer will be randomly allocated by the trading system of the exchange and he/she will have to take the delivery on T+2 day from the delivery centre where the seller has delivered the commodity.

Q38. Legal risks in commodities trading can be related to _____

a) Commodities Transaction Tax (CTT)
b) Essential Commodities Act
c) FSSI standards
d) All of the above

Show Answer & Explanation

Correct Answer: d) All of the above

Explanation: Exchanges face legal risk on account of uncertainty due to legal actions or uncertainty in the applicability or interpretation of contracts. The legal risk is also high in commodities trading which are subject matter of Essential Commodities Act, FSSI standards in addition to various taxes like GST, CTT, STT, etc.

Q39. What is the objective of Hedging?

a) Hedging leads to diversification of portfolio
b) Hedging helps generate 'Alpha' due to leverage offered by derivatives markets
c) Hedging helps generate excessive returns
d) Hedging limits the risks associated with the price changes

Show Answer & Explanation

Correct Answer: d) Hedging limits the risks associated with the price changes

Explanation: Hedging means taking a position in the derivatives market that is opposite of a position in the physical market with the objective of reducing or limiting risks associated with the price changes.

Q40. _____ are allowed exposure in commodity derivatives

a) Hedge Funds
b) Gold ETFs
c) Mutual Funds
d) All of the above

Show Answer & Explanation

Correct Answer: d) All of the above

Explanation: Market participants including individual investors, professional traders, manufacturing and trading companies, financial institutions such as hedge funds, exchange traded funds (ETFs), Trading Members and mutual funds can use commodity indices.

Q41. When a client registers a complaint, the dispute resolution mechanism follows following sequence-

a) Exchange-SEBI Grievance redressal committee
b) Grievance redressal committee-Exchange SEBI
c) Arbitration-Grievance redressal committee-Exchange
d) Exchange-Grievance redressal committee-SEBI

Show Answer & Explanation

Correct Answer: d) Exchange-Grievance redressal committee-SEBI

Explanation: Dispute resolution mechanism: The investor should first approach the concerned exchange/intermediary against whom there is a complaint. If the grievance is not resolved by the exchange due to disputes, it goes to Investor Grievance Resolution Committee (IGRC or GRC). If the response received is not satisfactory, then investors can approach SEBI through SCORES.

Q42. The relationship between Futures and Spot Price is logically explained by the formula F = S * e^(r * n). What does 'S' stand for if F: Futures price, r: Cost of financing in percentage, n: time till the expiry of the contract and e = A Constant number

a) Storage Cost
b) Scrap value
c) Spot Price
d) Simple Interest

Show Answer & Explanation

Correct Answer: c) Spot Price

Explanation: The fair value of a futures price with continuous/daily compounding can be expressed as: F = S * e^(r * n) where F: Futures price, S: Spot price, r: Cost of financing in percentage, n: time till the expiry of the contract (number of years).

Q43. The relationship between the Futures price and Spot price is expressed as F = S + C - Y. What does C indicate in this equation?

a) Convivence yield
b) Convergence Cost
c) Cost of carry
d) Cost of Living

Show Answer & Explanation

Correct Answer: c) Cost of carry

Explanation: F = S + C - Y where F: Futures Price, S: Spot Price, C: Cost of carry and Y: Convenience Yield.

Q44. Which of the following hedging method should not be used by a manufacturer of a product?

a) Selling the finished products in future
b) Buy a Call Option on the raw materials use to manufacture the product
c) Buy the raw materials use to manufacture the product in futures
d) Selling a Put Option in the finished goods

Show Answer & Explanation

Correct Answer: d) Selling a Put Option in the finished goods

Explanation: A manufacturer has to either hedge against a price rise of raw materials or against a price fall of finished goods in future. Selling a Put option is not an appropriate hedging mechanism for a manufacturer.

Q45. On expiry of futures resulting into delivery, the seller will raise bill on the buyer and charges appropriate GST rate on _____

a) Spot polling price
b) Exercise price
c) Daily settlement price
d) Final settlement price

Show Answer & Explanation

Correct Answer: d) Final settlement price

Explanation: Once obligations for delivery are assigned, seller will raise the bill on buyer at Final Settlement Price. The bill will be inclusive of appropriate GST levied on Final Settlement Price.

Q46. Black-Scholes option pricing model uses _____ to estimate theoretical options price.

a) Underlying asset of the asset
b) Strike price of the option
c) Risk-free interest rate
d) All of the above

Show Answer & Explanation

Correct Answer: d) All of the above

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

Q47. Miss Smita feels that Gold September futures are underpriced when compared to Gold November futures. To take advantage of this mispricing, she buys 1 Kg of September futures at Rs. 52000 per 10 grams and sells 1 Kg of November Gold futures at Rs. 52200. In October, she squares up the September Gold futures at Rs. 52100 and November Gold futures at Rs. 52250 and makes a profit of Rs. 5000. These trades done by Miss Smita is known as _____

a) Reverse Cash and Carry Arbitrage
b) Cash and Carry Arbitrage
c) Buying a Spread
d) Selling a Spread

Show Answer & Explanation

Correct Answer: c) Buying a Spread

Explanation: Buying a spread is an intra-commodity spread strategy. It means buying a near-month contract and simultaneously selling a far-month contract. This strategy is adopted when the near-month contract is underpriced or the far-month contract is overpriced.

Q48. Goods and Services Tax (GST) on goods is levied on which of these in commodity derivatives?

a) Exercise of options leading to delivery of goods
b) Trading in options
c) Exercise of options devolving in futures
d) Trading in futures

Show Answer & Explanation

Correct Answer: a) Exercise of options leading to delivery of goods

Explanation: In Commodity Derivatives, GST is levied by seller of goods on buyer of goods at the time of billing for delivery. It is levied at the point of delivery of goods after assignment of delivery obligations.

Q49. Which of these margins is deposited with the Commodity Futures Exchange?

a) Additional Margin
b) Margin of Safety
c) Crack Margin
d) Crush Margin

Show Answer & Explanation

Correct Answer: a) Additional Margin

Explanation: There are broadly six types of margins relating to Futures segment: initial margin, extreme loss margin, mark-to-market margin, special/additional margin, concentration margin and tender period/delivery period margin.

Q50. An oil refiner may enjoy a _____ yield on crude oil inventories and without it, production will be interrupted and the refiner cannot produce any finished product.

a) Current
b) Spread
c) Production
d) Convenience

Show Answer & Explanation

Correct Answer: d) Convenience

Explanation: Convenience yield indicates the benefit of owning a commodity rather than buying a futures contract on that commodity. An oil refiner may enjoy a convenience yield on crude oil inventories and without it, production will be interrupted and the refiner cannot produce any finished product.

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Dhaval Visariya

AMFI Registered Distributor (ARN-327925) | Software Developer & Finance Enthusiast

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