Mock Test 3: 50 Essential Commodity Market MCQs (Part 3 of 8)

Q1. Which of these can be the possible outcome when future contracts are used for hedging?

a) Hedging eliminates the possibility of gains. It has no impact on the potential losses.
b) Hedging eliminates the possibility of a loss. It also eliminates the possibility of a gain.
c) Hedging eliminates the losses while keeping the potential gains intact.
d) Hedging eliminates the losses while maximizing the gains.

Show Answer & Explanation

Correct Answer: b) Hedging eliminates the possibility of a loss. It also eliminates the possibility of a gain.

Explanation: A hedger seeks to transfer price risk by taking a futures position opposite to an existing position in the underlying commodity. By hedging, the hedger reduces to a large extent or even eliminates the possibility of a loss from a decline in the price of the commodity. However, he has also eliminated the possibility of a gain from a price increase.

Q2. The Strike Price of a commodity call option is Rs. 500. The current market price of the underlying commodity is Rs. 450. The option premium is Rs. 25. Calculate the Time Value from this data.

a) Rs. 100
b) Rs. 75
c) Rs. 25
d) 0

Show Answer & Explanation

Correct Answer: c) Rs. 25

Explanation: The option premium of an option is made up of Intrinsic Value + Time Value. Only 'In the Money' options have Intrinsic Value. In the above question, the Call Option is 'Out of the Money' as Market Price is lower than Strike Price. So there is no intrinsic value. So the option premium is entirely due to Time Value. The option premium is Rs 25 and this is the Time Value.

Q3. Sunita holds 2000 kilograms of Copper with Copper currently trading at Rs 400 per kilogram. She writes call options with a strike price of Rs 450 for a premium of Rs. 20. Which option strategy has she implemented here?

a) Covered short put
b) Covered short call
c) Bear call spread
d) Covered long call

Show Answer & Explanation

Correct Answer: b) Covered short call

Explanation: A covered short call position is created by combining a long underlying position i.e. holding the commodity stock with a short call option. A covered call option attempts to enhance the return in a stagnant market and at the same time partially hedge a long underlying position.

Q4. The agreement between two counterparties to exchange a series of cash payments for a stated period of time is known as

a) Options
b) Swaps
c) Forwards
d) Exchange Traded Contracts

Show Answer & Explanation

Correct Answer: b) Swaps

Explanation: Swaps are agreements between two counterparties to exchange a series of cash payments for a stated period of time. The periodic payments can be charged on fixed or floating price, depending on the terms of the contract. Swap is a pure financial transaction that is used to lock in the long-term price and there is no physical delivery of the commodity and there is net cash settlement on maturity.

Q5. _____ maintains electronic records of ownership of goods against negotiable warehouse receipts (NWRs) and warehouse receipts (WRs) and effects transfer of ownership of such goods by electronic process.

a) E-registry
b) Depository
c) Broker
d) Commodity Exchange

Show Answer & Explanation

Correct Answer: a) E-registry

Explanation: An E-registry maintains electronic records of ownership of goods against negotiable warehouse receipts (NWRs) and warehouse receipts (WRs) and effects transfer of ownership of such goods by electronic process.

Q6. A futures contract is a legally binding agreement between the buyer and the seller, entered on an exchange, to buy or sell a specified amount of an asset, at a certain time in the future, for a price that is

a) agreed at the time of entering into the contract
b) present when the contract matures
c) which is fixed by the exchange
d) prevailing in the spot market at the time of entering into the contract

Show Answer & Explanation

Correct Answer: a) agreed at the time of entering into the contract

Explanation: A futures contract is a legally binding agreement between the buyer and the seller, entered on an exchange, to buy or sell a specified amount of an asset, at a certain time in the future, for a price that is agreed at the time of entering into the contract.

Q7. _____ is/are included in the definition of 'Securities' under SCRA Act.

a) Debentures and bonds
b) Government securities
c) Financial Derivatives
d) All of the above

Show Answer & Explanation

Correct Answer: d) All of the above

Explanation: The term "securities" has been defined in the Section 2(h) of the Securities Contract (Regulation) Act, 1956 (SCRA). The term 'Securities' include: Shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate, Derivative, Units or any other instrument issued by any collective investment scheme to the investors in such schemes, Government securities etc.

Q8. 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 become same. This is known as

a) Zero Arbitrage
b) Contraction
c) Contango
d) Convergence

Show Answer & Explanation

Correct Answer: d) Convergence

Explanation: 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 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.

Q9. In India, deep in the money commodity PUT 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 physical commodity
d) Short position in the underlying commodity futures

Show Answer & Explanation

Correct Answer: d) Short position in the underlying commodity futures

Explanation: When a person buys a Put option, it means he is bearish on the commodity. On exercise, the commodity options devolve into commodity futures in India. So, this means on exercise the long PUT option will be short position (bearish) in underlying commodity futures.

Q10. Mr. Shetty has a long call option and would like to close that position before expiry. How would he do that?

a) By selling a call option or by selling a put option of the same strike and same expiry
b) By selling a call option or by buying a put option of the same strike and same expiry
c) By selling a call option of the same strike and same expiry
d) By buying a put option of the same strike and same expiry

Show Answer & Explanation

Correct Answer: c) By selling a call option of the same strike and same expiry

Explanation: A bought CALL option can only be squared up by selling the same CALL option.

Q11. Mr. Suresh has entered a short speculative position in commodity futures. Which of the following would be a possible outcome for Mr. Suresh at the expiry of the contract?

a) Even if the future prices rises or falls, Mr. Suresh will always make a profit
b) Mr. Suresh will not make any profit or loss for any price fluctuations of futures contract
c) Mr. Suresh makes a profit if the price of futures contract decreases
d) Mr. Suresh makes a profit if the price of futures contract increases

Show Answer & Explanation

Correct Answer: c) Mr. Suresh makes a profit if the price of futures contract decreases

Explanation: Short position means Mr. Suresh has sold the futures contract expecting the prices to fall. He can only make a profit if the futures prices fall. For eg. Mr. Suresh sells a futures contract at Rs 100. The price falls and on expiry the price is Rs. 90. Here he will make a profit of Rs. 10.

Q12. The Institute of Chartered Accountants of India (ICAI) has given guidance regarding the sales of hedged inventory. It says -'When sales of the hedged inventory occur in the future, the hedging related fair value adjustment to inventory will be

a) released to the Cashflow statement and can be classified as part of cash outflows
b) released to the profit and loss (P/L) statement and can be classified as part of depreciation
c) released to the statement of profit and loss (P/L) and can be classified as part of 'cost of goods sold'
d) released to the Balance Sheet and can be classified as part of 'cost of goods sold'

Show Answer & Explanation

Correct Answer: c) released to the statement of profit and loss (P/L) and can be classified as part of 'cost of goods sold'

Explanation: As per the Guidance Note of ICAI - When sales of the hedged inventory occur in the future, the 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'.

Q13. In which of the these scenarios, the buyer would be better off 'buying the commodity in the futures market' rather than 'buying the commodity in the spot market and holding it'? (Please do not consider convenience yield)

a) (Futures price - Spot price) Greater than Cost of carry
b) (Futures price - Spot price) = Cost of carry
c) (Futures price - Spot price) Less than Cost of carry
d) Commodities should always be bought in the spot markets as they are better priced

Show Answer & Explanation

Correct Answer: c) (Futures price - Spot price) Less than Cost of carry

Explanation: If the difference between the spot price and futures price is less than the cost of carry, the buyer would be better off buying the commodity in the futures market rather than buying the commodity in the spot market and holding it. [Conversely, if the differential is greater than the cost of carry, the buyer would be better off buying the asset in the spot market and holding it than buying the futures contract. However, when the difference between the spot and futures prices exactly matches the cost of carry then the buyer would be indifferent as to whether to buy from spot market or from futures market]

Q14. The best method of eliminating the Basis Risk is to

a) hold the futures contract till expiry
b) square off the futures contract before expiry
c) square off the spot contract before expiry
d) rollover the futures contract for the next month expiry

Show Answer & Explanation

Correct Answer: a) hold the futures contract till expiry

Explanation: Basis risk is defined as the risk that a futures price will move differently from that of its underlying asset spot price. There is a relationship between the futures price and its underlying commodity spot price and the futures price broadly follow the spot price and the difference between the two tends to become less as the futures approaches its expiry date. However, other factors can occasionally influence the futures price. The best method of eliminating the basis risk is to hold the futures contract till expiry, since the futures and spot prices converge on expiry.

Q15. Calculate the HEDGE RATIO using the following details: Coefficient of correlation between spot and futures prices is 0.66. Standard deviation of spot price is 7.3 and Standard deviation of futures price is 8.9

a) 0.541
b) 1.09
c) 42.88
d) 0.768

Show Answer & Explanation

Correct Answer: a) 0.541

Explanation: Hedge Ratio = Coefficient of correlation between spot and futures price (Standard deviation of change in spot price / Standard deviation of change in futures price) = $0.66(7.3/8.9)$ = $0.66\times0.82$ = 0.541.

Q16. The credit risk / settlement risk on futures is eliminated because the _____ of the exchange becomes the central counter-party and guarantees settlement of trade.

a) Clearing Bank
b) Settlement House
c) Regulator
d) Clearing Corporation

Show Answer & Explanation

Correct Answer: d) Clearing Corporation

Explanation: Credit risk is directly related to the credit worthiness of the buyer and seller and their ability and willingness to honour the contract. The credit risk / settlement risk on futures is eliminated because the clearing corporation of the exchange becomes the central counter-party and guarantees settlement of trade.

Q17. Which of these factor(s) affect the premium / price of options?

a) Volatility of the underlying asset's price
b) Strike price of the option
c) Interest rates
d) All of the above

Show Answer & Explanation

Correct Answer: d) All of the above

Explanation: There are five fundamental parameters on which the option price depends - 1) Price of the underlying asset 2) Strike price of the option 3) Volatility of the underlying asset's price 4) Time to expiration 5) Interest rates. These factors affect the premium/price of options in several ways.

Q18. In which way an option position can be closed?

a) Expiration
b) Exercise
c) Offset
d) All of the above

Show Answer & Explanation

Correct Answer: d) All of the above

Explanation: There are three different ways of closing an option position: offset, exercise and expiration. Offset is accomplished by selling (purchasing) a call or put identical to the put or call originally bought (sold) by the option holder or option seller. In Exercise, the option is exercised on the expiry date only if it is in-the-money either for physical delivery or for receipt of cash differential between strike price and settlement price, in case of cash settlement. In Expiration, the option holder abandons the option if it is out-of-the-money and is not profitable to him to exercise.

Q19. The Delta for put option buyer is _____

a) Positive
b) Negative
c) Zero
d) Cannot be estimated

Show Answer & Explanation

Correct Answer: b) Negative

Explanation: Delta measures the sensitivity of the option value to a given small change in the price of the underlying asset. Delta for put option buyer is negative. The value of the contract increases as the underlying price falls.

Q20. The clearing corporation computes and advises the clearing member's obligation and the clearing member makes funds available in the clearing account for the _____ and receives _____

a) funds-in, funds-out
b) pay-out, pay-in
c) pay-in, pay-out
d) funds out, funds in

Show Answer & Explanation

Correct Answer: c) pay-in, pay-out

Explanation: 'Pay in' means funds have to be paid and 'Pay out' means funds will be received by the clearing member for the trades done by him, his clients etc. Clearing banks play an important role in the smooth transfer of funds between the clearing members and clearing corporation to effect settlement of funds. The commodity exchange requires every clearing member to open a dedicated and exclusive clearing account with one of the empanelled clearing banks. The clearing corporation computes and advises the clearing member's obligation and the clearing member makes funds available in the clearing account for the pay-in and receives funds in case of a pay-out.

Q21. On 1st of July, the spot price of a commodity was Rs 2000 and its near month futures was at Rs 2400. On 15th July, the spot price moved up to Rs 2100 and the futures price has moved to Rs 2550. What has happened to the basis in this scenario?

a) The Basis has weakened
b) The Basis has strengthened
c) The Basis has become Zero
d) The Basis has remained constant

Show Answer & Explanation

Correct Answer: a) The Basis has weakened

Explanation: Basis is a measure of the difference between the spot and the futures prices. Strengthening of basis happens when basis becomes more positive or less negative and weakening of basis happens when basis becomes less positive or more negative. Basis = Spot Price - Futures Price. In the above question the Basis on 1st July was Rs. 2000 - 2400 = -400. On 15th July the basis is Rs. 2100 - 2550 = -450. The basis has become more negative from -400 to -450. So the basis has weakened.

Q22. How is the Mark-to-Market Margin calculated for carry forward futures positions from previous day?

a) By taking the difference between the closing price of a contract on that particular day and the price at which the trade was initiated
b) By taking the difference between the closing price of a contract on that particular day and its previous day's closing price
c) By taking the difference between the closing price of a contract on that particular day which is calculated as per the continuous compounding method and the price at which the trade was initiated
d) By taking the difference between the closing price in the spot market on that particular day and the price at which the trade was initiated

Show Answer & Explanation

Correct Answer: b) By taking the difference between the closing price of a contract on that particular day and its previous day's closing price

Explanation: There are two types of positions on which Mark to Market margin is calculated - 1. New Positions of that day and 2. For carry forward positions. Mark-to-market (MTM) margin is calculated on each trading day by taking the difference between the closing price of a contract on that particular day and the price at which the trade was initiated (for new positions taken during the day) or is based on the previous day's closing price (for carry forward positions from previous day).

Q23. What will be the effect of LOWER INTEREST RATES in an economy on the internationally traded commodities prices in domestic terms?

a) Lower interest rates could reduce the market prices of commodities
b) Lower interest rates could increase the market prices of commodities
c) Can increase or decrease the prices depending on the local gold prices
d) Interest rates have no effect on commodity prices

Show Answer & Explanation

Correct Answer: b) Lower interest rates could increase the market prices of commodities

Explanation: Interest rates impact the commodity prices and are the key determinants in commodity price movements. A decrease in real interest rates lowers the cost of carrying inventories, and raising commodity prices. Lower interest rates decrease the incentive to extract mine-based commodities, increase the incentives to maintain inventories, and stimulate the demand for commodity derivatives, all of which raise the prices of basic commodities.

Q24. Sumeet has taken a short position in Copper futures in the contracts expiring in April. What view does he have on the Copper future prices?

a) Sumeet is expecting the Copper prices to go up in April
b) Sumeet is expecting the Copper prices to go down in April
c) Sumeet is expecting the Copper prices to remain range bound
d) Sumeet is expecting the Copper prices to remain flat till April

Show Answer & Explanation

Correct Answer: b) Sumeet is expecting the Copper prices to go down in April

Explanation: Selling futures is often called "going short," or establishing a short position. Since he has sold the futures, which means he is expecting the Copper prices to fall so that he can buy the contract back at a lower price and make profits.

Q25. In a _____ the hedger offsets his naturally short position by buying futures contracts.

a) Long Hedge
b) Short Hedge
c) Delta Hedge
d) Riskfree Hedge

Show Answer & Explanation

Correct Answer: a) Long Hedge

Explanation: In the case of a long hedge, the hedger does not own the underlying commodity, but he needs to acquire it in the future. He can lock-in the price that he will be paying in the future by buying, or going long in futures contracts. In effect, he is already naturally short on the underlying commodity because he must buy it in future and he offsets this naturally short position by taking a long position in futures.

Q26. When a person buys 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 then this is called a

a) Long hedge transaction
b) Short hedge transaction
c) Short speculative transaction
d) Long speculative transaction

Show Answer & Explanation

Correct Answer: d) Long speculative transaction

Explanation: Taking a long position (i.e. buying) in 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 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.

Q27. The commodities futures contracts have a _____ payoff with respect to the spot price movement.

a) Horse Shoe
b) Dumb bell
c) Linear
d) Exponential

Show Answer & Explanation

Correct Answer: c) Linear

Explanation: Pay-off refers to profit or loss in a trade. The commodities futures contracts have a linear payoff. The pay-off chart implies that if the price of the underlying commodity rises, the futures' buyer makes profit and if the price of the underlying commodity falls, the futures' buyer makes losses.

Q28. Which of these value chain participants would have natural long or short position in the commodity spot market due to the nature of their business?

a) Merchandisers
b) Farmers
c) Food processors
d) All of the above

Show Answer & Explanation

Correct Answer: d) All of the above

Explanation: For any business or value chain participant, they are naturally short on raw materials and long on finished goods. It means, they gain if raw material prices reduce while they lose when raw material price increases. Similarly, on finished goods, they gain when its prices gain and they lose when its prices fall. Hence, hedgers generally hedge by buying raw materials in derivatives markets or by selling finished goods in derivatives markets or both. Hedgers include - Farmers, Merchandisers, Food processors, Exporters, Importers etc.

Q29. Mr. X instructs his broker to buy a certain number of contracts at the prevailing market price. This instruction is known as

a) a stop loss order
b) a limit order
c) a market order
d) a horizontal spread order

Show Answer & Explanation

Correct Answer: c) a market order

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

Q30. A _____ is an option strategy where the trader buys a call and a put with the same strike price and same expiry date by paying premium.

a) Long Strangle
b) Short Strangle
c) Long Straddle
d) Short Straddle

Show Answer & Explanation

Correct Answer: c) Long Straddle

Explanation: A long straddle is an option strategy where the trader buys a call and a put with the same strike price and same expiry date by paying premium. The market view is to profit from increase in volatility. (A long strangle involves the purchase of a call and a put with the same expiry date but with different strike prices.)

Q31. As per the definition of securities under Securities Contract Regulation Act 1956, which of the following does NOT fall under the definition of "Securities"?

a) Commodity Derivatives
b) Electronic Gold Receipt
c) Monsoon Derivatives
d) Deposit Receipt under SARFAESI Act

Show Answer & Explanation

Correct Answer: c) Monsoon Derivatives

Explanation: The term "securities" has been defined in the Section 2(h) of Securities Contract Regulation Act. The term 'Securities' include: Shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities; Derivative; Units or any other instrument issued by any collective investment scheme to the investors in such schemes; Security receipt as defined in clause (zg) of section 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act); Units or any other such instrument issued to the investors under any mutual fund scheme; Any certificate or instrument issued to an investor by any issuer being a special purpose distinct entity; Government securities; Such other instruments as may be declared by the Central Government to be securities; Rights or interests in securities. (Monsoon etc. has not been included in this list).

Q32. Mr. Rohan has taken a long speculative position in commodity futures. What would be the outcome for Mr. Rohan at the expiry of the contract?

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

Show Answer & Explanation

Correct Answer: b) Mr. Rohan incurs a loss, if the price of futures contract decreases

Explanation: Long speculators are those who buy first and expect the price to increase from current level. Taking a long position (i.e. buying) in 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 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.

Q33. Which of these does NOT directly relate to KYC and anti-money laundering control procedures?

a) Position limits violation
b) Financial Intelligence Unit
c) In-person verification
d) Suspicious Transaction Reporting

Show Answer & Explanation

Correct Answer: a) Position limits violation

Explanation: Client level position limits and member level position limits are set by the Exchange to avoid concentration risk and market manipulation by a trading member or group acting in concert. Its not a part of KYC and anti-money laundering control procedures/laws.

Q34. In India, deep in the money commodity 'call options on futures' 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

Show Answer & Explanation

Correct Answer: b) Long position in the underlying commodity futures

Explanation: Commodity options in India devolve into Commodity Futures. That means, buyers of 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.

Q35. A Bull Spread is considered as a type of

a) Inter commodity spread
b) Intra commodity spread
c) Arbitrage spread
d) Reverse cash and carry arbitrage

Show Answer & Explanation

Correct Answer: b) Intra commodity spread

Explanation: An intra-commodity spread is made up of a long position in futures contract and a short position in another month contract of the same underlying or another contract of the same commodity with different lot size. In a bull spread, the investor buys a lower strike and sells the higher strike of the same commodity. It attempts to profit from the directional movement in the underlying commodity. (An inter commodity spread is made up of a long position in one commodity and a short position in a different but economically related commodity).

Q36. _____ is a destination based tax on consumption of goods and services which is levied at all stages right from manufacture up to final consumption with credit of taxes paid at previous stages available as setoff.

a) Commodities Transaction Tax
b) Income Tax
c) Goods and Services Tax
d) Securities Transaction Tax

Show Answer & Explanation

Correct Answer: c) Goods and Services Tax

Explanation: Goods and Services Tax (GST) is a destination based tax on consumption of goods and services which is levied at all stages right from manufacture up to final consumption with credit of taxes paid at previous stages available as setoff. In other words, only value addition will be taxed.

Q37. The Theoretical futures price of the futures contract =

a) Spot price - Cost of carry
b) Spot price + Cost of carry
c) Spot price - Cost of carry
d) Spot price / Cost of carry

Show Answer & Explanation

Correct Answer: b) Spot price + Cost of carry

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

Q38. Which of the following is true?

a) Index Futures are based on underlying which is a Futures devolving on spot commodity
b) Index Futures are based on underlying which is a continuous series based on Commodity Futures
c) Commodity Indices are based on underlying which devolves on commodity Futures
d) Index is a derivative trading product

Show Answer & Explanation

Correct Answer: b) Index Futures are based on underlying which is a continuous series based on Commodity Futures

Explanation: Commodity indices are different from equity indices as commodity indices in India are constructed from futures prices of commodities instead of the underlying spot prices of the commodities.

Q39. From the options given below, identify the term which is not related to commodity derivatives trading?

a) Limit Order
b) Maximum Order Quantity
c) Stop Loss Order
d) Minimum Support Price

Show Answer & Explanation

Correct Answer: d) Minimum Support Price

Explanation: Minimum support price is not associated with commodities derivatives trading. Minimum Support Price (MSP) is declared by the Government for its procurement of agricultural commodities like Wheat, Maize etc.

Q40. A spread strategy which is implemented by buying and selling options of different strike prices and different expiry months is known as

a) Horizontal spreads
b) Directional spreads
c) Diagonal spreads
d) Vertical spreads

Show Answer & Explanation

Correct Answer: c) Diagonal spreads

Explanation: Diagonal spreads attempt to profit from market view and changes in volatility. Diagonal spreads are implemented by buying and selling options with different strike prices and different expiry months.

Q41. Following the Price-Time priority in order execution, which of these changes in an order will lead to its later execution?

a) When the Sell order price is reduced
b) When the Buy order price is increased
c) When the Buy order price is reduced
d) When the Stop-Loss level is changed

Show Answer & Explanation

Correct Answer: c) When the Buy order price is reduced

Explanation: The order matching on an Exchange is done on a price-time priority basis. Highest priced buy orders and lowest priced sell orders are matched first for trade, after which next highest buy order or next lowest sell order comes up for trade match. It indirectly means that reducing buy order limit will delay execution while increasing buy order price will speed-up its matching for trade. For Eg. If the market price of an commodity is Rs. 65 and there is a buy order at Rs 60. If this price of buy order is reduced from Rs. 60 to Rs. 55, the order execution will delayed until the price falls to Rs. 55.

Q42. What is the difference between a Stop Loss order and a Limit order?

a) Basically, a Stop loss level is just trigger for sending order while a Limit order is already sent
b) For a Limit order to be executed, a Stop loss triggers is to be set
c) Basically, a Limit loss level is just trigger for sending order while Stop Loss orders are already sent
d) Both, Stop Loss order and Limit order act similarly

Show Answer & Explanation

Correct Answer: a) Basically, a Stop loss level is just trigger for sending order while a Limit order is already sent

Explanation: Limit order: In a limit order, the buyer or seller specifies the price at which the trade should be executed. It is sent in the system and is either executed immediately or later or remains in the system till the end of day if not executed. A stop loss order is generally placed after entering into a trade. This is used in order to limit a probable loss if the price moves in the opposite direction. The stop loss level is a trigger for sending the stop loss order into the system.

Q43. Which of these are Soft Commodities?

a) Non-Agricultural commodities
b) Agricultural commodities which are perishable
c) Durable commodities from mining activities
d) Durable commodities from industrial processing

Show Answer & Explanation

Correct Answer: b) Agricultural commodities which are perishable

Explanation: There are two main types of commodities that trade in the spot and derivatives markets. Soft commodities: These are the perishable agricultural products such as corn, wheat, coffee, cocoa, sugar, soybean, etc. Hard commodities: These are natural resources that are mined or processed such as the crude oil, gold, silver, etc.

Q44. In a _____, one party known as the "fixed price payer" and the other party known is as the 'floating price payer'.

a) Swap contract
b) Option contract
c) Futures contract
d) Forwards contract

Show Answer & Explanation

Correct Answer: a) Swap contract

Explanation: Swaps are agreements between two counterparties to exchange a series of cash payments for a stated period of time. The periodic payments can be charged on fixed or floating price, depending on the terms of the contract. One of the commonly used commodity swaps is "fixed-for-floating swaps". In a "fixed-for-floating commodity swap", one party known as the "fixed price payer" makes periodic payments based on a fixed price for a specified commodity that is agreed upon at the execution of the swap, while the other party known as the "floating price payer" makes payments based on a floating price for such commodity that is reset periodically.

Q45. Identify the CORRECT statement with respect to the premiums of 'At the money' Call and Put option contracts.

a) The premiums on Call options will be higher than that of Put options
b) The premiums on Call options will be lower than that of Put options
c) The premiums on Call options and Put options will be same
d) The premiums on Call options and Put options will be zero

Show Answer & Explanation

Correct Answer: c) The premiums on Call options and Put options will be same

Explanation: Normally for At-TheMoney Options, intrinsic value is zero (or in practice, it is a very small amount), while option price mainly comprises of Time value. Both Call and Put At the Money will have the same time value. Therefore, generally, At the Money Call and Put options will have same or very similar option premiums.

Q46. Which of these is not represented in terms of price?

a) Tick size
b) Average daily turnover value
c) Auction price
d) Maximum order size

Show Answer & Explanation

Correct Answer: d) Maximum order size

Explanation: Maximum order size is represented in terms of quantity. For eg. The Maximum order size for Gold futures is 10 Kg.

Q47. Which of the following Act was replaced when FMC was merged with SEBI?

a) Forward Contracts (Regulation) Act
b) APMC Act
c) Foreign Exchange (Regulation) Act
d) Securities Contract (Regulation) Act

Show Answer & Explanation

Correct Answer: a) Forward Contracts (Regulation) Act

Explanation: After the Forward Contracts (Regulation) Act, 1952 (FCRA) was repealed by the Government, SEBI took over the regulation of the commodity derivatives market on September 28, 2015 as a result of merger of FMC (Forward Markets Commission) with SEBI.

Q48. A commodity Put option has a strike price of Rs 1500 and the current market price of the underlying commodity futures is Rs 1400 and the option premium is Rs 250. What is its intrinsic value?

a) Rs. 250
b) Rs. 50
c) Rs. 150
d) Rs. 100

Show Answer & Explanation

Correct Answer: d) Rs. 100

Explanation: A put option is said to be In the money (ITM) when current market price is lower than strike price. In the above question, the market price (Rs 1400) is lower than the strike price (Rs 1500). So it's a In the Money Put option. For 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 = 1500 - 1400 = 100.

Q49. _____ is NOT a Commodity based index.

a) Dow Jones AIG Commodities Index
b) Rogers International Commodities Index
c) Dow Jones Industrial Average
d) Goldman Sachs Commodities Index

Show Answer & Explanation

Correct Answer: c) Dow Jones Industrial Average

Explanation: The Dow Jones Industrial Average (DJIA) is a widely-watched benchmark index in the U.S. for blue-chip stocks. It is a stock index and not a commodity index. The Dow Jones-AIG Commodity Index is a benchmark index for the commodities markets that is composed of futures contracts on physical commodities and was introduced in 1998. The Rogers International Commodity Index (RICI) is a broad index of commodity futures designed by Jim Rogers in 1996/1997. The S&P GSCI (formerly the Goldman Sachs Commodity Index) is a tradable index to market participants of the Chicago Mercantile Exchange.

Q50. The spot price of a commodity is Rs. 20000. The time period is 180 days. Interest rate is 7% and storage cost is 1%. What will be the theoretical future price?

a) Rs. 20520.85
b) Rs. 21236.27
c) Rs. 20789.03
d) Rs. 21628.55

Show Answer & Explanation

Correct Answer: c) Rs. 20789.03

Explanation: Future price = Spot price + Cost of Carry. Here the cost of carry will have two components - Interest cost for 180 days and storage cost for 180 days.

Interest cost = 20000 @ 7% = 1400.

 For 180 days the interest cost will be 1400 / 365 * 180 = 690.40. 

Storage cost = 20000 @ 1% = 200.

 For 180 days the storage cost will be = 200 / 365 * 180 = 98.63. 

So the Total Cost of Carry will be 690.40 + 98.63 = 789.03. 

Future price = Spot price + Cost of Carry. Future price = 20000 + 789.03 = Rs. 20789.03.

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Dhaval Visariya

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

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