Commodity Derivatives Mock Test 7 (Complete Practice Set)

Q 1. Assuming all other factors remains constant, which of the following statement is TRUE regarding the relation between interest rates and option premium?

A) Reduction in interest rates will result in a decrease in the value of both call option and put option
B) Reduction in interest rates will result in an increase in the value of both call option and put option
C) Reduction in interest rates increases the value of a call option and decreases the value of a put option
D) Reduction in interest rates decreases the value of a call option and increases the value of a put option

View Answer & Explanation

✓ CORRECT ANSWER: Reduction in interest rates decreases the value of a call option and increases the value of a put option

Explanation: Reduction in interest rate increases put option price but reduces call option price. Lower interest rate leads to lower cost of finance of paying the call option premium, so the value of call option decreases. For put options, the opposite holds true, that is, the lower the interest rates the higher the put option price.

Q 2. As per the Guidance Note of ICAI, ______ model is applied when hedging the risk of changes in highly probable future cash flows or a firm commitment in a foreign currency.

A) Cash flow hedge accounting
B) Fair value hedge accounting
C) Book value hedge accounting
D) Intrinsic value hedge accounting

View Answer & Explanation

✓ CORRECT ANSWER: Cash flow hedge accounting

Explanation: Types of hedge accounting - The Guidance Note of ICAI recognizes the following types of hedging: The fair value hedge accounting model is applied when hedging the risk of a fair value change of assets and liabilities already recognized in the balance sheet, or a firm commitment that is not yet recognized. The cash flow hedge accounting model is applied when hedging the risk of changes in highly probable future cash flows or a firm commitment in a foreign currency.

Q 3. For options on financial assets, which is the price for which the underlying security can be sold by the option buyer, by exercising the put option?

A) Negotiated Price
B) Spot Price
C) Strike Price
D) Bid Price

View Answer & Explanation

✓ CORRECT ANSWER: Strike Price

Explanation: Strike price is the price for which the underlying security may be purchased (in case of call) or sold (in case of put) by the option holder, by exercising the option.

Q 4. Due to seasonality factors in many agricultural commodities, we sometimes see a ______ market in such agricultural commodities.

A) Backwardation
B) Contango
C) Convergence
D) Divergence

View Answer & Explanation

✓ CORRECT ANSWER: Backwardation

Explanation: If futures price is lower than spot price of an asset, market participants may expect the spot price to come down in future. This expectedly falling market is called "Backwardation market". This backwardation inspite of cost-of-carry arises due to seasonality factors in commodities especially in agricultural products. For e.g. during sowing season, spot supplies are less while it increases during harvesting month which will come after around 3 months. Hence, spot prices are expected to be lower during harvesting months (i.e., 3 months later) than the present spot price (i.e., while sowing).

Q 5. During the sowing season, the prices of agricultural commodities generally ______

A) are unpredictable
B) remain unchanged
C) tend to rise
D) tend to fall

View Answer & Explanation

✓ CORRECT ANSWER: tend to rise

Explanation: Most commodities follow a certain schedule of production cycle, which impacts the price trend. For example, in agricultural commodities, during the harvesting season, due to an increased supply, prices tend to come down, whereas during the sowing season the overall supply (availability) remains lower, which leads to an increase in prices.

Q 6. The Strike Price of a commodity call option is Rs. 2000. The current market price of the underlying commodity futures is Rs. 1900. The option premium is Rs. 200. Calculate the Intrinsic Value from this data.

A) Rs. 200
B) Rs. 100
C) Rs. 300
D) Zero

View Answer & Explanation

✓ CORRECT ANSWER: Zero

Explanation: Intrinsic Value = Market price - Strike price. 1900 - 2000 = -100. Intrinsic value can never be negative, so it will be considered as Zero. A Call Option is 'In the Money' when Market Price is greater than Strike Price. Its 'At the Money' when Market Price is equal to Strike Price and its 'Out of the Money' when Market Price is less than Strike Price. Only an 'In the Money' ie. a profitable option will have an intrinsic value. Otherwise it will have only time value. In the above question, the market price (Rs 1900) is below the Strike price (Rs 2000). So this is an Out of the Money Call Option and will have NIL intrinsic value. The option premium of Rs 200 is only the time value.

Q 7. What is 'Delivery Supply' when seen with reference to construction of a Commodity Index?

A) Year end closing stock
B) Value of commodity stored in FCI godowns
C) Production plus Import
D) Import minus Export

View Answer & Explanation

✓ CORRECT ANSWER: Production plus Import

Explanation: Weights of commodities in the index are decided by the Exchanges, based on their scoring on production value and liquidity value. Production Value is average value of deliverable supply in the past 5 financial years. Liquidity Value is the average trading volume of its futures in the last 12 months. Deliverable supply is Production plus Import.

Q 8. ______ is the price at which Option contracts of a specific commodity are settled in case of cash settled contracts.

A) RBI Settlement Rate
B) Due Date Rate
C) Delivery free date
D) SEBI decided rate

View Answer & Explanation

✓ CORRECT ANSWER: Due Date Rate

Explanation: In the case of a both option, the delivery will be executed only when both buyers and sellers agree to take/give delivery. If they do not give intention for delivery, such open positions are cash settled at the Due Date Rate (DDR). Due date rate is the rate at which contracts is settled by the exchange. Usually it is the average of spot prices (polled) in last few days of Futures contract which is defined under the contract specification of the exchange. It is also referred as final settlement price of the contract.

Q 9. Which margin is NOT applicable for the sellers of Commodity Futures, Option on goods, Option on futures and index futures?

A) Pre-Expiry Margin
B) Devolvement Margin
C) Delivery Period Margin
D) Initial Margin

View Answer & Explanation

✓ CORRECT ANSWER: Delivery Period Margin

Explanation: Index Futures and Index Options are cash settled and hence, delivery period margins do not apply to it. Option on Commodity Futures devolve into Commodity Futures before those futures go into staggered delivery period. Thus, delivery period margin does not apply to Options on Futures.

Q 10. A trader has a original SELL position. In a Stop Loss purchase order against this original sell position, stop loss trigger acts as ______

A) the minimum price level to buy
B) the maximum price level to buy
C) selling at exactly stop loss trigger
D) buying at exactly stop loss trigger

View Answer & Explanation

✓ CORRECT ANSWER: the maximum price level to buy

Explanation: A Stop Loss order has two prices ie. Trigger Price and Limit Price. For eg. A trader has sold a commodity at Rs 96 and wants to restrict his losses to Rs 5. For this, he will use a Stop Loss purchase order, the trigger price will be Rs 100 and the Limit price will be Rs 101. Which means if the price rises and reaches Rs 100, it will trigger the Buy Order and the commodity will be bought till Rs 101. Thus, stop loss trigger acts as the maximum price level to buy.

Q 11. The relationship between Futures and Spot Price is logically explained by the formula (F: Futures price, S: Spot price, r: Cost of financing in percentage, n: time till the expiry of the contract, e = A Constant number)

A) F = S * e^(r * n)
B) S = F * e^r
C) F = S * e^r
D) S = F * e^(r * n)

View Answer & Explanation

✓ CORRECT ANSWER: F = S * e^(r * n)

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), e = 2.71828 (A Constant number used in continuous compounding in mathematics).

Q 12. The Delta for put option SELLER is ______

A) Negative
B) Positive
C) Zero
D) Infinite

View Answer & Explanation

✓ CORRECT ANSWER: Positive

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. This is similar to a short or 'bear' position in the underlying asset. Delta for put option seller will be same in magnitude but with the opposite sign (positive).

Q 13. Once obligations for delivery are assigned, seller will raise the bill on buyer inclusive of appropriate GST on ______

A) Spot Polling Price
B) Final Settlement Price
C) Mart to Market (MTM) Price
D) Traded price of derivative contract

View Answer & Explanation

✓ CORRECT ANSWER: 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. Even though the trades might have happened at some other traded rates on trade date, the bills are raised at Final Settlement Price. The difference between these two rates was already adjusted earlier during daily MTM obligations.

Q 14. Identify which of these is a Commodity Futures?

A) Gold Futures
B) Stock Futures
C) Currency Futures
D) Bond Futures

View Answer & Explanation

✓ CORRECT ANSWER: Gold Futures

Explanation: Stock, Currency and Bond Futures are all financial futures. Gold Futures is a commodity futures.

Q 15. In the ______, goods were exchanged between two parties with matching and opposite needs

A) Bullion market
B) OTC market
C) Monetary system
D) Barter system

View Answer & Explanation

✓ CORRECT ANSWER: Barter system

Explanation: In barter system, goods were exchanged between two parties with matching and opposite needs (for example, bags of wheat were exchanged for cattle).

Q 16. For Options on goods, if the Final Settlement Price (FSP) is exactly in between two strike prices then how many strike prices are considered as Close-to-Money (CTM) options?

A) 6
B) 8
C) 4
D) 10

View Answer & Explanation

✓ CORRECT ANSWER: 6

Explanation: if FSP of option falls exactly mid-way between two strike prices, then there is no ATM option. In that case, three contracts of strike price above FSP and three contracts of strike price below FSP are considered as CTM options (i.e., total of 6 strike prices).

Q 17. Among various commodity indices of the world, which of these is not a commodity index?

A) S&P GSCI Commodity Index
B) Bloomberg Commodity Index
C) Russell 1000 Index
D) LME Commodity Index

View Answer & Explanation

✓ CORRECT ANSWER: Russell 1000 Index

Explanation: In Commodity Exchanges globally, there are various commodity indices. A few of these are: S&P World Commodity Index, CME Commodity Index, Bloomberg Commodity Index (BCOM), S&P GSCI Commodity Index at Chicago Mercantile Exchange, LME Commodity Index etc. Russell 1000 index is not a commodity index and it represents the top 1000 companies by market capitalisation in the United States.

Q 18. Till what time is the trading is allowed in Index futures contracts on expiry day?

A) 5.00 PM
B) 6.00 PM
C) As per the regular trading hours of all the Exchange contracts
D) As per the regular trading hours of Futures of the index's constituents

View Answer & Explanation

✓ CORRECT ANSWER: 5.00 PM

Explanation: Index Futures are like any other normal Futures with cash settlement without delivery and payment obligations. On Expiry day of Index Futures, Final Settlement Price (FSP) of index is determined after 5:00 pm. It is based on index calculation on weighted average traded price of constituents' future contract during 4:00 pm to 5:00 pm.

Q 19. In case a rebalancing of commodity index is proposed, then the new proposed rebalanced index must be disclosed atleast ______ before actual rebalancing date.

A) one month
B) two months
C) three months
D) 15 days

View Answer & Explanation

✓ CORRECT ANSWER: three months

Explanation: Once Index is constructed with certain weights of each commodity futures, those weights can remain fixed for one year. Index weights and constituents must be rebalanced atleast once in a year. In case of rebalancing is proposed, new proposed rebalanced index should be disclosed atleast 3 months before actual rebalancing date.

Q 20. Which of the following happen together for option on Goods and Commodity Futures?

A) Exercise Window
B) Devolvement schedule
C) Settlement schedule
D) Launch date

View Answer & Explanation

✓ CORRECT ANSWER: Settlement schedule

Explanation: On expiry of Options, Final Settlement Price (FSP) is determined which is same as Daily Settlement Price (DSP) of respective Futures. The difference between FSP and Strike price is considered MTM gain / loss of the players which is received / credited on T+1 basis i.e., on the next morning. Exercise window is opened to determine which options are going to be exercised and devolved on Futures.

Q 21. What is the criteria for admitting a person as a member of the Exchange?

A) Track record
B) Infrastructure facilities
C) Net worth
D) All of the above

View Answer & Explanation

✓ CORRECT ANSWER: All of the above

Explanation: Commodity Exchanges prescribe different eligibility criterion for different classes of membership. While admitting members, the commodity exchanges generally take into account specific factors such as corporate structure, capital adequacy, track record, education, experience, infrastructure set-up, manpower, etc. to ensure that the members are equipped to offer quality broking services so as to build and sustain confidence among investors in the Exchange's operations.

Q 22. In ______ markets, traders sell goods such as rice for immediate delivery against payment in cash.

A) Commodity Options
B) Commodity Forwards
C) Commodity Spot
D) Commodity Futures

View Answer & Explanation

✓ CORRECT ANSWER: Commodity Spot

Explanation: In Commodity spot markets, the counterparties meet at common places where goods are brought for immediate sale and delivery at the market price decided by the demand and supply forces. Thus in Commodity spot markets, traders sell goods such as rice, wheat etc. for immediate delivery against cash.

Q 23. Commodity Transaction Tax (CTT) on commodity options is charged as a percentage of ______

A) the strike price
B) the option premium
C) the final settlement price
D) the devolvement price

View Answer & Explanation

✓ CORRECT ANSWER: the option premium

Explanation: CTT is levied as an percent on the option premium and is borne by the seller of options. (In case the option is exercised, CTT is levied on the settlement price)

Q 24. Margin period of risk (MPOR) is determined in terms of ______ by the Exchange.

A) Rupees (amount)
B) Number of days
C) Quantity in lot size
D) Quantity in trading units

View Answer & Explanation

✓ CORRECT ANSWER: Number of days

Explanation: MPOR is Margin Period of Risk. This is a period in terms of number of days, for which settlement risk is required to be covered by collecting margins.

Q 25. Indices are used for comparing portfolio return with return of ______ to see how portfolio performed vis-à-vis markets.

A) Bank Rate
B) Benchmark
C) GDP Rate
D) Inflation

View Answer & Explanation

✓ CORRECT ANSWER: Benchmark

Explanation: In India there have been various equity market indices (like Nifty, Sensex including market cap related and sector related indices). There have been debt market indices as well (such as I-Bex, Composite Bond Index, etc). These indices serve as comparison of portfolios and their returns with a benchmark to see how much deviation portfolios are taking to earn additional return above markets.

Q 26. For Index Futures, Commodities Transaction Tax (CTT) is levied on ______

A) Buyer of index futures while trading
B) Seller of index futures while trading
C) Buyer of index futures while devolvement
D) Seller of index futures while devolvement

View Answer & Explanation

✓ CORRECT ANSWER: Seller of index futures while trading

Explanation: CTT is determined at the end of each trading day. For each client code, all the sell transactions for a trading day shall be aggregated at contract level. CTT is levied on sellers of Futures and Options.

Q 27. All the exchanges need to disclose which of the following information regarding Spot Price Polling?

A) Mechanism of spot prices polling
B) Whether the spot price polling has been outsourced to any agency and if so, the details thereof
C) Criteria for selection of spot polling participants
D) All of the above

View Answer & Explanation

✓ CORRECT ANSWER: All of the above

Explanation: The exchanges need spot price information on a daily basis to be used as the basis for the commodity futures contracts traded on their platforms. As per the regulatory guidelines, all the exchanges need to disclose following information regarding spot price polling of the commodities: Details of the contract; Mechanism of spot prices polling; How spot prices are arrived at; Whether these prices include or exclude taxes and other levies; Whether the spot price polling has been outsourced to any agency and if so, the details thereof; Criteria for selection of these participants; Any other information that exchange may consider useful for improving transparency in arriving at spot prices.

Q 28. Which Act mandates that in order to be recognized as a stock exchange in India has to comply with conditions prescribed by SEBI.

A) Forward Contracts (Regulation) Act, 1952
B) Stock Exchanges and Clearing Corporation) Regulations, 2012
C) Commodity Exchange (Regulation) Act, 1986
D) The Securities Contracts (Regulation) Act, 1956

View Answer & Explanation

✓ CORRECT ANSWER: The Securities Contracts (Regulation) Act, 1956

Explanation: The Securities Contracts (Regulation) Act, 1956 (SCRA), provides for direct and indirect control of virtually all aspects of securities trading and the running of stock exchanges. SCRA gives SEBI the jurisdiction over stock exchanges through recognition and supervision. It also gives SEBI the jurisdiction over contracts in securities and listing of securities on stock exchanges.

Q 29. Future Price can be calculated using the equation F = S + C - Y. What does 'Y' stand for?

A) Yield to Maturity
B) Spot Price
C) Convenience Yield
D) Storage Cost

View Answer & Explanation

✓ CORRECT ANSWER: Convenience Yield

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

Q 30. SPAN system (Standard Portfolio Analysis of Risk) of margin calculations relates to ______

A) Calculation of margin including Futures positions
B) Calculation of margin including Options positions
C) Calculation of margin including Spot positions
D) Calculation of margin including Spot and Futures positions

View Answer & Explanation

✓ CORRECT ANSWER: Calculation of margin including Options positions

Explanation: SPAN scenarios take into account possible changes in the underlying asset's price and changes in the underlying asset's price volatility, time to expiry etc.

Q 31. Custodians are allowed to offer their services only for ______ for the purpose of Gold ETF.

A) Bullion index units
B) Gold Futures
C) Gold Options
D) Gold

View Answer & Explanation

✓ CORRECT ANSWER: Gold

Explanation: Mutual funds are currently not allowed to invest in physical commodities (except Gold) as this requires custodians to be geared up to take up commodity level activities. As of now, custodians are allowed to offer their services only for Gold for the purpose of Gold ETF. (Gold Exchange Traded Funds)

Q 32. The future price of an underlying asset is lower than its spot price. This is known as ______

A) Divergence
B) Convergence
C) Backwardation
D) Contango

View Answer & Explanation

✓ CORRECT ANSWER: Backwardation

Explanation: When the futures price is less than the spot price, it is known as backwardation market.

Q 33. On what basis is the order matching done in an Indian derivative exchange?

A) Time - Price priority
B) Price - Quantity priority
C) Price-Time priority
D) Time - Speed priority

View Answer & Explanation

✓ CORRECT ANSWER: Price-Time priority

Explanation: The order matching is done on a price-time priority basis. This means that all the orders received are sorted on 'best-price' basis i.e., orders are first ranked according to their prices and similar priced orders are then sorted on a time-priority basis. Highest buy orders and lowest sell orders are matched first for trade, after which next highest buy order or next lowest sell order comes up for trade match.

Q 34. Which of these is not represented in terms of Rupees?

A) Maximum order size
B) Daily price limit
C) Spot polling price
D) Final settlement price

View Answer & Explanation

✓ CORRECT ANSWER: Maximum order size

Explanation: Maximum order size is represented as a quantity. For eg. The maximum order size for Gold futures is 10 kgs.

Q 35. The Minimum Support Price (MSP) offered by the Government to the farmers is similar to ______ (from the perspective of farmers)

A) Buying a Call Option
B) Buying a Put Option
C) Selling a Call Option
D) Selling a Put Option

View Answer & Explanation

✓ CORRECT ANSWER: Buying a Put Option

Explanation: Minimum Support Price (MSP) declared by the Government for its procurement can be considered as a put option for the farmers. These are the guaranteed procurement prices by the Government for its procurement from the farmers. For eg For Maize Kharif crop, if MSP = Rs 1,850 per quintal and Market price = Rs 1,350 per quintal: Thus, farmers get a price protection (put option buy position) at a price of Rs 1,850. If the market price continues to remain far below MSP, farmers will sell the farm output post harvesting to Government at Rs 1,850 instead of selling it in the market at Rs 1,350. The government, like a put option seller, has to take delivery of purchased crop at Rs 1,850 instead of buying from market at Rs 1,350. By chance, actual market price goes above MSP (say, to Rs 2,000, which is greater than the MSP), then farmer may not exercise this option of selling to government but may sell in the market directly.

Q 36. Identify the true statement with respect to 'Trading Unit' and 'Lot Size'.

A) Both Trading unit and Lot Size are same and indicate quantity for quoted price
B) Both Trading unit and Lot Size are same and indicate minimum quantity to be traded
C) Trading unit means the quantity for quoted price whereas Lot size means the minimum quantity to be traded
D) Lot size means the quantity for quoted price whereas Trading Lot means minimum quantity to be traded

View Answer & Explanation

✓ CORRECT ANSWER: Trading unit means the quantity for quoted price whereas Lot size means the minimum quantity to be traded

Explanation: Trading Unit: It is the quantity for which trading price is shown. For example, price for 10 grams of Gold. Lot size: It is the minimum quantity which will go for trading or delivery (eg: Silver 30 Kilos lot, Wheat 10 MT lot, etc.). Lot size is equal to or higher than minimum trading unit.

Q 37. Identify the TRUE statement with respect to 'Tick Size'.

A) High tick size benefits both Retail traders as well as Algo traders
B) Low tick size benefits both Retail traders as well as Algo traders
C) High tick size benefits Algo traders while low tick size benefits Hedgers
D) High tick size benefits Retail traders while low tick size benefits Algo traders

View Answer & Explanation

✓ CORRECT ANSWER: High tick size benefits Algo traders while low tick size benefits Hedgers

Explanation: Tick size: It is the minimum price movement in terms of change in price or change in quotation for order. Tick size is significant for Algo traders as well as Hedgers / Speculators. In most cases, higher tick size benefits Algo traders while lower tick size benefits hedgers.

Q 38. Client level limits and member level limits are set by the exchange to avoid ______ and market manipulation by a trading member or group acting in concert.

A) Herd mentality Risk
B) Credit Risk
C) Concentration Risk
D) Counterparty Risk

View Answer & Explanation

✓ CORRECT ANSWER: Concentration Risk

Explanation: Client level limits and member level limits are set by the exchange to avoid concentration risk and market manipulation by a trading member or group acting in concert. Position Limits are set at the client level and member level to prevent any members and clients from building up large position on the buy side or sell side to manipulate short-term price movements to their advantage.

Q 39. After exercising Put Options on goods, the option buyer will ______

A) Add premium to sells proceeds
B) Write off premium as expenses
C) Account premium as income
D) Reduce premium from sales proceeds of goods

View Answer & Explanation

✓ CORRECT ANSWER: Reduce premium from sales proceeds of goods

Explanation: By buying a put option on goods, the put option buyer has created a hedge to protect any downward fall in the price of the goods. For this he has to pay a premium. So, when he sells the goods, he has to reduce the premium paid from the sale proceeds to get the correct picture.

Q 40. In the context of Commodity Index construction by the exchanges, 'Liquidity Value' is ______

A) the average trading volume of its futures in the last 3 months
B) the average trading volume of its futures in the last 6 months
C) the average trading volume of its futures in the last 12 months
D) the average trading volume of its futures in the last 15 months

View Answer & Explanation

✓ CORRECT ANSWER: the average trading volume of its futures in the last 12 months

Q 41. Which of these document(s) is/are part of the new client registration by a broker?

A) Risk Disclosure document
B) Know your client (KYC) form of the client
C) Client-Member constituent agreement
D) All of the above

View Answer & Explanation

✓ CORRECT ANSWER: All of the above

Explanation: Client registration documents are to be executed with any new client before allowing the client to start trading in commodity exchanges. Documents obtained from the clients would include: "Know your client (KYC) form", execution of Client-Member constituent agreement (MCA) and Risk Disclosure document (RDD).

Q 42. A commodity's ______ is the benefit in rupee term that a user/producer realizes for carrying sufficient stock of physical goods over and above his immediate needs.

A) Delta Yield
B) Convenience Yield
C) Production Yield
D) Spot Yield

View Answer & Explanation

✓ CORRECT ANSWER: Convenience Yield

Explanation: Convenience yield indicates the benefit of owning a commodity rather than buying a futures contract on that commodity. Producers may face losses, if they do not have enough inventory at all times for uninterrupted production. Therefore, a commodity's convenience yield is the benefit in rupee term that a user realizes for carrying sufficient stock of physical goods over and above his immediate needs.

Q 43. What does KYC and KYD refer to?

A) Know Your Customer and Know Your Depositor
B) Know Your Customer and Know Your Distributor
C) Know Your Client and Know Your Depositor
D) Know Your Client and Know Your Distributor

View Answer & Explanation

✓ CORRECT ANSWER: Know Your Customer and Know Your Depositor

Explanation: A Broker while onboarding a client should satisfy himself about Know your Customer (KYC) norms and KYC documents of the client. Warehouse service providers have to comply with Know Your Depositor (KYD) Policy to be able to identify the depositor of the goods deposited in registered warehouses.

Q 44. Which of these is NOT a type of margin deposited with Exchange?

A) Delivery Margin
B) Special Margin
C) Pre-Expiry Margin
D) Crush Margin

View Answer & Explanation

✓ CORRECT ANSWER: Crush Margin

Explanation: A Crush Spread is an option trading strategy used in the Soyabean futures market. The general term for this is Crush Margin or Gross processing margin.

Q 45. 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 Put option with higher strike price would have a higher option premium
B) Put options of all strikes would have the same option premium
C) A Put option with lower strike price would have a higher option premium
D) At any given strike price, the call option and the put option would always have the same premium

View Answer & Explanation

✓ CORRECT ANSWER: A Put option with higher strike price would have a higher option premium

Explanation: 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 higher strike price would have a higher option premium.

Q 46. Portfolio Management Service who participate in commodity derivatives cannot have ______ as their clients.

A) Foreign Portfolio Investors
B) Individuals without Aadhar Card
C) High Net worth individuals
D) All of the above

View Answer & Explanation

✓ CORRECT ANSWER: Foreign Portfolio Investors

Explanation: SEBI allowed Portfolio Management Services (PMS) to take exposure in the commodity derivatives. This is subject to condition of agreement with the client and adequate risk disclosures. As Foreign Portfolio Investors (FPIs) are not allowed to have exposure in commodity derivatives, no onboarding of FPIs in these schemes of PMS is allowed.

Q 47. Mr. Harshad sold a Gold PUT option of strike price Rs.45000 (per 10 grams) for a premium of Rs. 250 (per 10 grams). The lot size is 1 Kg. This option expired at a settlement price of Rs. 44000 per 10 grams. Calculate the profit or loss to Mr. Harshad on this position. (Do not consider any tax or transaction costs)

A) Profit of Rs 75000
B) Loss of Rs 75000
C) Profit of Rs 25000
D) Loss of Rs 25000

View Answer & Explanation

✓ CORRECT ANSWER: Loss of Rs 75000

Explanation: Selling a PUT option means the view is bullish (price to rise). Mr. Harshad has sold a PUT option but the price has fallen from Rs.45000 to Rs. 44000. This means there is a loss of Rs. 1000. He has however earned a premium of Rs.250. So his net loss is Rs. 1000 - Rs. 250 = Rs. 750. Rs 750 is the loss for 10 grams. So for 1 kg or 1000 grams (lot size) the loss is (1000 x 750 / 10) = Rs 75000 Loss.

Q 48. For Option on Futures and Option on Goods having the same terms and conditions, which statement is true?

A) Option on Goods may be less volatile than Options on Futures and hence, Option on goods may be costlier
B) Option on Goods may be less volatile than Options on Futures and hence, Option on goods may be cheaper
C) Option on Goods may be more volatile than Options on Futures and hence, Option on goods may be costlier
D) Option on Goods may be more volatile than Options on Futures and hence, Options on goods may be cheaper

View Answer & Explanation

✓ CORRECT ANSWER: Option on Goods may be more volatile than Options on Futures and hence, Option on goods may be costlier

Explanation: Option on goods may be costlier than Option on Futures in relatively shallow markets and one of the reason is Futures are part of organized markets at Exchanges and have Daily Price Limits (DPL) i.e., circuit breakers which puts a limit on volatility. On the other hand, spot markets in commodity is not centralized and do not have DPL, which may lead to higher volatility.

Q 49. An option on goods contract has following benefit against option on futures:

A) Option on goods are free from pitfalls of goods delivery and GST related procedures as applicable in the case of Options on futures
B) Option on Goods is more realistic pricing as buyers and sellers of goods may price it based on consideration of delivery and payment obligations rather than depending upon speculative demand supply
C) Option on goods are less volatile
D) Option on goods do not have devolvement margin

View Answer & Explanation

✓ CORRECT ANSWER: Option on Goods is more realistic pricing as buyers and sellers of goods may price it based on consideration of delivery and payment obligations rather than depending upon speculative demand supply

Explanation: Options on Goods have one specific advantage against Option on Futures: as futures contracts themselves being used as tools in lot of speculative trades, they may sometime lead to inconsistent price movements.

Q 50. Which of the following ratios are as per the regulatory requirements for production related weights and liquidity related weights while constructing index?

A) Minimum 25% each factor
B) Minimum 40% each factor
C) Maximum 60% each factor
D) 50: 50 i.e., equal weight

View Answer & Explanation

✓ CORRECT ANSWER: Minimum 25% each factor

Explanation: Weights of commodities in the index are decided by the Exchanges, based on their scoring on production value and liquidity value. These two scores should be in a ratio which should provide minimum 25% weightage to each parameter i.e., production and liquidity should have a minimum of 25% weightage each.

Dhaval Visariya

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