NISM Commodity Derivatives Mock Test 8 (Questions 1 to 100)

Q1. Which option greek measures change in option premium with respect to change in price of the underlying asset?

Gamma
Delta
Rho
Theta

View Answer & Explanation

✓ CORRECT ANSWER: Delta

Explanation: The most important of the 'Greeks' is the option's "Delta". This measures the sensitivity of the option value to a given small change in the price of the underlying asset. Delta = Change in option premium / Unit change in price of the underlying asset

Q2. In case of futures contract, when is the margin money is released and open position reduced?

Only on the expiry of the contract
Only when the open position is squared off
Either on the expiry of the contract or when the open position is squared off, whichever is later
Either on the expiry of the contract or when the open position is squared off, whichever is earlier

View Answer & Explanation

✓ CORRECT ANSWER: Either on the expiry of the contract or when the open position is squared off, whichever is earlier

Explanation: The initial margin must be maintained throughout the time the position is open and is refundable at the time of delivery or cash settlement on the date of expiry or if the open position is squared off - which ever is earlier.

Q3. ________ enters into the derivatives contract to mitigate the risk of adverse price fluctuation in respect of his existing position.

Arbitrageur
Trader
Hedger
Investor

View Answer & Explanation

✓ CORRECT ANSWER: Hedger

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. Hedger enters into the derivatives contract to mitigate the risk of adverse price fluctuation in respect of his existing position.

Q4. In the process of ________, the post-trade process of reconciling the obligations of the parties involved in the trade is done.

Clearing
Settlement
Mark to Margin
Risk Management

View Answer & Explanation

✓ CORRECT ANSWER: Clearing

Explanation: Clearing refers to the process of accounting to update and reconcile obligations/payments of the parties involved in the trade. Settlement process involves matching the outstanding buy and sell instructions, by transferring the commodities ownership against funds between buyer and seller.

Q5. In the case of an In The Money (ITM) PUT option, the intrinsic value is ________.

Excess of underlying assets price over the strike price
Excess of the strike price over the underlying assets price
One
Zero

View Answer & Explanation

✓ CORRECT ANSWER: Excess of the strike price over the underlying assets price

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

Q6. Option premium - Intrinsic value = ________.

Delta Value
Theta Value
Future Value
Time Value

View Answer & Explanation

✓ CORRECT ANSWER: Time Value

Explanation: Option premium consists of two components: Intrinsic value and Time value. Time value is the difference between the option premium and intrinsic value.

Q7. ________ is a measure of the sensitivity of an option price to changes in market volatility.

Theta
Vega
Rho
Delta

View Answer & Explanation

✓ CORRECT ANSWER: Vega

Explanation: Vega (v) is a measure of the sensitivity of an option price to changes in market volatility. It is the change of an option premium for a given change (typically 1%) in the underlying volatility. Vega = Change in an option premium / Change in volatility

Q8. Identify the true statement with respect to Time Decay of an option.

Time Decay is higher in the initial days but slows down as expiry approaches
Time Decay is slow in the initial days but speeds up as expiry approaches
Time Decay happens only for Call options and not for Put options
Time Decay is more or less uniform throughout the options life

View Answer & Explanation

✓ CORRECT ANSWER: Time Decay is slow in the initial days but speeds up as expiry approaches

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. This is also known as time decay. The rate at which the time value of the option erodes (time decay) is not linear and the erosion speeds up as expiry date approaches. This means that the time decay is slow in the initial days buy speeds up as the expiry approaches.

Q9. During the settlement of funds on a commodity exchange, ________ communicate the status of fund flow in respect of each trading and clearing member to the clearing house to facilitate monitoring.

The Commodity Exchanges
The Custodians
The RBI
The Clearing Banks

View Answer & Explanation

✓ CORRECT ANSWER: The Clearing Banks

Explanation: 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 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. The clearing banks communicate the status of fund flow in respect of each trading and clearing member to the clearing house to facilitate monitoring.

Q10. During the physical commodity deliveries, in the pay-out process, ________ makes a commodity pay-out to the clearing member of the buyer by transferring the ownership of warehouse receipt in the concerned buyers name.

Commodity Exchange
SEBI
The Selling Broker
The Clearing Corporation

View Answer & Explanation

✓ CORRECT ANSWER: The Clearing Corporation

Explanation: The Clearing Corporation makes a commodity pay out to the clearing member by transferring the ownership of warehouse receipt on the concerned buyer's name.

Q11. Agricultural Spot markets like Mandis and APMCs are generally governed by ________.

The State Government
The Central Government
Local bodies such as municipalities and gram panchayats
Farmers Unions

View Answer & Explanation

✓ CORRECT ANSWER: The State Government

Explanation: Agricultural Spot markets like Mandis and APMCs are generally governed by the individual state governments.

Q12. The exchange traded commodity derivatives in India devolves into ________.

OTC markets prices
underlying commodity options contracts
underlying commodity futures contracts
underlying commodity spot contracts

View Answer & Explanation

✓ CORRECT ANSWER: underlying commodity futures contracts

Explanation: IMP-The exchange traded commodity derivatives in India devolves into their futures contracts and not into the spot.

Q13. ________ does NOT have to meet margin requirements, till the very far-end of the contract life.

Buyer of commodity options
Seller/Writer of commodity options
Buyer of commodity futures
Seller of commodity futures

View Answer & Explanation

✓ CORRECT ANSWER: Buyer of commodity options

Explanation: The buyer of a option pays a premium while buying the option contract. This option premium which he has paid is the maximum possible loss he can suffer. So he does not have to pay any margin till the end of contract life.

Q14. In January, the spot price of Gold is Rs 40000 per 10 grams and the cost of carry for one month is Rs 500 per 10 grams. If the February Gold futures is trading at Rs. 40900, which of the following is the appropriate trade setup in this scenario?

Arbitrage - Future versus Future
Arbitrage - Spot versus Future
Long Hedge
Covered call

View Answer & Explanation

✓ CORRECT ANSWER: Arbitrage - Spot versus Future

Explanation: The cost of carry is Rs 500 per month. So, ideally the February future price should be Rs. 40000+Rs. 500 = Rs. 40500. The February futures is trading at Rs. 40900, which means its overpriced and giving an opportunity for arbitrage. One should do an arbitrage by buying in the spot market at Rs 40000 and sell in February futures at Rs 40900. The cost of carry is Rs 500. So the profits will be Cost of purchase ie. 40000+500, Selling Price ie. 40900 = Rs 400.

Q15. Which of these are in the form of a bilateral agreement between two specific counter parties?

Exchange traded derivatives
Spot derivatives
OTC derivatives
Futures

View Answer & Explanation

✓ CORRECT ANSWER: OTC derivatives

Explanation: Derivatives are either traded on an exchange platform or bilaterally between counterparties known as the over the counter (OTC) market. OTC derivatives are created by an agreement between two specific counterparties.

Q16. If the buyer of a wheat futures contract decides that he does not want the wheat derivatives position, he can ________.

sell the contract to someone who needs it
abandon the contract by taking no action on it
buy more contracts of the same type
The buyer has no option but to carry the derivatives position till expiry

View Answer & Explanation

✓ CORRECT ANSWER: sell the contract to someone who needs it

Explanation: With the introduction of exchange based futures, the contracts of commodities being traded gradually got 'standardized' in terms of quantity and quality over a period of time. The contracts also began to change hands before the delivery date. For instance, if the buyer of a wheat contract decides that he does not want the wheat, he would sell the contract to someone who needed it.

Q17. Mr. Sharma is an active option trader and is sure that there will be a good move in the prices of Gold. But he is unsure if the price movement will be upwards or downwards. Which strategy should he use to execute his view to make a gain?

Short Strangle
Short Straddle
Long Straddle
Bull Call spread

View Answer & Explanation

✓ CORRECT ANSWER: 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. In this the view is of an increase in volatility either upward or downward.

Q18. ________ is the margin amount a customer needs to deposit with the clearing house before entering into a trade.

Basic Margin
Extreme Loss Margin
Mark to Market Margin
Initial Margin

View Answer & Explanation

✓ CORRECT ANSWER: Initial Margin

Explanation: Initial margin is the margin amount a customer needs to deposit with the clearing house before entering into a trade. Initial margin is a certain percentage of contract value of the open position. The initial margin is determined by the exchange based on the Value at Risk (VaR) methodology.

Q19. As per the accounting standards, the prospective effectiveness testing has to be performed ________.

only at the inception of the hedge
once at the inception of the hedge and once the hedge is over
at inception of the hedge and at each subsequent reporting date during the life of the hedge
only at the termination of the hedge

View Answer & Explanation

✓ CORRECT ANSWER: at inception of the hedge and at each subsequent reporting date during the life of the hedge

Explanation: To qualify for hedge accounting, the accounting standards require the hedge to be highly effective. Prospective effectiveness testing has to be performed at inception of the hedge and at each subsequent reporting date during the life of the hedge. This testing consists of demonstrating that the undertaking expects changes in the fair value or cash flows of the hedged item to be almost fully offset by the changes in the fair value or cash flows of the hedging instrument.

Q20. In a put options transaction, the seller / writer charges ________ from the buyer for giving buyer a right to sell, without an obligation to sell.

a fee
an option premium
a commission
the full contract value of underlying upfront

View Answer & Explanation

✓ CORRECT ANSWER: an option premium

Explanation: In an options transaction, the purchaser pays the seller (the writer of the option), an amount for the right to buy (in case of "call" options) or for the right to sell (in case of "put" options). This amount is known as the "Option Premium".

Q21. A BULL SPREAD is created by a lower strike option and a higher strike option.

buying, buying
selling, selling
buying, selling
selling, buying

View Answer & Explanation

✓ CORRECT ANSWER: buying, selling

Explanation: Vertical Spreads (Bull or Bear spreads) attempts to profit from the directional movement in the underlying commodity. Unlike an outright purchase of call/put option, the vertical spreads are used when the market view of the investor is moderately bearish/bullish. In a bull spread, the investor buys a lower strike and sells the higher strike. Conversely, the investor sells the lower strike and buys a higher strike in a bear spread.

Q22. A long call position on exercise shall devolve into which of these contracts in the Indian exchange traded commodity markets?

Short position in the underlying spot contract
Short position in the underlying futures contract
Long position in the underlying spot contract
Long position in the underlying futures contract

View Answer & Explanation

✓ CORRECT ANSWER: Long position in the underlying futures contract

Explanation: The exchange traded commodity derivatives in India devolves into their futures contracts and not into the spot. The question says 'Long Call option' which means the trader has taken a bullish position. So this will devolve as Long futures contract.

Q23. Mr. Mohit has a short call option and would like to close that position before expiry. How would he do that?

By buying a put option of the same strike and same expiry
By selling a put option of the same strike and same expiry
By buying a call option of the same strike and same expiry
By selling a call option or by buying a put option of the same strike and same expiry

View Answer & Explanation

✓ CORRECT ANSWER: By buying a call option of the same strike and same expiry

Explanation: A sold CALL option can only be squared up by buying the same CALL option.

Q24. An option contract gives its writer ________ to exercise the option.

the right as well as the obligation
the right but no obligation
the obligation but no right
no obligation and no right

View Answer & Explanation

✓ CORRECT ANSWER: the obligation but no right

Explanation: The writer (seller) of an option is one who receives the option premium and is thereby obliged to sell/buy the asset if the buyer of option exercises his right. He has no right in this matter.

Q25. ________ measures the change in an option's price per unit increase in the cost of funding the underlying.

Rho
Theta
Vega
Gamma

View Answer & Explanation

✓ CORRECT ANSWER: Rho

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

Q26. In case of 'Principal Risk' in Indian commodity derivatives trading, what does the Exchanges guarantee?

Exchanges guarantees financial settlement and not gross delivery settlement
Exchanges guarantees gross delivery settlement and not financial settlement
Exchanges guarantees both gross delivery settlement and financial settlement
Exchanges does not guarantees gross delivery settlement nor financial settlement

View Answer & Explanation

✓ CORRECT ANSWER: Exchanges guarantees financial settlement and not gross delivery settlement

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 of the exchange. Exchanges guarantees financial settlement and not gross delivery settlement i.e., exchanges can guarantee the financial compensation to the aggrieved party in case of default by other counterparty.

Q27. ________ indicates the benefit of owning a commodity rather than buying a futures contract on that commodity.

Operational yield
Convenience yield
Current yield
Production 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. Convenience yield can be generated because of the benefit from ownership of a physical asset. Sometimes, due to supply bottlenecks in the market, the holding of an underlying commodity may become more profitable than owning the futures contract, due to its relative scarcity versus huge demand. 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.

Q28. When a option contract devolves into underlying asset, a call option is said to be In the Money (ITM) when ________.

Spot price is greater than strike price
Spot price is lower than strike price
Spot price is equal strike price
Spot price is equal OTC price

View Answer & Explanation

✓ CORRECT ANSWER: Spot price is greater than strike price

Explanation: A call option is said to be ITM, when spot price is higher than strike price. And, a put option is said to be ITM when spot price is lower than strike price.

Q29. ________ activities, if left unchecked, pose a risk to market integrity and have potential to distort the fair price discovery.

Cornering the stocks
Cartelling
Price rigging
All of the above

View Answer & Explanation

✓ CORRECT ANSWER: All of the above

Explanation: Markets always carry the risks of price rigging, cartelling, cornering the stocks in derivatives markets and/or in spot market to create artificial prices. All these distorts the market integrity and basic purpose of organized markets which is fair price discovery.

Q30. In India, the commodity options, on exercise, devolve into the underlying futures contracts. All such devolved futures positions are considered to be acquired at the ________, on the expiry date of options, during the end of the day processing.

Strike price of exercised options
Last traded price in the futures exchange
Last traded price of the exercised options
Spot price of the underlying commodity

View Answer & Explanation

✓ CORRECT ANSWER: Strike price of exercised options

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

Q31. Terms of the contract is tailored to suit the needs of the buyer and the seller in a ________.

Future contract
Forward contract
Exchange traded derivatives contract
Standarised derivatives contract

View Answer & Explanation

✓ CORRECT ANSWER: Forward contract

Explanation: Forward contracts can be customized to accommodate any commodity, in any quantity, for delivery at any point in the future, at any place. These contracts are traded on the OTC markets. In a forward contract the terms of the contract is tailored to suit the needs of the buyer and the seller.

Q32. 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 and this is known as ________.

Time Decay
Time Appreciation
Value Decay
Value Accumulation

View Answer & Explanation

✓ CORRECT ANSWER: Time Decay

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. This is also known as time decay. Options are known as 'wasting assets', due to this property where the time value gradually falls to zero by the time the contract reaches the expiry.

Q33. The coefficient of correlation between spot and futures price is 0.76. The standard deviation of change in spot price is 7.60 and the standard deviation of change in futures price is 8.35. Calculate the Hedge Ratio based on the above data.

0.691
48.23
0.483
0.202

View Answer & Explanation

✓ CORRECT ANSWER: 0.691

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) = 0.76 * (7.60 / 8.35) = 0.76 * 0.91 = 0.691

Q34. Which is the price at which the underlying security can be purchased by the option holder by exercising the call option?

Strike Price
Spot Price
Premium Price
Ask 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.

Q35. The investor sells the lower strike option and buys a higher strike option in a ________.

Bull spread
Bear spread
Bull Call spread
Bull Put spread

View Answer & Explanation

✓ CORRECT ANSWER: Bear spread

Explanation: Vertical Spreads attempts to profit from the directional movement in the underlying commodity. Vertical spreads are implemented by buying or selling calls or puts with different strike prices but same expiry months. Vertical Spreads are classified into bull spreads and bear spreads. In a bull spread, the investor buys a lower strike and sells the higher strike. Conversely, the investor sells the lower strike and buys a higher strike in a bear spread.

Q36. The cost of 10 grams of gold in the spot market is Rs 38000 and the cost of financing is 12 percent per annum and this is compounded quarterly. Calculate the theoretical futures price (Fair Value) of a 1 year futures contract.

Rs. 43748
Rs. 42769
Rs. 38114
Rs. 41000

View Answer & Explanation

✓ CORRECT ANSWER: Rs. 42769

Explanation: Fair Value of a Futures Contract = Spot Price (1 + Interest Rate / No. of times compounding)^ No. of compounding in a year X Number of years. In the above question, Spot price is Rs. 38000, Interest Rate is 12% = .12, Compounding is quarterly which means 4 times a year, Number of years = 1. Substituting - 38000 * (1 + .12/4)^4*1 = 38000 * (1 + .03)^4 = 38000 * (1.03)^4. On the Scientific Calculator of your computer, enter 1.03, X^Y, 4 and you will get 1.1255. 38000 * 1.1255 = 42769.

Q37. Which of these choices does an option buyer have?

Let the option expire without being exercised on the expiration date
Sell the option in the Exchange before the expiration date
Exercise the option on the expiration date
All of the above

View Answer & Explanation

✓ CORRECT ANSWER: All of the above

Explanation: An option buyer has all the rights but no obligation. An option buyer has the following choices: (1) Exercise the option on the expiration date (2) Sell the option in the Exchange before the expiration date (3) Let the option expire without being exercised on the expiration date.

Q38. ________ will have positive intrinsic value.

Only At-the-Money options
Only In-the-Money options
Only Out of-the-Money options
Both At-the-Money and Out of-the-Money options

View Answer & Explanation

✓ CORRECT ANSWER: Only In-the-Money options

Explanation: In the money (ITM) option: This option would give holder a positive cash flow, if it were exercised immediately. Intrinsic value: Option premium consists of two components: intrinsic value and time value. For an option, intrinsic value refers to the amount by which option is in the money i.e., the amount an option buyer will realize, before adjusting for premium paid, if he exercises the option instantly. Therefore, only in-the-money options have intrinsic value whereas at-the-money and out-of-the-money options have zero intrinsic value.

Q39. The Black-Scholes option pricing model calculates implied volatility using ________.

Strike price
Cost of carry (interest rate)
Time to expiry
All of the above

View Answer & Explanation

✓ CORRECT ANSWER: All of the above

Explanation: The Black-Scholes model was published in 1973 by Fisher Black and Myron Scholes. It is one of the most popular, relative simple and fast modes of calculation of option premium. This model calculates implied volatility using strike price, underlying market price, time to expiry and cost of carry (interest rate) as parameters.

Q40. The commodity derivatives contracts which are standardized in terms of quantity and quality are known as ________.

OTC Contracts
Forward Contracts
Multi Party Contracts
Futures Contracts

View Answer & Explanation

✓ CORRECT ANSWER: Futures Contracts

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 today. Futures are standardized in terms of size, quantity, grade and time, so that each contract traded on the exchange has the same specification.

Q41. By ________ the buyer is effectively buying insurance against higher product prices in the spot market on the specified future date.

buying a call option
buying a put option
selling a call option
selling a put option

View Answer & Explanation

✓ CORRECT ANSWER: buying a call option

Explanation: When a person buys a Call option, he gains from any rise in the prices. So its like an insurance for the buyer to safe guard himself against any rise in prices in the spot market in the future.

Q42. ________ maintain overnight positions, which may run into weeks or even months, in anticipation of favourable movement in the commodity futures prices.

Day traders
Position Traders
Market Makers
Arbitrageurs

View Answer & Explanation

✓ CORRECT ANSWER: Position Traders

Explanation: Position Traders are the subset of speculators who maintain overnight positions, which may run into weeks or even months, in anticipation of favourable movement in the commodity futures prices. They may hold positions in which they run huge risks and with a possibility to earn big profits if their directional call proved to be correct.

Q43. Calculate the Ticket Value of a Gold Futures contract if the Quotation factor for Gold is 'Rupees per 10 grams', lot size for regular gold contract = 1 KG (1000 grams) and tick size is '1 Rupee' per 10 grams.

Rs. 1000
Rs. 10,000
Rs. 100
Rs. 10

View Answer & Explanation

✓ CORRECT ANSWER: Rs. 100

Explanation: The formula for calculating tick value is: Ticket Value = (Lot size / Quotation factor) X Tick size. Substituting the values given in the question - Ticket Value = (1000 / 10) x 1 = Rs. 100.

Q44. The buyer of an American option can exercise his right ________.

At any time on or before the expiry day of the contract
only on the expiry day of the contract
at any time after the expiry day of the contract
only during the last week before the expiry day of the contract

View Answer & Explanation

✓ CORRECT ANSWER: At any time on or before the expiry day of the contract

Explanation: American option: The owner of such option can exercise his right at any time on or before the expiry date/day of the contract. European option: The owner of such option can exercise his right only on the expiry date/day of the contract. As per current regulatory norms, only European style commodity options are available in Indian derivatives exchanges.

Q45. Traders who have long positions are inherently ________.

Long on Vega
Short on Vega
Delta Neutral
Bearish

View Answer & Explanation

✓ CORRECT ANSWER: Long on Vega

Explanation: Vega is a measure of the sensitivity of an option price to changes in market volatility. An option spread which takes the view that volatility will rise in short time horizon and the investor would buy a short maturity option and sell a long maturity option on the same underlying commodity and on the same strike price. This creates long positions in Vega and hence, trader gains with increasing volatility.

Q46. The guidance note issued by the Institute of Chartered Accountants of India (ICAI) requires that all derivatives are recognised on the balance sheet and measured at ________.

Book Value
Fair Value
Intrinsic Value
Real Value

View Answer & Explanation

✓ CORRECT ANSWER: Fair Value

Explanation: ICAI 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. Fair value in the context of derivative contracts represents the 'exit price' i.e., the price that would be paid to transfer a liability or the price that would be received when transferring an asset to a knowledgeable, willing counterparty.

Q47. In the hedging process, a long call option gives the option buyer protection from any price appreciation in the underlying asset above the ________.

settlement price of that option contract
futures price of the underlying asset
current market price of the underlying asset
strike price of the option contract

View Answer & Explanation

✓ CORRECT ANSWER: strike price of the option contract

Explanation: Hedgers use options to manage price risk and protect themselves against the possibility that the market prices may go against them. A buyer of call option gets protection from any price appreciation in the spot market above the strike price of the option contract. In case of a price increase in the spot market, the loss is compensated by hedging gains. For example, if you buy a call option of strike price Rs.1000 and on expiry you find that the spot price is Rs. 1700, you can exercise this contract at a profit of Rs.700.

Q48. What reduces the effect of inter-seasonal price fluctuations in the commodity futures market?

Transactional Efficiency
Price Stability
Price Volatility
Price Discovery

View Answer & Explanation

✓ CORRECT ANSWER: Price Discovery

Explanation: The price discovery in futures markets refers to the process of determining the futures price through expected demand and supply after discounting expected news, data releases and information on the product. The ability of derivatives markets to provide information about potential future prices is an integral component of an efficient economic system. Price discovery reduces the effect of inter-seasonal price fluctuations.

Q49. ________ the process of adjusting financial positions of the parties to the trade transactions to reflect the net amounts due to them or due from them.

Clearing
Settlement
Mark-to-Margin
Risk Management

View Answer & Explanation

✓ CORRECT ANSWER: Settlement

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

Q50. A ________ position is created by combining a long underlying position with a short call option.

Spread trading
Bull Call
Covered short put
Covered short call

View Answer & Explanation

✓ CORRECT ANSWER: Covered short call

Explanation: A covered short call position is created by combining a long underlying position 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. Covered short call is different from a naked short call. A naked short call is a speculative position where the investor does not own the commodity.

Q51. In which of these situations the commodity owner, who wants to sell the commodity would be better off selling the commodity in the spot market rather than selling the commodity in the futures market? (Do not consider any convenience yield)

When Future price < (Spot price + Interest that can be earned on the realized spot price + Storage cost)
When Future price = (Spot price + Interest that can be earned on the realized spot price + Storage cost)
When Future price > (Spot price + Interest that can be earned on the realized spot price + Storage cost)
Selling in futures is always recommended as compared to spot

View Answer & Explanation

✓ CORRECT ANSWER: When Future price < (Spot price + Interest that can be earned on the realized spot price + Storage cost)

Explanation: If the futures price is lower than the spot price + Interest that can be earned on the realized spot price + Storage cost, then its better to sell in the spot and not in the future as the seller is getting a better deal this way.

Q52. Mr. Adarsh is SHORT on a call option. He has ________.

an obligation to buy and also with a right to buy
an obligation to sell without a right to sell
an obligation to buy without a right to buy
an obligation to sell and also with a right to sell

View Answer & Explanation

✓ CORRECT ANSWER: an obligation to sell without a right to sell

Explanation: Seller of an option is said to be "short on option". A seller of a call option would have an obligation but no right with regard to selling.

Q53. In 'Compulsory Delivery' option, what will indicate the number of contracts that will attract compulsory physical delivery?

The Open interest remaining on the settlement date
The value of contracts traded on the contract expiry day
The number of contract traded on the contract expiry day
The Order book data on the contract expiry day

View Answer & Explanation

✓ CORRECT ANSWER: The Open interest remaining on the settlement date

Explanation: In the compulsory delivery option, both buyer and seller having an open position during the tender/delivery period of the contract are obligated to take/give delivery of the commodity. The total open interest remaining on the settlement date will indicate the number of contracts outstanding as the number of open contracts will attract physical delivery compulsorily after expiry date.

Q54. The clearing corporation undertakes which of these post-trade activities?

Arranges for pay-in and pay-out of funds
Assumes the counter-party risk of each member and guarantees financial settlement
Collects different types of margins prescribed by the commodity exchanges
All of the above

View Answer & Explanation

✓ CORRECT ANSWER: All of the above

Explanation: The clearing corporation undertakes post-trade activities such as clearing and settlement of trades including risk management executed on a commodity exchange. The clearing corporation, inter alia: collects different types of margins prescribed by the commodity exchanges; computes obligations of members; arranges for pay-in and pay-out of funds; assumes the counter-party risk of each member and guarantees financial settlement; arranges for physical delivery of goods, wherever applicable.

Q55. In which of these strategies does an investor buy a lower strike option and sells a higher strike option?

Covered Short Call
Covered Short Put
Bear Spread
Bull Spread

View Answer & Explanation

✓ CORRECT ANSWER: Bull Spread

Explanation: In a Bull Spread, the investor buys a lower strike and sells a higher strike option. This strategy is used when the investor has a Moderately Bullish view.

Q56. A short call position on exercise shall devolve into which of these contracts in the Indian exchange traded commodity markets?

Short position in the underlying spot contract
Short position in the underlying futures contract
Long position in the underlying spot contract
Long position in the underlying futures contract

View Answer & Explanation

✓ CORRECT ANSWER: Short position in the underlying futures contract

Explanation: The exchange traded commodity derivatives in India devolves into their futures contracts and not into the spot. The question says 'Short Call option' which means the trader has taken a bearish position. So this will devolve as short futures contract.

Q57. The Spread between Guar Seed and Guar Gum is known as ________.

Intra commodity spread
Inter commodity spread
Calendar spread
Reverse cash and carry arbitrage

View Answer & Explanation

✓ CORRECT ANSWER: Inter commodity spread

Explanation: 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. Example: Spread between Guar Seed and Guar Gum. This strategy involves buying and selling different but economically related commodities by taking a long and short positions in the commodities simultaneously for the same calendar month.

Q58. A commodity's current market price is Rs 700 and the Put premium for the 600 strike is Rs 20. The option expires in three months' time and the risk-free interest rate is currently 8%. Calculate the theoretical premium for the Rs 600 strike Call option.

Rs. 107.60
Rs. 98.93
Rs. 158.32
Rs. 131.77

View Answer & Explanation

✓ CORRECT ANSWER: Rs. 131.77

Explanation: The formula for calculating a premium is - C - P = S - [K/(1+rt)] where C is Call Premium, P is Put Premium, S is Underlying Price, K is Strike Price, r is rate of interest and t is time period. Here time is 3 months ie. 3/12 = .25. C - 20 = 700 - [600/1+(0.08*0.25)] -> C - 20 = 700 - 600/1.02 -> C - 20 = 700 - 588.23 -> C - 20 = 111.77 -> C = 111.77 + 20 = 131.77.

Q59. An order is called a ________ if it is to buy a specified quantity of a futures contract at or below a specified price, or an order to sell it at or above a specified price.

Immediate or Cancel order
Limit Order
Market order
Trailing stop loss order

View Answer & Explanation

✓ CORRECT ANSWER: Limit Order

Explanation: In a limit order, the buyer or seller specifies the price at which the trade should be executed. For a buyer, the limit order generally remains below the on-going asking price and for a seller the limit order remains above the then bid price.

Q60. What is the 'Open interest' of a commodity futures contract?

It is the total volume traded during the day in that contract
It is the total sum of long or short positions in that contract after netting at client level
It is the excess of short positions over the long positions in that contract
It is the excess of long positions over the short positions in that contract

View Answer & Explanation

✓ CORRECT ANSWER: It is the total sum of long or short positions in that contract after netting at client level

Explanation: Open Interest is the total number of option contracts outstanding for an underlying asset. (outstanding positions at client level)

Q61. Option contracts belonging to 'Close to the Money' (CTM) option series shall ________.

automatically expire worthless
be rolled over to next contract cycle
be exercised only on 'explicit instruction' for exercise by the long position holders of such contracts
be exercised automatically unless the buyer of option gives an instruction of not exercising it

View Answer & Explanation

✓ CORRECT ANSWER: be exercised only on 'explicit instruction' for exercise by the long position holders of such contracts

Explanation: Two option series having strike prices immediately below the ATM strike is referred as 'Close to the money' (CTM) option series. All option contracts belonging to 'CTM' option series shall be exercised only on 'explicit instruction' for exercise by the long position holders of such contracts.

Q62. Backwardation arises due to ________ in commodities especially in agricultural products.

demand supply gap
seasonality factors
cantongo
convergence

View Answer & Explanation

✓ CORRECT ANSWER: seasonality factors

Explanation: 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).

Q63. Who will bear the expenses such as transport, loading and unloading etc. for physically settled commodity futures contracts?

The Buyer
The Seller
The Clearing Corporation of the Exchange
The Warehouse service provider

View Answer & Explanation

✓ CORRECT ANSWER: The Buyer

Explanation: The buyer will bear the expenses such as transport, loading and unloading etc. for physically settled commodity futures contracts.

Q64. What are the guidelines for brokers with respect to advertising their business in public media?

A broker is free to advertise his business in any media with out any restrictions only if its ethically done
A broker can advertise his business only if its on national TV
A broker shall not advertise its business publicly unless permitted by the stock exchange
A broker can advertise his business only if its business only in print media and if he has a trading license for more than 7 years

View Answer & Explanation

✓ CORRECT ANSWER: A broker shall not advertise its business publicly unless permitted by the stock exchange

Explanation: As per the Advertisement and Publicity guidelines A broker shall not advertise its business publicly unless permitted by the stock exchange.

Q65. An ________ is made up of a long position in futures contract and a short position in another month contract of the same underlying.

Intra commodity spread
Inter commodity spread
Reverse Cash and Carry Arbitrage
Spot versus Futures Arbitrage

View Answer & Explanation

✓ CORRECT ANSWER: 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. 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.

Q66. According to 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 ________.

on the same day
on T+2 days
on T+5 days
on T+12 days

View Answer & Explanation

✓ CORRECT ANSWER: on T+2 days

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.

Q67. If the closing price for Copper futures contract was Rs. 400 yesterday and Daily Price Range is 5 percent as per the contract specification. What would be the price range for this contract today?

Rs. 390 to Rs. 410
Rs. 380 to Rs. 420
Rs. 395 to Rs. 405
Rs. 375 to Rs. 425

View Answer & Explanation

✓ CORRECT ANSWER: Rs. 380 to Rs. 420

Explanation: The Daily Price Range is 5%. 5% of Rs. 400 is Rs. 20. So the price range will be 400-20 and 400+20 = Rs. 380 to Rs. 420.

Q68. If an In-the-Money (ITM) option is actively traded in the market, it will have ________.

Time Value
Intrinsic Value
Both Intrinsic and Time value
Neither Intrinsic nor Time value

View Answer & Explanation

✓ CORRECT ANSWER: Both Intrinsic and Time value

Explanation: Intrinsic value refers to the amount by which option is in the money i.e., the amount an option buyer will realize, before adjusting for premium paid, if he exercises the option instantly. Therefore, only in-the-money options have intrinsic value whereas at-the-money and out-of-the-money options have zero intrinsic value. As the option is actively traded, it will also have time value. Options which are sparsely traded lose their time value.

Q69. For a PUT option, time decay will work to the advantage of ________.

Option buyer
Option writer
Both Option buyer and writer
Neither Option buyer nor writer

View Answer & Explanation

✓ CORRECT ANSWER: Option writer

Explanation: Other things being equal, options tend to lose time value each day throughout their life. This is due to the fact that the uncertainty element in the price decreases. So if all things remain constant throughout the contract period, the option price will always fall in price by expiry. Thus option writers (sellers) are at a fundamental advantage as compared to option buyers as there is an inherent tendency in the price to go down.

Q70. Which of these is/are advantage(s) of Commodity futures over Commodity forwards?

Elimination of counterparty credit risk
Transparent trading platform
Efficient price discovery
All of the above

View Answer & Explanation

✓ CORRECT ANSWER: All of the above

Explanation: The clearing corporation undertakes post-trade activities such as clearing and settlement of trades including risk management executed on a commodity exchange.

Q71. Which of the following is correct about Electronic Contract Note (ECN)?

Brokers can issue ECN to FPIs but not to the retail clients who are residents of India
Brokers can issue ECN to clients only after getting client's consent either on client agreement or separately
Brokers should avoid issuing ECN in view of phishing and cyber security risks
With increased digitization, it is compulsory for brokers to issue ECN to clients

View Answer & Explanation

✓ CORRECT ANSWER: Brokers can issue ECN to clients only after getting client's consent either on client agreement or separately

Explanation: As per SEBI's Code of Conduct for Brokers: Issue of Contract Note: The trading member shall issue without delay to its client a Contract Note for all transactions in the form specified by the stock exchange. Contract note can be issued electronically by way of Electronic Contract Note (ECN) to the client only upon consent of the client either through client agreement or by way of separate consent.

Q72. ________ gives SEBI the power to grant recognition to stock exchanges in India.

Stock Exchange Regulation Act, 1992
Forward Contracts (Regulation) Act, 1952
Commodity Exchange Regulation Act, 1986
Securities Contract (Regulation) Act, 1956

View Answer & Explanation

✓ CORRECT ANSWER: Securities Contract (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. The act covers a variety of issues like Granting recognition to stock exchanges, Corporatization and demutualization of stock exchanges etc.

Q73. Which of these is/are excluded while calculating minimum networth criteria of members?

Margins which are collected from clients
Fixed assets which are used in other business
The advances given
All of the above

View Answer & Explanation

✓ CORRECT ANSWER: All of the above

Explanation: The computation procedure of networth specified by the regulator ensures that the net-worth free to be used for broking business only to be considered and other fixed assets, advances given and due for more than 3 months, investments in other subsidiaries, pledged securities, intangible assets, prepaid expenses, etc. to be ignored while calculating networth.

Q74. If a commodity call option has a strike price of Rs 1000 and the current market price of the underlying commodity futures is Rs 1150 and the option premium is Rs 200, calculate its Intrinsic Value.

Rs 200
Rs 150
Rs 100
Rs 50

View Answer & Explanation

✓ CORRECT ANSWER: Rs 150

Explanation: For a call option which is in-the-money, intrinsic value is the excess of spot price over the strike price i.e. Market Price - Strike Price. In the question, the call option is In the Money as the Spot Price is above the Strike Price. Intrinsic value = Market Price - Strike Price = 1150 - 1000 = 150.

Q75. The maximum potential gain for the seller of an option contract is ________ till the expiry of the contract.

Limited to the premium received upfront
Limited to the spot price of the underlying
Limited to the futures price of same expiry
Unlimited

View Answer & Explanation

✓ CORRECT ANSWER: Limited to the premium received upfront

Explanation: The writer / seller of an option is one who receives the option premium. The maximum potential gain for an option seller is limited to the premium he receives but the losses can be unlimited. The maximum potential gain for an option is unlimited and the maximum potential losses are restricted to the premium paid.

Q76. ________ options give the option buyer zero or close to zero cash flow, if it were exercised immediately.

ITM & OTM options
ATM & CTM options
All Exchange Traded
All OTC

View Answer & Explanation

✓ CORRECT ANSWER: ATM & CTM options

Explanation: In 'At-the-money' (ATM) and 'Close to the money' (CTM) options, the strike price is equal to the market price and so there is no intrinsic value. ATM and CTM options would lead to zero cash flow if it were exercised immediately.

Q77. ________ indicates the benefit of owning a commodity rather than buying a futures contract on that commodity.

Spot Yield
Current Yield
Convenience Yield
Yield to Maturity

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. Convenience yield can be generated because of the benefit from ownership of a physical asset. For eg. Sometimes, due to supply bottlenecks in the market, the holding of an underlying commodity may become more profitable than owning the futures contract, due to its relative scarcity versus huge demand.

Q78. ________ refers to the cost associated with substituting the original trade with a new trade, as the new trade may generally be done at a different price and probably at an adverse price to the aggrieved party.

Rollover risk
Replacement-cost risk
Principal risk
Systemic risk

View Answer & Explanation

✓ CORRECT ANSWER: Replacement-cost risk

Explanation: Counterparty Risk arises if one of the parties to the commodity derivatives contract does not honour the contact and fails to discharge their obligation fully and on time. This broadly has two components, namely replacement cost risk (pre-settlement risk) and principal risk, which arises during settlement. Replacement-cost risk refers to the cost associated with replacing the original trade, as the new trade may generally be done at a different price and probably at an adverse price to the aggrieved party.

Q79. If futures price is higher than spot price of an underlying asset, it is called as ________.

Backwardation
Contango
Divergence
Convergence

View Answer & Explanation

✓ CORRECT ANSWER: Contango

Explanation: If futures price is higher than spot price of an underlying asset, market participants may expect the spot price to go up in near future. This expectedly rising market is called "Contango market". Similarly, if futures price are 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".

Q80. The regulatory framework for commodity markets in India consist of three tiers. Which of the following is NOT one of them?

Forward Markets Commission (FMC)
Securities and Exchange Board of India (SEBI)
Government of India
Exchanges

View Answer & Explanation

✓ CORRECT ANSWER: Forward Markets Commission (FMC)

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.

Q81. ________ are agreements between two counterparties to exchange a series of cash payments for a stated period of time based on a certain pre-agreed arrangement.

Forwards
Options
Swaps
Futures

View Answer & Explanation

✓ CORRECT ANSWER: 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.

Q82. Which of the following macroeconomic factors have an impact on the commodity prices?

Per capita income
Growth in industrial production
GDP growth rate
All of the above

View Answer & Explanation

✓ CORRECT ANSWER: All of the above

Explanation: The domestic and global macroeconomic conditions can have an impact on commodity prices. The GDP growth rate, consumption pattern, per capita income, industrial production, employment rate, inflation rate, etc. are very important factors in deciding the price trend of a commodity both in the short term as well as in the long term.

Q83. Assuming all other factors remains constant, which of the following statement is TRUE regarding the relation between interest rates and option premium?

Higher interest rates will result in decrease in the value of both call option and put option
Higher interest rates will result in increase in the value of both call option and put option
Higher interest rates will result in an increase in the value of a call option and a decrease in the value of a put option
Higher interest rates will result in a decrease in the value of a call option and an increase in the value of a put option

View Answer & Explanation

✓ CORRECT ANSWER: Higher interest rates will result in an increase in the value of a call option and a decrease in the value of a put option

Explanation: Higher interest rate leads to higher cost of finance of paying the call option premium, so the value of call option increases. For put options, the opposite holds true, that is, the higher the interest rates the lower the put option price. This is because if interest rates are high you will have to hold the asset for a longer time to deliver it under the put option. Simply selling the asset and using the proceeds to invest at a higher rate would be a better option. This makes the put option less attractive and hence less costly when interest rates are high.

Q84. ________ is an option strategy where the trader buys a call and a put with the same strike price and same expiry date.

Long straddle
Short straddle
Long strangle
Short strangle

View Answer & Explanation

✓ CORRECT ANSWER: Long straddle

Explanation: One of the major strategies in option trading involves simultaneous purchase of calls/puts with a view to profit from a change in the volatility of the underlying commodity. 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 view is to gain from an increase in volatility.

Q85. An option contract gives its buyer ________ to exercise that option.

A right and an obligation
A right but not an obligation
An obligation but not a right
Neither a right nor an obligation

View Answer & Explanation

✓ CORRECT ANSWER: A right but not an obligation

Explanation: Options contracts give the right to the buyer but no obligation to exercise the option.

Q86. ________ refers to the process of determining commodity price through forces of market demand and supply.

Price discovery
Arbitrary pricing
Price determination
Law of one price

View Answer & Explanation

✓ CORRECT ANSWER: Price discovery

Explanation: Price discovery in spot markets refers to the process of determining commodity price through forces of market demand and supply.

Q87. In case of options contracts where they devolve into underlying asset, a call option is termed as 'At the Money' (ATM) when ________.

The Spot price is lower than strike price
The Spot price is equal to or nearest to that strike price
The Spot price is equal to OTC price
The Spot price is higher than strike price

View Answer & Explanation

✓ CORRECT ANSWER: The Spot price is equal to or nearest to that strike price

Explanation: At the Money (ATM) option would lead to zero cash flow if it were exercised immediately. Therefore, for both Call and Put ATM options, strike price is equal to spot price.

Q88. ________ can trade either on their own account or on behalf of the clients.

Trading member
Market maker
Clearing member
Professional clearing member

View Answer & Explanation

✓ CORRECT ANSWER: Trading member

Explanation: A Trading Member can trade either on their own account or on behalf of the clients. This category of membership entitles a member to execute trades on his own account as well as for clients registered with him. The clearing and settlement of the trades is done through a clearing member.

Q89. A "limit order" is an order ________.

To execute at or better than a given price or not at all
To execute at the best available price
To execute only when the price touches the exact specified price
To both buy and sell simultaneously

View Answer & Explanation

✓ CORRECT ANSWER: To execute at or better than a given price or not at all

Explanation: In a limit order, the buyer or seller specifies the price at which the trade should be executed. If that price is not reached, the order will not be executed. For eg. The current price of a commodity is Rs 100. The limit order placed by a trader is to sell the commodity at Rs 105. So only if the price rises to 105, this limit order will be executed.

Q90. Which of the following is a type of hedge from "accounting" point of view?

Cashflow hedge
Fair value hedge
Net investment hedge
All of the above

View Answer & Explanation

✓ CORRECT ANSWER: All of the above

Explanation: From the accounting point of view there are three types of hedges viz., Fair Value Hedge, Cash Flow Hedge and Net Investment Hedge.

Q91. If the cost of 10 grams of Gold in the spot market is Rs 25,000 and the cost-of-carry is 12% per annum, the theoretical fair value of a 3-month futures contract would be ________.

Rs 25,750
Rs 26,000
Rs 28,000
Rs 25,000

View Answer & Explanation

✓ CORRECT ANSWER: Rs 25,750

Explanation: Futures Price = Spot Price + Cost of carry (The cost of carry is the Spot price + interest cost for 3 months) = 25000 + (25000 x 12% x 3/12) = 25000 + (25000 x .12 x 0.25) = 25000 + (25000 x 0.03) = 25000 + 750 = 25750.

Q92. ________ is levied and administered by the Centre on every inter-state supply of goods and services.

IGST
CGST
XGST
SGST

View Answer & Explanation

✓ CORRECT ANSWER: IGST

Explanation: The GST levied by the Centre on intra-State supply of goods and/or services is called the Central GST (CGST) and that levied by the States is called the State GST (SGST). Similarly, Integrated GST (IGST) is levied and administered by the Centre on every inter-state supply of goods and services.

Q93. The margin money is released,

Only on the expiry of the contract
Only when the open position is squared off
Either on the expiry of the contract or when the open position is squared off, whichever is later
Either on the expiry of the contract or when the open position is squared off, whichever is earlier

View Answer & Explanation

✓ CORRECT ANSWER: Either on the expiry of the contract or when the open position is squared off, whichever is earlier

Explanation: The Initial Margin money is released when the trader either squares off the position or it expires, which ever is earlier.

Q94. Calculate the Total Cost of Carry, if the Spot price of a commodity is Rs 28000, Time period is 90 days, Interest rate is 7% and Storage cost is 2%.

Rs 483.29
Rs 1,400.00
Rs 621.18
Rs 138.08

View Answer & Explanation

✓ CORRECT ANSWER: Rs 621.18

Explanation: The cost of carry has two components Interest cost (for 90 days) and storage cost (for 90 days). Interest Cost = 28000 x .07 (Interest rate) x (90/365) for 90 days = 28000 x .07 x 0.2465 = 483.14. Storage Cost = 28000 x .02 (Storage cost) x (90/365) for 90 days = 28000 x .02 x 0.2465 = 138.04. So the total cost of carry will be 483.14 + 138.04 = 621.18.

Q95. Selling a commodity futures contract, without any corresponding long positions in the spot market or without stocks in hand, in expectation of a decrease in price before the expiry of the contract is a ________.

Short speculative transaction
Long speculative transaction
Short hedge transaction
Long hedge transaction

View Answer & Explanation

✓ CORRECT ANSWER: Short speculative transaction

Explanation: Short speculators are those who expect the price to fall and therefore sell futures contracts. Taking a short position in futures (i.e., selling) in a commodity futures contract in anticipation of a decrease in the price before the expiry of the contract without any corresponding long positions in the spot market or without stocks in hand is called a short speculative transaction.

Q96. Introduction of futures trading on new commodities, or withdrawal of futures trading on a specific commodity require the prior approval of ________.

The exchange
FMC
SEBI
The clearing corporation of that exchange

View Answer & Explanation

✓ CORRECT ANSWER: SEBI

Explanation: Whenever a new contract on commodity futures is to be introduced by commodity exchanges, an approval from Securities and Exchange Board of India (SEBI) should be obtained by the concerned exchange and similarly whenever trading in a specific commodity futures is withdrawn from the market, prior permission of SEBI has to be obtained.

Q97. What is the lot size of index future trading?

100 units
1000 units
Rs.3 lakhs on launch date
Rs.5 lakhs on launch date

View Answer & Explanation

✓ CORRECT ANSWER: Rs.5 lakhs on launch date

Explanation: Order / lot size has to be such that its value is Rs 5 lakhs on the Index Futures launch date and every rebalancing date thereafter.

Q98. Which of the following can be used as a Hedging Instrument?

Commodity Options
Commodity Forwards
Commodity Futures
All of the above

View Answer & Explanation

✓ CORRECT ANSWER: All of the above

Explanation: Hedging can be used effectively by commodity producers. Forward Contracts, Commodity Futures and Commodity Options are examples of hedging instruments.

Q99. ________ is the risk that a commodity's futures price will move differently from that of its underlying physical commodity.

Spread risk
Premium risk
Basis risk
Margin risk

View Answer & Explanation

✓ CORRECT ANSWER: Basis risk

Explanation: 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. Basis risk is defined as the risk that a futures price will move differently from that of its underlying asset.

Q100. Transactions involving transfer of ownership of commodities are settled on ________ basis.

Delivery-versus-payment
Margin settlement
Cash settlement
Auction settlement

View Answer & Explanation

✓ CORRECT ANSWER: Delivery-versus-payment

Explanation: Settlement process involves matching the outstanding buy and sell instructions, by transferring the commodities ownership against funds between buyer and seller. Transactions involving transfer of ownership of commodities are settled on delivery-versus-payment (DVP) basis by netting at a client level and grossing up at the member level.

Dhaval Visariya

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

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