NISM XVI – COMMODITY

DERIVATIVES EXAM
 NISM XVI – COMMODITY DERIVATIVES
PRACTICE TEST . 4

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 NISM XVI – COMMODITY DERIVATIVES
PRACTICE TEST . 4

PRACTICE TEST . 4

Question1 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
(a) Principal Risk
(b) Replacement-cost risk
(c) Market Integrity risk
(d) Operational Risk

Correct Answer Replacement-cost risk

Answer Counterparty Risk arises if one of the parties to the commodity derivatives contract does not
Explanation honour the contact and fails to discharge their obligation fully and on time. This broadly has two
components, namely Replacement cost 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.

Question2 The Theta for a short call option is .

(a) Positive
(b) Negative
(c) Zero
(d) Always one

Correct Answer Positive

Answer Options Theta values are either positive or negative.
Explanation
All short stock options positions have positive Theta values, which indicates that the position is
gaining value as expiration draws nearer.
All long stock options positions have negative Theta values, which indicates that they lose
value as expiration draws nearer.
 NISM XVI – COMMODITY DERIVATIVES
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Question3 The orders received on an Indian derivative exchange are first ranked according to their
and then on .
(a) Amount , Time
(b) Time , Prices
(c) Time, Quantity
(d) Prices , Time

Correct Answer Prices , Time

Answer All the orders received are sorted on ‘best-price’ basis i.e., orders are first ranked according to
Explanation their prices and similar priced orders are then sorted on a time-priority basis (i.e., the order that
comes in early gets priority over the later order).

For eg. if there are three BUY orders at Rs 100, Rs 101 and Rs 99, the buy order at Rs 101 will
be ranked first and then Rs 100 and Rs 99 orders.
If there are two buy orders at Rs 101, then the order received first (time basis) will be ranked
first.

Question4 In which of these situations the buyer would be indifferent as to whether to buy from spot
market or from futures market? (Do not consider any convenience yield)
(a) (Futures price - Spot price) < Cost of carry
(b) (Futures price - Spot price) > Cost of carry
(c) (Futures price -Spot price) = Cost of carry
(d) Its always profitable to buy a commodity in the spot market

Correct Answer (Futures price - Spot price) = Cost of carry

Answer When the difference between the spot and futures prices exactly matches the cost of carry then
Explanation the buyer would be indifferent as to whether to buy from spot market or from futures market.

He can buy from any market and his costs will be same.
 NISM XVI – COMMODITY DERIVATIVES
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Question5 If the futures price is than spot price of an underlying asset, its known as Contango.
(a) Lower
(b) Higher
(c) Equal
(d) More volatile

Correct Answer Higher

Answer If futures price is higher than spot price of an underlying asset, market participants may expect
Explanation the spot price to go up in near future. This expectedly rising market is called “Contango market”.

Question6 For a commodity to be suitable for futures trading, it must possess which of the following
characteristics?
(a) It must be possible to specify a standard, as it is necessary for the futures exchange to deal in
standardized contracts.
(b) Prices should be volatile to necessitate hedging through derivatives
(c) The commodity should be free from substantial control from Government regulations
(d) All of the above

Correct Answer All of the above

Answer All the commodities are not suitable for futures trading. For a commodity to be suitable
Explanation for futures trading, it must possess the following characteristics:
(i) The commodity should have a suitable demand and supply conditions i.e., volume
and marketable surplus should be large.
(ii) Prices should be volatile to necessitate hedging through derivatives. As a result, there
would be a demand for hedging facilities.
(iii) The commodity should be free from substantial control from Government regulations
(or other bodies) imposing restrictions on supply, distribution and prices of the commodity.
(iv) The commodity should be homogenous or, alternately it must be possible to specify
a standard, as it is necessary for the futures exchange to deal in standardized contracts.
(v) The commodity should be storable. In the absence of this condition, arbitrage would not
be possible and there would be no relationship between spot and futures markets.
 NISM XVI – COMMODITY DERIVATIVES
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Question7 A contracts give the buyer the right to sell a specified quantity of an asset at a
particular price on or before a certain future date.
(a) Call option
(b) Put option
(c) Futures
(d) OTC

Correct Answer Put option

Answer There are two types of option contracts —call options and put options. Call option contracts give
Explanation the purchaser the right to buy a specified quantity of a commodity or financial asset at a
particular price (the exercise price) on or before a certain future date (the expiration date).
Put option contracts give the buyer the right to sell a specified quantity of an asset at a
particular price on or before a certain future date.

Question8 have to be executed on the same trading day that they are entered. If these orders
do not get executed that day, they expire or are automatically cancelled by the exchange.
(a) Limit Orders
(b) Immediate or Cancel (IOC) order
(c) Day Orders
(d) Stop Loss Orders

Correct Answer Day Orders

Answer A Day order is valid only for the day and gets automatically cancelled at the end of the day, if
Explanation not executed.
 NISM XVI – COMMODITY DERIVATIVES
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Question9 The spot price of a commodity is Rs. 50000. The Interest rate is 9% and storage cost is 1%. The
Time period is 90 days. Calculate the Total cost of carry.
(a) Rs. 1230
(b) Rs. 795.60
(c) Rs. 850.90
(d) Rs. 1145

Correct Answer Rs. 1230

Answer The cost of carry has two components - Interest cost for 90 days and storage cost for 90 days
Explanation
Interest Cost = 50000 x .09 (Interest rate) x ( 90 /365) for 90 days
= 50000 x .09 x 0.246
= 1107
Storage Cost = 50000 x .01 (Storage cost) x ( 90/365) for 90 days
= 50000 x .01 x 0.246 = 123
So the total cost of carry will be 1107 + 123 = 1230

Question10 In commodities market terminology, the perishable agricultural products are known as .
(a) Exotic commodities
(b) Natural commodities
(c) Soft commodities
(d) Hard commodities

Correct Answer Soft commodities

Answer There are two main types of commodities that trade in the spot and derivatives markets:
Explanation
- Soft commodities: These are the perishable agricultural products such as corn, wheat, coffee,
cocoa, sugar, soybean, etc.
- Hard commodities: These are natural resources that are mined or processed such as the crude
oil, gold, silver, etc.
 NISM XVI – COMMODITY DERIVATIVES
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Question11 As per accounting terminology, is the price received for selling an asset or the price
paid for transferring a liability in an arms-length transaction between knowledgeable and
willing counterparties.
(a) Market Value
(b) Real Value
(c) Fair Value
(d) Intrinsic Value

Correct Answer Fair Value

Answer Fair value is the price received for selling an asset or the price paid for transferring a liability
Explanation in an arms-length transaction between knowledgeable and willing counterparties.

Question12 It is a accepted fact that futures have many advantages compared to forwards. However what
is a limitation of futures over forwards?
(a) Futures are not as liquid as forward contracts
(b) Futures are standardized contracts whereas forwards are customised
(c) Forwards generally lead to profits where as futures generally lead to losses
(d) There is no counter party risk in futures but forwards have counter party risks

Correct Answer Futures are standardized contracts whereas forwards are customised
Answer Futures are standardized in terms of size, quantity, grade and time, so that each contract
Explanation traded on the exchange has the same specification.
The limitation is that one has to trade as per the contract specification. If the person has
different requirement, he cannot use futures. For eg. if a hotel owner wants to buy half a ton of
wheat, he cannot do so as the lot size of wheat is larger on the commodity exchanges.
 NISM XVI – COMMODITY DERIVATIVES
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Question13 Which type of limits are set by the exchange to avoid concentration risk and market
manipulation by a trading member or group acting in concert?
(a) Margin limits
(b) Risk limits
(c) Circuit limits
(d) Position limits

Correct Answer Position limits

Answer Client level position limits and member level position limits are set by the exchange to avoid
Explanation concentration risk and market manipulation by a trading member or group acting in concert.

Question14 is the number of units of underlying asset in an options contract.

(a) Volume of the day
(b) Open Interest
(c) Lot Size
(d) ISIN number

Correct Answer Lot Size

Answer Lot size is the number of units of underlying asset in an options contract.
Explanation
For eg. the lot size of Cotton is 25 bales.
 NISM XVI – COMMODITY DERIVATIVES
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Question15 Generally the futures prices price broadly follow the price movement of the underlying asset.
However sometimes, the two prices may not always vary by the same degree and this will lead
to .
(a) Delta Risk
(b) Basis Risk
(c) Spread Risk
(d) Margin Risk

Correct Answer Basis Risk

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

Question16 Crude oil, Gold, Silver, etc are known as .

(a) Hard commodities
(b) Soft commodities
(c) Valuable commodities
(d) Exotic commodities

Correct Answer Hard commodities

Answer There are two main types of commodities that trade in the spot and derivatives markets:
Explanation
- Hard commodities: These are natural resources that are mined or processed such as the crude
oil, gold, silver, etc.
- Soft commodities: These are the perishable agricultural products such as corn, wheat, coffee,
cocoa, sugar, soybean, etc.
 NISM XVI – COMMODITY DERIVATIVES
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Question17 The price discovery in futures markets refers to the process of determining the futures price of
a commodity through after discounting expected news, data releases and information
on the product.
(a) A special formula for calculating the future price
(b) Random sampling of commodity prices
(c) Expected demand and supply
(d) Polling mechanism approved by regulator

Correct Answer Expected demand and supply

Answer The price discovery in futures markets refers to the process of determining the futures price
Explanation through expected demand and supply after discounting expected news, data releases and
information on the product.

Question18 Functions of the E-Registry include which of the following ?

(a) On-line viewing of warehouse charges/ stocks
(b) Maintaining the identity of the original depositor of the commodity
(c) Consolidation and splitting of the goods in deliverable lots as per the contract specification
(d) All of the above

Correct Answer All of the above

Answer An E-registry maintains electronic records of ownership of goods against negotiable warehouse
Explanation receipts (NWRs) and warehouse receipts (WRs) and effects transfer of ownership of such goods
by electronic process. The functions of the E- Registry are :
- Maintaining the identity of the original depositor of the commodity.
- Flexibility for acceptance of non-standard (small lots) quantities.
- On-line viewing of warehouse charges/ stocks.
- Consolidation and splitting of the goods in deliverable lots as per the contract specification.
- Stacking and weight tracking information.
- Ability to capture quality related information and receipt expiry dates.
 NISM XVI – COMMODITY DERIVATIVES
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Question19 Which of these establishes a direct relationship between call/put prices and the underlying
commodity price?
(a) Moneyness of an Option
(b) Time value
(c) Put-Call Parity Theorem
(d) Volatility

Correct Answer Put-Call Parity Theorem

Answer The put-call parity theorem explains the relationship between call/put prices and the
Explanation underlying commodity price.

Question20 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) a fee
(b) an option premium
(c) a commission
(d) the full contract value of underlying upfront

Correct Answer an option premium

Answer In an options transaction, the purchaser pays the seller (the writer of the option), an amount
Explanation 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”.
 NISM XVI – COMMODITY DERIVATIVES
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Question21 Mr. Sunil is long on a put option. He has a .

(a) Right to buy, with an obligation to buy
(b) Right to sell, without an obligation to sell
(c) Right to buy, without an obligation to buy
(d) Right to sell with an obligation to sell

Correct Answer Right to sell, without an obligation to sell

Answer Put option contracts give the buyer the right to sell a specified quantity of an asset at a
Explanation particular price on or before a certain future date.
Since the buyer is paying the premium to the seller, he has the right to exercise the option
when it is favourable to him but no obligation to do so.

Question22 If a new a new short futures position is taken during the day and if the clearing price at the end
of the day is higher than the transaction price, .
(a) the seller has made a Mark to Market (MTM) profit
(b) the buyer has made a Mark to Market (MTM) loss
(c) the seller has made a Mark to Market (MTM) loss
(d) Premium has to paid to the exchange

Correct Answer the seller has made a Mark to Market (MTM) loss
Answer Mark-to-market (MTM) margin is calculated on each trading day by taking the difference
Explanation between the closing price of a contract on that particular day and the price at which the trade
was initiated (for new positions taken during the day) or is based on the previous day’s closing
price (for carry forward positions from previous day).
When a new short position is initiated, it means the trader has sold the futures believing that
prices will fall. If the prices rise and is higher than the transaction price at the end of day, there
will be a Mark to Margin loss which the trader has to pay.
 NISM XVI – COMMODITY DERIVATIVES
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Question23 In Exchange traded gold futures, the price is calculated on the basis of .995 purity. What would
be the price to be paid to a seller if he delivers a higher .999 purity gold instead of .995 purity?
(a) Contract rate * 995/999
(b) Contract Rate * 999/995
(c) Contract rate * 0.999
(d) No extra price will be paid

Correct Answer Contract Rate * 999/995

Answer If the Seller gives delivery of .999 purity, he will get a proportionate premium and sale
Explanation proceeds will be calculated as under:
Rate of delivery ie. Contract Rate X 999/ 995
If the quality is less than 995, it is rejected.

Question24 Which of these statements is true with respect to Commodities Transaction Tax (CTT) on
commodities?
(a) CTT is applicable on sale transactions of commodity futures, except for exempted agricultural
commodities.
(b) CTT is applicable on purchase transactions of commodity futures, except for exempted
agricultural commodities.
(c) CTT is applicable on both purchase and sale transactions of commodity futures, except for
exempted agricultural commodities.
(d) CTT is applicable on both purchase and sale transactions of commodity futures

Correct Answer CTT is applicable on sale transactions of commodity futures, except for exempted agricultural
commodities.
Answer Commodities Transaction Tax (CTT) is applicable on sale transactions of commodity
Explanation futures, except for exempted agricultural commodities.
CTT is determined at the end of each trading day.
 NISM XVI – COMMODITY DERIVATIVES
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Question25 In the commodity market, what does it mean by Hard Commodities?

(a) Perishable agricultural commodities
(b) Commodities resulted from mining activities
(c) Commodities resulted from industrial processing
(d) Both 2 and 3

Correct Answer Both 2 and 3

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

Question26 The purchaser of a CALL OPTION pays the seller / writer, an option premium for the .
(a) Right to buy with an obligation to buy
(b) Right to sell with an obligation to sell
(c) Right to sell without an obligation to sell
(d) Right to buy without an obligation to buy

Correct Answer Right to buy without an obligation to buy

Answer Call option contracts give the purchaser the right to buy a specified quantity of a commodity or
Explanation financial asset at a particular price (the exercise price) on or before a certain future date but he
has no obligation to buy.
In case of both call and put options, the buyer has the right but no obligation whereas the
seller, being the receiver of the premium, has no right but an obligation to the buyer.
 NISM XVI – COMMODITY DERIVATIVES
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Question27 Two parties Mr. A and Mr. B have entered into agreement today for delivery of Sugar cane at a
specified time in future at a price agreed today. What is this contract called?
(a) Commodity delivery contract
(b) Commodity spot contract
(c) Commodity forward contract
(d) Commodity cash contract

Correct Answer Commodity forward contract

Answer A forward contract is a legally enforceable agreement for delivery of goods or the
Explanation underlying asset on a specific date in future at a price agreed on the date of contract.
Forward contracts can be customized to accommodate any commodity, in any quantity, for
delivery at any point in the future, at any place.

Question28 Which of these indicates ‘weakening of basis’ ?

(a) Change of basis from -70 Rupees to -60 Rupees
(b) Change of basis from -70 Rupees to +70 Rupees
(c) Change of basis from +70 Rupees to +60 Rupees
(d) Change of basis from +70 Rupees to +80 Rupees

Correct Answer Change of basis from +70 Rupees to +60 Rupees

Answer Basis is a measure of the difference between the spot and the futures prices.
Explanation
Basis= Spot Price – Futures Price
Remember - Weakening of basis happens when basis becomes less positive or more negative.
In the above question, a change of basis from +70 Rupees to +60 Rupees is weakening of basis
because the basis is becoming less positive.
 NISM XVI – COMMODITY DERIVATIVES
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Question29 A future contract buyer of a commodity will tend to if the the price of the underlying
commodity falls.
(a) make a profit
(b) make a loss
(c) make neither profit nor loss
(d) Cannot say as usually there is no relation between spot price and futures price

Correct Answer make a loss

Answer Generally there is a direct relationship between spot and future prices. If the spot prices rise,
Explanation the future prices will also tend to rise and vise versa.
So a buyer of a future contract will tend to lose money if the spot prices fall as the future prices
will also fall and he will make a loss.

Question30 Mr. A sold a Gold call option of strike price Rs. 40,000 (per 10 grams) for a premium of Rs. 600
(per 10 grams). The lot size is 1 Kg. This option expired at a settlement price of Rs. 42000 per 10
grams. Calculate the profit or loss to Mr. A on this position. (Do not consider any tax or
transaction costs)
(a) Profit of Rs. 2,00,000
(b) Loss of Rs. 20,000
(c) Loss of Rs. 1,40,000
(d) Profit of Rs. 2,80,000

Correct Answer Loss of Rs. 1,40,000

Answer Selling a call option means the view is bearish (price to fall). Mr. A has sold a call option but the
Explanation price has risen from Rs.40000 to Rs. 42000. This means there is a loss of Rs. 2000. He has however
earned a premium of Rs.600.
So his net loss is Rs. 2000 – Rs. 600 = Rs. 1400
Rs 1400 is the loss for 10 grams.
So for 1 kg or 1000 grams (lot size) the loss is (1000 x 1400 / 10) = Rs 140000.
 NISM XVI – COMMODITY DERIVATIVES
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Question31 The physical markets for commodities deal in transactions for ready delivery and
payment.
(a) Commodity futures
(b) Commodity options
(c) Commodity forwards
(d) Commodity spot

Correct Answer Commodity spot

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

Question32 Arbitrage opportunities can exist between .

(a) Futures and options prices
(b) Spot and futures prices
(c) Two futures prices
(d) All of the above

Correct Answer All of the above

Answer Arbitrageurs simultaneously buy and sell in two markets where their selling price in one
Explanation market is higher than their buying price in another market by more than the transaction costs,
resulting in riskless profit to the arbitrager. In commodity derivatives, we see arbitrage
play between Futures / Options – Spot or within Futures when we see huge backwardation.
 NISM XVI – COMMODITY DERIVATIVES
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Question33 Introduction of futures trading on new commodities, or withdrawal of futures trading on a

specific commodity require the prior approval of .
(a) The exchange
(b) FMC
(c) SEBI
(d) The clearing corporation of that exchange

Correct Answer SEBI

Answer Whenever a new contract on commodity futures is to be introduced by commodity exchanges,
Explanation 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.

Question34 is the risk that a commodity's futures price will move differently from that of its
underlying physical commodity.
(a) Spread risk
(b) Premium risk
(c) Basis risk
(d) Margin risk

Correct Answer Basis risk

Answer There is a relationship between the futures price and its underlying commodity spot price and
Explanation 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.
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Question35 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.
(a) Forwards
(b) Options
(c) Swaps
(d) Futures

Correct Answer Swaps

Answer Swaps are agreements between two counterparties to exchange a series of cash payments for
Explanation a stated period of time. The periodic payments can be charged on fixed or floating price,
depending on the terms of the contract

Question36 options give the option buyer zero or close to zero cash flow, if it were exercised
immediately.
(a) ITM & OTM options
(b) ATM & CTM options
(c) All Exchange Traded
(d) All OTC

Correct Answer ATM & CTM options

Answer In 'At-the-money' (ATM) and ‘Close to the money’ (CTM) options, the strike price is equal to
Explanation 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.
 NISM XVI – COMMODITY DERIVATIVES
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Question37 The regulatory framework for commodity markets in India consist of three tiers. Which of the
following is NOT one of them?
(a) Forward Markets Commission (FMC)
(b) Securities and Exchange Board of India (SEBI)
(c) Government of India
(d) Exchanges

Correct Answer Forward Markets Commission (FMC)

Answer The main objective of commodity market regulation is to maintain and promote the fairness,
Explanation 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.

Question38 If the closing price for X Metal futures contract was Rs. 2000 yesterday and Daily Price Range is
10 percent as per the contract specification. What would be the price range for this contract
today?
(a) Rs. 1500 to Rs. 2500
(b) Rs. 1900 to Rs. 2100
(c) Rs. 1800 to Rs. 2200
(d) Rs. 1750 to Rs. 2250

Correct Answer Rs. 1800 to Rs. 2200

Answer The Daily Price Range is 10%.
Explanation
10% of Rs. 2000 is Rs. 200
So the price range will be 2000 - 200 and 2000 + 200 = Rs. 1800 to Rs.2200
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Question39 Price discovery in spot markets refers to the process of determining commodity price through
.
(a) a mechanism approved by regulator
(b) forces of market demand and supply
(c) a special formula approved by the exchange
(d) random sampling of commodity prices

Correct Answer forces of market demand and supply

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

Question40 Delta for call option buyer is .

(a) Positive
(b) Negative
(c) Zero
(d) Infinite

Correct Answer Positive

Answer Delta measures the sensitivity of the option value to a given small change in the price of the
Explanation underlying asset.
Delta for call option buyer is positive. This means that the value of the contract increases as
the underlying price rises.
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Question41 option would lead to zero cash flow if it were exercised immediately.
(a) In the money
(b) Out of the money
(c) At the money
(d) American options

Correct Answer At the money

Answer At the money (ATM) option would lead to zero cash flow if it were exercised immediately. For
Explanation both call and put ATM options, strike price is equal to spot price.

Question42 A trader holds 500 kgs of Nickel of with the spot price of Rs.800 per kilo. He writes a single call
option with a strike price of Rs 825 for a premium of Rs 12. Which option strategy has the trader
implemented here?
(a) Covered Long put
(b) Covered Short put
(c) Covered Long call
(d) Covered Short call

Correct Answer Covered Short call

Answer A covered short call position is created by combining a long underlying position (stock in hand -
Explanation spot market) 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. In the above question, the following can be the
possible outcomes on expiry-
• If the price remains at Rs 800, the option does not get exercises and he keeps the premium of
Rs.12.
• If the nickel price rises to Rs 825, the investor keeps the premium of Rs12 (on options) plus a
gain of Rs.25 per kilo (on the spot position)
• If the nickel price falls to Rs 790, the option is not exercised by the buyer and the seller keeps
the premium of Rs 12 which partly compensates the fall in the value of the spot position.
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Question43 The Strike Price of a commodity call option is Rs. 1000. The current market price of the
underlying commodity is Rs. 1250. The option premium is Rs. 300. Calculate the Time Value
from this data.
(a) Rs 300
(b) Rs 250
(c) Rs 100
(d) Rs 50

Correct Answer Rs 50
Answer The option premium of an option is made up of Intrinsic Value + Time Value.
Explanation
Only 'In the Money' options have Intrinsic Value.
In the above question, the Call Option is 'In the Money' as Market Price is higher than Strike
Price. So there is positive intrinsic value.
Intrinsic value = Current market price of underlying - Strike price
= 1250 - 1000 = Rs.250
Option Premium = Intrinsic Value + Time Value
300 = 250 + Time Value
So the Time Value is 300 - 250 = Rs. 50
(Note : 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)

Question44 If a new a new short futures position is taken during the day and if the clearing price at the end
of the day is lower than the transaction price, .
(a) the seller has made a Mark to Market (MTM) profit
(b) the buyer has made a Mark to Market (MTM) gain
(c) the seller has made a Mark to Market (MTM) loss
(d) Premium has to paid to the exchange

Correct Answer the seller has made a Mark to Market (MTM) profit
Answer Mark-to-market (MTM) margin is calculated on each trading day by taking the difference
Explanation between the closing price of a contract on that particular day and the price at which the trade
was initiated (for new positions taken during the day) or is based on the previous day’s closing
price (for carry forward positions from previous day).
When a new short position is initiated, it means the trader has sold the futures believing that
prices will fall. If the prices fall and is lower than the transaction price at the end of day, there
will be a Mark to Margin profit which the trader will receive.
 NISM XVI – COMMODITY DERIVATIVES
PRACTICE TEST . 4

Question45 is made up of a long position in one commodity and a short position in a different
but economically related commodity.
(a) Spot versus Futures Arbitrage
(b) Intra commodity spread
(c) Inter commodity spread
(d) Reverse Cash and Carry Arbitrage

Correct Answer Inter commodity spread

Answer An inter commodity spread is made up of a long position in one commodity and a short
Explanation position in a different but economically related commodity.
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.

Question46 A holder of an can exercise his right at any time on or before the expiry date/day of
the contract.
(a) European option
(b) American option
(c) Swiss option
(d) None of the above

Correct Answer American option

Answer A holder of an American option can exercise his right at any time on or before the expiry
Explanation date/day of the contract.
The holder of European option can exercise his right only on the expiry date/day of the
contract.
 NISM XVI – COMMODITY DERIVATIVES
PRACTICE TEST . 4

Question47 Fair Value or the Theoretical futures price of the futures contract = + Cost of Carry.
(a) Strike Price
(b) Spot Price
(c) Forward Price
(d) Futures Price

Correct Answer Spot Price

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

Question48 Mr. Bimal sold a Gold call option of strike price Rs. 35000 (per 10 grams) for a premium of Rs.
500 (per 10 grams). The lot size is 1 Kg. This option expired at a settlement price of Rs. 36000 per
10 grams. Calculate the profit or loss to Mr. Bimal on this position. (Do not consider any taxor
transaction costs)

(a) Profit of Rs. 50000

(b) Loss of Rs. 50000
(c) Profit of Rs. 100000
(d) Loss of Rs. 100000
Correct Answer Loss of Rs. 50000
Answer Selling a call option means the view is bearish (price to fall). Mr.Bimal has sold a call option but
Explanation the price has risen from Rs.35000 to Rs. 36000. This means there is a loss of Rs. 1000. He has
however earned a premium of Rs.500.
So his net loss is Rs. 1000 – Rs. 500 = Rs. 500
Rs 500 is the loss for 10 grams.
So for 1 kg or 1000 grams (lot size) the loss is (1000 x 500 / 10) = Rs 50000
 NISM XVI – COMMODITY DERIVATIVES
PRACTICE TEST . 4

Question49 On expiry, option series having strike price closest to the Daily Settlement Price of Futures shall
be termed as At the Money (ATM) option series. This ATM option series and two option series
having strike prices immediately above this ATM strike and two option series having strike prices
immediately below this ATM strike shall be referred as option series.
(a) In the money (ITM)
(b) Near the money (NTM)
(c) Close to the money (CTM)
(d) Out of the money (OTM)

Correct Answer Close to the money (CTM)

Question50 In which of these scenarios should the buyer buy the commodities in the futures market?
(a) (Futures price - Spot price) < Cost of carry
(b) (Futures price - Spot price) > Cost of carry
(c) (Futures price - Spot price) = Cost of carry
(d) Commodities should always be bought in the spot markets as they are better priced

Correct Answer (Futures price - Spot price) < Cost of carry

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

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