NISM XVI – COMMODITY

DERIVATIVES EXAM
 NISM XVI – COMMODITY DERIVATIVES
REAL FEEL TEST

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 NISM XVI – COMMODITY DERIVATIVES
REAL FEEL TEST

THIS IS A MOCK EXAM TO TEST YOUR PREPARATIONS.

PLEASE SOLVE THESE 100 QUESTIONS IN 2 HOURS.

Question1 is a measure of the sensitivity of an option price to changes in market volatility.

(a) Theta
(b) Vega
(c) Rho
(d) Delta

Correct Answer Vega

Answer Vega (ν) is a measure of the sensitivity of an option price to changes in market volatility. It is
Explanation 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
(Note - Please memorise the features of all - Delta, Gamma, Rho, Theta and Vega)

Question2 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 .
(a) on the same day
(b) on T + 2 days
(c) on T + 5 days
(d) on T + 12 days

Correct Answer on T + 2 days

Answer Under the staggered delivery mechanism, the seller has an option of marking an intention
Explanation 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.
 NISM XVI – COMMODITY DERIVATIVES
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Question3 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 .
(a) The Commodity Exchanges
(b) The Custodians
(c) The RBI
(d) The Clearing Banks

Correct Answer The Clearing Banks

Answer Clearing banks play an important role in the smooth transfer of funds between the
Explanation 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 respectof each
trading and clearing member to the clearing house to facilitate monitoring.

Question4 Which of these is/are advantage(s) of Commodity futures over Commodity forwards?
(a) Elimination of counterparty credit risk
(b) Transparent trading platform
(c) Efficient price discovery
(d) All of the above

Correct Answer All of the above

Answer Advantages of commodity futures over commodity forwards:
Explanation
- Efficient price discovery as the market brings together buyers and sellers of divergent needs
- Elimination of counterparty credit risk as exchanges interposes as central counter-party
- Access to all types of market participants, big or small
- Standardized products: Standardisation increases the clarity and number of participants
in Future trades which results in increased liquidity than the forward markets
- Transparent trading platform
 NISM XVI – COMMODITY DERIVATIVES
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Question5 The exchange traded commodity derivatives in India devolves into .

(a) OTC markets prices
(b) underlying commodity options contracts
(c) underlying commodity futures contracts
(d) underlying commodity spot contracts

Correct Answer underlying commodity futures contracts

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

Question6 Who will bear the expenses such as transport, loading and unloading etc. for physically settled
commodity futures contracts?
(a) The Buyer
(b) The Seller
(c) The Clearing Corporation of the Exchange
(d) The Warehouse service provider

Correct Answer The Buyer

Answer The buyer will bear the expenses such as transport, loading and unloading etc. for physically
Explanation settled commodity futures contracts.
 NISM XVI – COMMODITY DERIVATIVES
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Question7 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.
(a) Immediate or Cancel order
(b) Limit Order
(c) Market order
(d) Trailing stop loss order

Correct Answer Limit Order

Answer In a limit order, the buyer or seller specifies the price at which the trade should be executed. For
Explanation 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.

Question8 Backwardation arises due to in commodities especially in agricultural products.

(a) demand supply gap
(b) seasonality factors
(c) cantongo
(d) Convergence

Correct Answer seasonality factors

Answer Backwardation, inspite of cost-of-carry, arises due to seasonality factors in commodities
Explanation 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).
 NISM XVI – COMMODITY DERIVATIVES
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Question9 The clearing corporation undertakes which of these post-trade activities?

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

Correct Answer All of the above

Answer The clearing corporation undertakes post-trade activities such as clearing and settlement of
Explanation 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

Question10 A BULL SPREAD is created by a lower strike option and a higher strike option.
(a) buying, buying
(b) selling, selling
(c) buying, selling
(d) selling. Buying

Correct Answer Buying, selling

Answer Vertical Spreads (Bull or Bear spreads) attempts to profit from the directional movement in the
Explanation 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.
 NISM XVI – COMMODITY DERIVATIVES
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Question11 will have positive intrinsic value.

(a) Only At-the-Money options
(b) Only In-the-Money options
(c) Only Out of-the-Money options
(d) Both At-the-Money and Out of-the-Money options

Correct Answer Only In-the-Money options

Answer In the money (ITM) option: This option would give holder a positive cash flow, if it were
Explanation 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.

Question12 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?

(a) Rs. 390 to Rs. 410

(b) Rs. 380 to Rs. 420
(c) Rs. 395 to Rs. 405
(d) Rs. 375 to Rs. 425

Correct Answer Rs. 380 to Rs. 420

Answer The Daily Price Range is 5%.
Explanation
5% of Rs. 400 is Rs. 20
So the price range will be 400 - 20 and 400 + 20 = Rs. 380 to Rs.420
 NISM XVI – COMMODITY DERIVATIVES
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Question13 Mr. Sharma is an active option trader and is sure that there will be a big 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?
(a) Short Strangle
(b) Short Straddle
(c) Long Straddle
(d) Bull Call spread

Correct Answer Long Straddle

Answer A long straddle is an option strategy where the trader buys a call and a put with the same
Explanation strike price and same expiry date by paying premium.
In this the view is of an increase in volatility either upward or downward.

Question14 In the case of a In The Money (ITM) PUT option, the intrinsic value is .
(a) Excess of underlying assets price over the strike price
(b) Excess of the strike price over the underlying assets price
(c) One
(d) Zero

Correct Answer Excess of the strike price over the underlying assets price
Answer For put option which is in-the-money, intrinsic value is the excess of strike price over the assets
Explanation spot price.
For call option which is in-the-money, intrinsic value is the excess of the assets spot price over
the strike price.
 NISM XVI – COMMODITY DERIVATIVES
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Question15 Which is the price at which the underlying security can be purchased by the option holder by
exercising the call option?
(a) Strike Price
(b) Spot Price
(c) Premium Price
(d) Ask Price

Correct Answer Strike Price

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

Question16 Identify the true statement with respect to Time Decay of an option.
(a) Time Decay is higher in the initial days but slows down as expiry approaches
(b) Time Decay is slow in the initial days but speeds up as expiry approaches
(c) Time Decay happens only for Call options and not for Put options
(d) Time Decay is more or less uniform throughout the options life

Correct Answer Time Decay is slow in the initial days but speeds up as expiry approaches
Answer If all other factors affecting an option’s price remain same, the time value portion of an
Explanation 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.
 NISM XVI – COMMODITY DERIVATIVES
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Question17 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.
(a) Commodity Exchange
(b) SEBI
(c) The Selling Broker
(d) The Clearing Corporation

Correct Answer The Clearing Corporation

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

Question18 An option contract gives its writer to exercise the option.

(a) the right as well as the obligation
(b) the right but no obligation
(c) the obligation but no right
(d) no obligation and no right

Correct Answer the obligation but no right

Answer The writer (seller) of an option is one who receives the option premium and is thereby obliged
Explanation to sell/buy the asset if the buyer of option exercises his right. He has no right in this matter.
 NISM XVI – COMMODITY DERIVATIVES
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Question19 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.
(a) Strike price of exercised options
(b) Last traded price in the futures exchange
(c) Last traded price of the exercised options
(d) Spot price of the underlying commodity

Correct Answer Strike price of exercised options

Answer Commodity options, on exercise, devolve into the underlying futures contracts. All such
Explanation 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.

Question20 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.
(a) 0.691
(b) 48.23
(c) 0.483
(d) 0.202

Correct Answer 0.691

Answer Hedge Ratio = Coefficient of correlation between spot and futures price * (Standard deviation
Explanation of change in spot price / Standard deviation of change in futures price)
= 0.76 ( 7.60 / 8.35 )
= 0.76 x 0.91
= 0.691
 NISM XVI – COMMODITY DERIVATIVES
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Question21 The investor sells the lower strike option and buys a higher strike option in a .
(a) Bull spread
(b) Bear spread
(c) Bull Call spread
(d) Bull Put spread

Correct Answer Bear spread

Answer Vertical Spreads attempts to profit from the directional movement in the underlying
Explanation 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.

Question22 In case of ‘Principal Risk’ in Indian commodity derivatives trading, what does the Exchanges
guarantee?
(a) Exchanges guarantees financial settlement and not gross delivery settlement
(b) Exchanges guarantees gross delivery settlement and not financial settlement
(c) Exchanges guarantees both gross delivery settlement and financial settlement
(d) Exchanges does not guarantees gross delivery settlement nor financial settlement

Correct Answer Exchanges guarantees financial settlement and not gross delivery settlement
Answer Principal risk arises when the buyer/seller has not received the goods/funds but has fulfilled his
Explanation 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.
 NISM XVI – COMMODITY DERIVATIVES
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Question23 What are the guidelines for brokers with respect to advertising their business in public media?
(a) A broker is free to advertise his business in any media with out any restrictions only if its
ethically done
(b) A broker can advertise his business only if its on national TV
(c) A broker shall not advertise its business publicly unless permitted by the stock exchange
(d) 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

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

Question24 Traders who have long positions are inherently .

(a) Long on Vega
(b) Short on Vega
(c) Delta Neutral
(d) Bearish

Correct Answer Long on Vega

Answer Vega is a measure of the sensitivity of an option price to changes in market volatility.
Explanation
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.
 NISM XVI – COMMODITY DERIVATIVES
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Question25 Time decay in a call option is .

(a) Uniform throughout its life
(b) Higher in the initial days but slows down towards expiry
(c) Slow in the initial days but speed up as expiry approaches
(d) applicable only for out of the money call options

Correct Answer Slow in the initial days but speed up as expiry approaches
Answer If all other factors affecting an option’s price remain same, the time value portion of an
Explanation 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.

Question26 Option premium - Intrinsic value = .

(a) Delta Value
(b) Theta Value
(c) Future Value
(d) Time Value

Correct Answer Time Value

Answer Option premium consists of two components : Intrinsic value and Time value.
Explanation
Time value is the difference between the option premium and intrinsic value.
 NISM XVI – COMMODITY DERIVATIVES
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Question27 In the process of , the post-trade process of reconciling the obligations of the
parties involved in the trade is done.
(a) Clearing
(b) Settlement
(c) Mark to Margin
(d) Risk Management

Correct Answer Clearing

Answer Clearing and Settlement Process -
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.

Question28 Which of these are in the form of a bilateral agreement between two specific counter parties?
(a) Exchange traded derivatives
(b) Spot derivatives
(c) OTC derivatives
(d) Futures

Correct Answer OTC derivatives

Answer Derivatives are either traded on an exchange platform or bilaterally between counterparties-
Explanation known as the over the counter (OTC) market. OTC derivatives are created by an agreement
between two specific counterparties.
 NISM XVI – COMMODITY DERIVATIVES
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Question29 In which of these strategies does an investor buy a lower strike option and sells a higher strike
option?
(a) Covered Short Call
(b) Covered Short Put
(c) Bear Spread
(d) Bull Spread

Correct Answer Bull Spread

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

Question30 When a option contract devolves into underlying asset, a call option is said to be In the Money
(ITM) when .
(a) Spot price is greater than strike price
(b) Spot price is lower than strike price
(c) Spot price is equal strike price
(d) Spot price is equal OTC price

Correct Answer Spot price is greater than strike price

Answer A call option is said to be ITM, when spot price is higher than strike price. And, a put option is
Explanation said to be ITM when spot price is lower than strike price.
 NISM XVI – COMMODITY DERIVATIVES
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Question31 The Spread between Guar Seed and Guar Gum is known as .
(a) Intra commodity spread
(b) Inter commodity spread
(c) Calendar 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.
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.
A trader expects a fall in the spread between guar seed and guar gum in the near month
and executes the short sell position in spread by using the following strategy.

Question32 A short call position on exercise shall devolve into which of these contracts in the Indian
exchange traded commodity markets ?
(a) Short position in the underlying spot contract
(b) Short position in the underlying futures contract
(c) Long position in the underlying spot contract
(d) Long position in the underlying futures contract

Correct Answer Short position in the underlying futures contract

Answer The exchange traded commodity derivatives in India devolves into their futures contracts and
Explanation 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.
 NISM XVI – COMMODITY DERIVATIVES
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Question33 A position is created by combining a long underlying position with a short call option.
(a) Spread trading
(b) Bull Call
(c) Covered short put
(d) Covered short call

Correct Answer Covered short call

Answer A covered short call position is created by combining a long underlying position with a short
Explanation 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.

Question34 In ‘Compulsory Delivery’ option, what will indicate the number of contracts that will attract
compulsory physical delivery?
(a) The Open interest remaining on the settlement date
(b) The value of contracts traded on the contract expiry day
(c) The number of contract traded on the contract expiry day
(d) The Order book data on the contract expiry day

Correct Answer The Open interest remaining on the settlement date

Answer In the compulsory delivery option, both buyer and seller having an open position during the
Explanation 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.
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Question35 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 semi annually. Calculate the theoretical futures
price (Fair value) of a 1-year futures contract.
(a) Rs. 41580.90
(b) Rs. 39666.66
(c) Rs. 43748.50
(d) Rs. 42696.80

Correct Answer Rs. 42696.80

Answer Fair Value of a Futures Contract
Explanation = 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 semi
annually which means 2 times a year, Number of years = 1
Substituting -
= 38000 ( 1 + .12 / 2) ^ 2x1
= 38000 ( 1 + .06 ) ^ 2
= 38000 (1.06) ^ 2
On the Scientific Calculator of your computer, enter 1.06 , X^Y, 2 and you will get 1.1236
= 38000 x 1.1236 = 42696.80

Question36 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?
(a) Arbitrage - Future versus Future
(b) Arbitrage - Spot versus Future
(c) Long Hedge
(d) Covered call

Correct Answer Arbitrage - Spot versus Future

Answer The cost of carry is Rs 500 per month. So, ideally the February future price should be Rs. 40000
Explanation + 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.
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Question37 What is the 'Open interest' of a commodity futures contract ?

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

Correct Answer It is the total sum of long or short positions in that contract after netting at client level
Answer Open interest is the total number of option contracts outstanding for an underlying asset.
Explanation (outstanding positions at client level)

Question38 If an In-the-Money (ITM) option is actively traded in the market, it will have .
(a) Time Value
(b) Intrinsic Value
(c) Both Intrinsic and Time value
(d) Neither Intrinsic nor Time value

Correct Answer Both Intrinsic and Time value

Answer Intrinsic value refers to the amount by which option is in the money i.e., the amount an option
Explanation 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.
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Question39 Mr. Mohit has a short call option and would like to close that position before expiry. How
would he do that?
(a) By buying a put option of the same strike and same expiry
(b) By selling a put option of the same strike and same expiry
(c) By buying a call option of the same strike and same expiry
(d) By selling a call option or by buying a put option of the same strike and same expiry

Correct Answer By buying a call option of the same strike and same expiry
Answer A sold CALL option can only be squared up by buying the same CALL option.
Explanation

Question40 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 .
(a) Book Value
(b) Fair Value
(c) Intrinsic Value
(d) Real Value

Correct Answer Fair Value

Answer ICAI guidance note requires that all derivatives are recognised on the balance sheet and
Explanation 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.
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Question41 An is made up of a long position in futures contract and a short position in another
month contract of the same underlying.
(a) Intra commodity spread
(b) Inter commodity spread
(c) Reverse Cash and Carry Arbitrage
(d) Spot versus Futures Arbitrage

Correct Answer Intra commodity spread

Answer An intra commodity spread is made up of a long position in futures contract and a short
Explanation 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.

Question42 In the hedging process, a long call option gives the option buyer protection from any price
appreciation in the underlying asset above the .
(a) settlement price of that option contract
(b) futures price of the underlying asset
(c) current market price of the underlying asset
(d) strike price of the option contract

Correct Answer strike price of the option contract

Answer Hedgers use options to manage price risk and protect themselves against the possibility that
Explanation 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.
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Question43 The Black-Scholes option pricing model calculates implied volatility using .
(a) Strike price
(b) Cost of carry (interest rate)
(c) Time to expiry
(d) All of the above

Correct Answer All of the above

Answer The Black-Scholes model was published in 1973 by Fisher Black and Myron Scholes. It is one
Explanation 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.

Question44 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 .
(a) Time Decay
(b) Time Appreciation
(c) Value Decay
(d) Value Accumulation

Correct Answer Time Decay

Answer If all other factors affecting an option’s price remain same, the time value portion of an
Explanation 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.
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Question45 For a PUT option, time decay will work to the advantage of .
(a) Option buyer
(b) Option writer
(c) Both Option buyer and writer
(d) Neither Option buyer nor writer

Correct Answer Option writer

Answer Other things being equal, options tend to lose time value each day throughout their life. This is
Explanation 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.

Question46 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.
(a) Rs. 107.60
(b) Rs. 98.93
(c) Rs. 158.32
(d) Rs. 131.77

Correct Answer Rs. 131.77

Answer The formula for calculating a premium is -
Explanation
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 x 0.25) ]
C – 20 = 700 – 600 / 1.02
C – 20 = 700 – 588.23
C – 20 = 111.77
C = 111.77+20
C = 131.77
 NISM XVI – COMMODITY DERIVATIVES
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Question47 activities, if left unchecked, pose a risk to market integrity and have potential to
distort the fair price discovery.
(a) Cornering the stocks
(b) Cartelling
(c) Price rigging
(d) All of the above

Correct Answer All of the above

Answer Markets always carry the risks of price rigging, cartelling, cornering the stocks in derivatives
Explanation 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.

Question48 enters into the derivatives contract to mitigate the risk of adverse price fluctuation in
respect of his existing position.
(a) Arbitrageur
(b) Trader
(c) Hedger
(d) Investor

Correct Answer Hedger

Answer Hedging means taking a position in the derivatives market that is opposite of a position in
Explanation 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.
 NISM XVI – COMMODITY DERIVATIVES
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Question49 The buyer of an American option can exercise his right .

(a) At any time on or before the expiry day of the contract
(b) only on the expiry day of the contract
(c) at any time after the expiry day of the contract
(d) only during the last week before the expiry day of the contract

Correct Answer At any time on or before the expiry day of the contract
Answer American option: The owner of such option can exercise his right at any time on or before
Explanation 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.

Question50 Terms of the contract is tailored to suit the needs of the buyer and the seller in a .
(a) Future contract
(b) Forward contract
(c) Exchange traded derivatives contract
(d) Standarised derivatives contract

Correct Answer Forward contract

Answer Forward contracts can be customized to accommodate any commodity, in any quantity, for
Explanation 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.
 NISM XVI – COMMODITY DERIVATIVES
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Question51 Agricultural Spot markets like Mandis and APMCs are generally governed by .
(a) The State Government
(b) The Central Government
(c) Local bodies such as municipalities and gram panchayats
(d) Farmers Unions

Correct Answer The State Government

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

Question52 Which option greeks measures change in option premium with respect to change in price of
the underlying asset?
(a) Gamma
(b) Delta
(c) Rho
(d) Theta

Correct Answer Delta

Answer The most important of the ‘Greeks’ is the option’s “Delta”. This measures the sensitivity of
Explanation 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
 NISM XVI – COMMODITY DERIVATIVES
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Question53 By the buyer is effectively buying insurance against higher product prices in the
spot market on the specified future date.
(a) buying a call option
(b) buying a put option
(c) selling a call option
(d) selling a put option

Correct Answer buying a call option

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

Question54 Which of these choices does an option buyer have ?

(a) Let the option expire without being exercised on the expiration date
(b) Sell the option in the Exchange before the expiration date
(c) Exercise the option on the expiration date
(d) All of the above

Correct Answer All of the above

Answer An option buyer has all the rights but no obligation.
Explanation

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
 NISM XVI – COMMODITY DERIVATIVES
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Question55 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. indicates the benefit of owning a commodity rather than buying
a futures contract on that commodity.
(a) Operational yield
(b) Convenience yield
(c) Current yield
(d) Production yield

Correct Answer Convenience yield

Answer Convenience yield indicates the benefit of owning a commodity rather than buying a futures
Explanation 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.

Question56 maintain overnight positions, which may run into weeks or even months, in
anticipation of favourable movement in the commodity futures prices.
(a) Day traders
(b) Position Traders
(c) Market Makers
(d) Arbitrageurs

Correct Answer Position Traders

Answer Position Traders are the subset of speculators who maintain overnight positions, which may run
Explanation 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.
 NISM XVI – COMMODITY DERIVATIVES
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Question57 In case of futures contract, when is the margin money is released and open position reduced ?
(a) Only on the expiry of the contract
(b) Only when the open position is squared off
(c) Either on the expiry of the contract or when the open position is squared off, whichever is later
(d) Either on the expiry of the contract or when the open position is squared off, whichever is
earlier

Correct Answer Either on the expiry of the contract or when the open position is squared off, whichever is
earlier
Answer The initial margin must be maintained throughout the time the position is open and is
Explanation 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.

Question58 A long call position on exercise shall devolve into which of these contracts in the Indian
exchange traded commodity markets ?
(a) Short position in the underlying spot contract
(b) Short position in the underlying futures contract
(c) Long position in the underlying spot contract
(d) Long position in the underlying futures contract

Correct Answer Long position in the underlying futures contract

Answer The exchange traded commodity derivatives in India devolves into their futures contracts and
Explanation 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.
 NISM XVI – COMMODITY DERIVATIVES
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Question59 is the margin amount a customer needs to deposit with the clearing house before
entering into a trade.
(a) Basic Margin
(b) Extreme Loss Margin
(c) Mark to Market Margin
(d) Initial Margin

Correct Answer Initial Margin

Answer Initial margin is the margin amount a customer needs to deposit with the clearing house before
Explanation entering into a trade. Initial margin is a certain percentage of contract value of the openposition.

The initial margin is determined by the exchange based on the Value at Risk (VaR)
methodology.

Question60 Mr. Adarsh is SHORT on a call option. He has .

(a) an obligation to buy and also with a right to buy
(b) an obligation to sell without a right to sell
(c) an obligation to buy without a right to buy
(d) an obligation to sell and also with a right to sell

Correct Answer an obligation to sell without a right to sell

Answer Seller of an option is said to be “short on option”.
Explanation
A seller of a call option would have an obligation but no right with regard to selling.
 NISM XVI – COMMODITY DERIVATIVES
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Question61 As per the accounting standards, the prospective effectiveness testing has to be performed
.
(a) only at the inception of the hedge
(b) once at the inception of the hedge and once the hedge is over
(c) at inception of the hedge and at each subsequent reporting date during the life of the hedge
(d) only at the termination of the hedge

Correct Answer at inception of the hedge and at each subsequent reporting date during the life of the hedge
Answer To qualify for hedge accounting, the accounting standards require the hedge to be
Explanation 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.

Question62 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)
(a) When Future price < (Spot price + Interest that can be earned on the realized spot price +
Storage cost)
(b) When Future price= (Spot price + Interest that can be earned on the realized spot price +
Storage cost)
(c) When Future price > (Spot price + Interest that can be earned on the realized spot price +
Storage cost)
(d) Selling in futures is always recommended as compared to spot

Correct Answer When Future price < (Spot price + Interest that can be earned on the realized spot price +
Storage cost)
Answer If the futures price is lower than the spot price + Interest that can be earned on the realized
Explanation 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.
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Question63 Option contracts belonging to ‘Close to the Money' (CTM) option series shall .
(a) automatically expire worthless
(b) be rolled over to next contract cycle
(c) be exercised only on ‘explicit instruction’ for exercise by the long position holders of such
contracts
(d) automatically exercised unless the buyer of option gives an instruction of not exercising it

Correct Answer be exercised only on ‘explicit instruction’ for exercise by the long position holders of such
contracts
Answer Two option series having strike prices immediately below the ATM strike is referred as ‘Close
Explanation 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.

Question64 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.
(a) Rs. 1000
(b) Rs. 10,000
(c) Rs. 100
(d) Rs. 10

Correct Answer Rs. 100

Answer The formula for calculating tick value is : Ticket Value = (Lot size / Quotation factor) X Tick size
Explanation

Substituting the values given in the question -

Ticket Value = (1000 / 10 ) X 1 = Rs. 100

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Question65 does NOT have to meet margin requirements, till the very far-end of the contract
life.
(a) Buyer of commodity options
(b) Seller/Writer of commodity options
(c) Buyer of commodity futures
(d) Seller of commodity futures

Correct Answer Buyer of commodity options

Answer The buyer of a option pays a premium while buying the option contract. This option premium
Explanation 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.

Question66 What reduces the effect of inter-seasonal price fluctuations in the commodity futures market?
(a) Transactional Efficiency
(b) Price Stability
(c) Price Volatility
(d) Price Discovery

Correct Answer Price Discovery

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. 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.

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Question67 measures the change in an option’s price per unit increase in the cost of funding the
underlying.
(a) Rho
(b) Theta
(c) Vega
(d) Gamma

Correct Answer Rho

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

Question68 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.
(a) Clearing
(b) Settlement
(c) Mark-to-Margin
(d) Risk Management

Correct Answer Settlement

Answer Settlement process involves matching the outstanding buy and sell instructions, by
Explanation 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.
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Question69 The commodity derivatives contracts which are standardized in terms of quantity and quality
are known as .
(a) OTC Contracts
(b) Forward Contracts
(c) Multi Party Contracts
(d) Futures Contracts

Correct Answer Futures Contracts

Answer A futures contract is a legally binding agreement between the buyer and the seller, entered on
Explanation 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.

Question70 If the buyer of a wheat futures contract decides that he does not want the wheat derivatives
position, he can .
(a) sell the contract to someone who needs it
(b) abandon the contract by taking no action on it
(c) buy more contracts of the same type
(d) The buyer has no option but to carry the derivatives position till expiry

Correct Answer sell the contract to someone who needs it

Answer With the introduction of exchange based futures, the contracts of commodities being traded
Explanation 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.
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Question71 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.
(a) Rs 200
(b) Rs 150
(c) Rs 100
(d) Rs 50

Correct Answer Rs 150

Answer For a call option which is in-the-money, intrinsic value is the excess of spot price over the strike
Explanation 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

Question72 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%.
(a) Rs 483.29
(b) Rs 1,400.00
(c) Rs 621.18
(d) Rs 138.08

Correct Answer Rs 621.18

Answer The cost of carry has two components - Interest cost (for 90 days) and storage cost (for 90
Explanation 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
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Question73 enters into the derivatives contract to mitigate the risk of adverse price fluctuation
in her existing position.
(a) Arbitrageur
(b) Hedger
(c) Trader
(d) Speculator

Correct Answer Hedger

Answer Hedgers have an underlying exposure in the commodity and use derivatives market to insure
Explanation themselves against adverse price fluctuations.
Hedger enters into the derivatives contract to mitigate the risk of adverse price fluctuation in
respect of his existing position.

Question74 Assuming all other factors remains constant, which of the following statement is TRUE
regarding the relation between interest rates and option premium?
(a) Higher interest rates will result in decrease in the value of both call option and put option
(b) Higher interest rates will result in increase in the value of both call option and put option
(c) 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
(d) 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

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
Answer Higher interest rate leads to higher cost of finance of paying the call option premium, so the
Explanation 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 fora
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.
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Question75 If futures price is higher than spot price of an underlying asset, it is called as .
(a) Backwardation
(b) Contango
(c) Divergence
(d) Convergence

Correct Answer Contango

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”.

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”.

Question76 indicates the benefit of owning a commodity rather than buying a futures contract
on that commodity.
(a) Spot Yield
(b) Current Yield
(c) Convenience Yield
(d) Yield to Maturity

Correct Answer Convenience Yield

Answer Convenience yield indicates the benefit of owning a commodity rather than buying a futures
Explanation 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.
 NISM XVI – COMMODITY DERIVATIVES
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Question77 refers to the process of determining commodity price through forces of market
demand and supply.
(a) Price discovery
(b) Arbitrary pricing
(c) Price determination
(d) Law of one price

Correct Answer Price discovery

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

Question78 A is an option strategy where the trader buys a call and a put with the same strike price
and same expiry date.
(a) Long straddle
(b) Short straddle
(c) Long strangle
(d) Short strangle

Correct Answer Long straddle

Answer One of the major strategies in option trading involves simultaneous purchase of calls/puts
Explanation 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 samestrike
price and same expiry date by paying premium. The view is to gain from an increasein
volatility.
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Question79 gives SEBI the power to grant recognition to stock exchanges in India.
(a) Stock Exchange Regulation Act, 1992
(b) Forward Contracts (Regulation) Act, 1952
(c) Commodity Exchange Regulation Act, 1986
(d) Securities Contract (Regulation) Act, 1956

Correct Answer Securities Contract (Regulation) Act, 1956

Answer The Securities Contracts (Regulation) Act, 1956 (SC(R)A), provides for direct and indirect
Explanation 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.

Question80 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.
(a) Rollover risk
(b) Replacement-cost risk
(c) Principal risk
(d) Systemic 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 (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.
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Question81 What is /are the limitation(s) of hedging?

(a) Basis risk continues to remain
(b) Transaction cost is to be incurred
(c) Price risk cannot be totally eliminated
(d) All of the above

Correct Answer All of the above

Answer Limitations of hedging :
Explanation
1) Price risk cannot be totally eliminated.
2) Basis risk continues to remain
3) Transaction cost is to be incurred
4) Margin is to be maintained leading to cash flow pressures
5) If hedging is selectively carried out on a few positions based on one’s view and not on other
positions, it may happen that the hedging transaction leg itself results in loss or cumulatively
over a period, total gain on hedged leg may be negative.

Question82 At the end of the trading session every day, reports are downloaded by the trading members
through FTP. These contain(s) .
(a) Details of transactions executed by the member on that day
(b) Positions carried forward from the previous day
(c) Closing position of the day, including net obligation of the member
(d) All of the above

Correct Answer All of the above

Answer After the end of the trading session every day, files/reports are downloaded by the trading
Explanation members through FTP (File Transfer Protocol), which contains: a) details of transactions
executed by the member on that day, b) positions carried forward from the
previous day, c) closing position of the day, including net obligation of the member.
 NISM XVI – COMMODITY DERIVATIVES
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Question83 Theta is for a LONG call option

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

Correct Answer Negative

Answer Options Theta values are either positive or negative.
Explanation
All long stock options positions have negative Theta values, which indicates that they lose
value as expiration draws nearer.
All short stock options positions have positive Theta values, which indicates that the position is
gaining value as expiration draws nearer.

Question84 In a , the investor buys a lower strike option and sells a higher strike option.
(a) Bull spread
(b) Bear spread
(c) Covered short call
(d) Covered short put

Correct Answer Bull spread

Answer Vertical Spreads attempts to profit from the directional movement in the underlying
Explanation 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.
 NISM XVI – COMMODITY DERIVATIVES
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Question85 help grading and standardization of commodities certifying the required quality for
trading on commodity exchanges.
(a) Region wise Mandis
(b) Commodity Exchange Lab
(c) Quality Testing Companies
(d) E-registry

Correct Answer Quality Testing Companies

Answer Quality Testing Companies help grading and standardization of commodities certifying
Explanation the required quality for trading on commodity exchanges.

Question86 Identify the true statement with respect to Time Decay on options?
(a) Time decay is more and faster only for Call options as the expiry approaches
(b) Time decay is more and faster only for Put options as the expiry approaches
(c) There is no effect of time decay on options as time decay is seen only in futures
(d) Time decay has same effect on both Call and Put options

Correct Answer Time decay has same effect on both Call and Put options
Answer If all other factors affecting an option’s price remain same, the time value portion of an
Explanation option’s premium will decrease with the passage of time. This is also known as time decay.

Time decay happens both for Call and Put options in similar measures.
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Question87 Which of the following are NOT considered as Commodity futures?

(a) Crude oil futures
(b) Agriculture products futures
(c) Stock futures
(d) Metals futures

Correct Answer Stock futures

Answer Futures on crude oil, metals, agriculture products, etc. are known as Commodity Futures.
Explanation
Stock futures are known as Financial Futures.

Question88 Calculate the Ticket Value of a Zinc Futures contract if the Quotation factor for Zinc is 'Rupees
per Kilogram', lot size for regular Zinc contract = 5MT and tick size is Rs. 0.05.
(a) Rs. 50
(b) Rs. 250
(c) Rs. 500
(d) Rs. 25

Correct Answer Rs. 250

Answer The quotation for Zinc = Rupees per Kilogram
Explanation
Lot size = 5 MT (5000 kilograms)
Tick size = Rs 0.05

The formula for calculating tick value is : Ticket Value = (Lot size / Quotation factor) X Tick size

Tick value = (5000 / 1) * 0.05 = Rs 250

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Question89 Mr. Mehta has entered in a forward contract to sell 100 kgs of Nickel to Mr. Shah at Rs. 900 per
kg for delivery after 3 months. To save on finance and storage costs, Mr. Mehta does not buy
any physical Nickel immediately. Mr. Mehta is confident of a fall in Nickel prices in the next three
months and wants to profit from it. However he also wants to void the risk of a pricerise. Which
option strategy should Mr. Mehta use?
(a) Mr. Mehta should take a short position in call options equivalent to 100 kgs of Nickel
(b) Mr. Mehta should take a long position in put options equivalent to 100 kgs of Nickel
(c) Mr. Mehta should take a long position in call options equivalent to 100 kgs of Nickel
(d) Mr. Mehta should take a short position in put options equivalent to 100 kgs of Nickel

Correct Answer Mr. Mehta should take long position in call options equivalent to 100 kgs of Nickel
Answer Mr. Mehta has sold Nickel and to hedge his position he has to go long on Nickel (Buy)
Explanation
When he buys a Call option, he will benefit if prices rise. And if prices fall, he will benefit from
his forward sale position. So, by buying a Call option, he will create a good hedge.

Note -

Buy Call Option - View is bullish / Prices to rise. Maximum profit unlimited and maximum loss
limited to premium paid

Buy Put Option - View is bearish / Prices to fall - Maximum profit unlimited and maximum loss
limited to premium paid

Sell Call Option - View is bearish / Prices to fall - Maximum profit limited to premium received
and maximum loss is unlimited

Sell Put Option - View is bullish / Prices to rise - Maximum profit limited to premium received
and maximum loss is unlimited
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Question90 If futures price is than spot price of an underlying asset, it is called Backwardation.
(a) Higher
(b) Lower
(c) Equal
(d) Volatile

Correct Answer Lower

Answer If futures price are lower than spot price of an asset, market participants may expect the spot
Explanation price to come down in future. This expectedly falling market is called “Backwardation market”.

Question91 Warehousing Development and Regulatory Authority (WDRA) has recognized as

approved Repositories for electronically maintaining records of warehoused goods.
(a) NERL
(b) CDSL
(c) NSDL
(d) Both 1 and 2

Correct Answer Both 1 and 2

Answer WDRA has recognized NERL (National E-Repository Limited) and CDSL (Central Depository
Explanation Services Limited) as approved Repositories for electronically maintaining records of
warehoused goods which can also be used for clearing and settlement of trades on exchanges.
 NISM XVI – COMMODITY DERIVATIVES
REAL FEEL TEST

Question92 Smriti has a physical exposure of 2000 kilograms to the underlying commodity and the lot size
of the futures contract on this underlying is 10 kilograms. The hedge ratio between the spot and
futures price is 0.90. Calculate how many futures contract she should trade to set up an optimal
hedge?
(a) 180
(b) 18
(c) 90
(d) 280

Correct Answer 180

Answer The formula for calculating the contracts to hedge is :
Explanation
No of contracts to be hedged = (Physical Exposure X Hedge ratio) / Lot size
= 2000 x .90 / 10
= 180 lots

Question93 opportunity can be explored when futures price of the commodity is less than the
spot price + cost of carry.
(a) Cash and Carry Arbitrage
(b) Reverse Cash and Carry Arbitrage
(c) Spot versus spot Arbitrage
(d) Futures versus Futures Arbitrage

Correct Answer Reverse Cash and Carry Arbitrage

Answer Reverse cash and carry arbitrage opportunity is for those who have asset holdings with them.
Explanation
The arbitrage opportunity can be explored when futures price of the commodity is less than
the spot price + cost of carry. It is initiated by lending funds released from selling the commodity
in the spot market and buying futures simultaneously. At the end of the contract period the
asset will be bought after funds realization happens and interest income is also part
of final calculations as an income.
 NISM XVI – COMMODITY DERIVATIVES
REAL FEEL TEST

Question94 is a class of member who is obligated to provide liquidity in the Exchange in the
relevant commodity.
(a) Position trader
(b) Arbitrageurs
(c) Day traders
(d) Market Maker

Correct Answer Market Maker

Answer Market Maker is a class of member who is obligated to provide liquidity in the Exchange in the
Explanation relevant commodity by giving two way quotes at all times on such terms and conditions as may
be prescribed by the Exchange from time to time.

Question95 measures change in delta with respect to change in price of the underlying asset.
(a) Delta
(b) Theta
(c) Gamma
(d) Vega

Correct Answer Gamma

Answer Gamma measures change in delta with respect to change in price of the underlying asset. This is
Explanation called a second derivative option with regard to price of the underlying asset. It is calculated as
the ratio of change in delta for a unit change in market price of the underlying asset.

Gamma = Change in an option delta / Unit change in price of underlying asset

 NISM XVI – COMMODITY DERIVATIVES
REAL FEEL TEST

Question96 The additional price paid by the futures buyer compared to the spot buyer for the same
commodity (in absence of convenience yield) is known as .
(a) Delta Yield
(b) Convenience cost
(c) Cost of Carry
(d) Risk management cost

Correct Answer Cost of Carry

Answer The Cost-of-Carry concept theoretically explains the additional price that a futures buyer is
Explanation ready to pay compared to a spot buyer for the same commodity.
The cost-of-carry model can be expressed as:
F=S+C
where:
F: Futures Price, S: Spot Price and C: Cost of carry

Question97 Buying futures is often referred to as .

(a) Long Hedge
(b) Going Short
(c) Going Long
(d) Short Hedge

Correct Answer Going Long

Answer Buying futures is often referred to as “going long” or establishing a long position.
Explanation

Selling futures is often called “going short,” or establishing a short position.

 NISM XVI – COMMODITY DERIVATIVES
REAL FEEL TEST

Question98 A is entitled to clear and settle trades executed by other members of the
commodity exchanges but does not have the right to execute trades.
(a) Professional clearing member
(b) Self Clearing Members
(c) Trading Member
(d) Market Maker

Correct Answer Professional clearing member

Answer A professional clearing member is entitled to clear and settle trades executed by other members
Explanation of the commodity exchanges (Trading Members / Trading cum Clearing Members) but does not
have the right to execute trades.

A professional clearing member is a clearing member who is not a trading member. Typically,
banks and custodians become professional clearing members and clear and settle for their
trading members.

Question99 A involves the purchase of a call and a put with the same expiry date but with
different strike prices.
(a) Long strangle
(b) Short strangle
(c) Long Straddle
(d) Short Straddle

Correct Answer Long strangle

Answer A long strangle involves the purchase of a call and a put with the same expiry date but with
Explanation different strike prices. The market view is to profit from a large increase in volatility.

(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.)
 NISM XVI – COMMODITY DERIVATIVES
REAL FEEL TEST

Question100 Spread between Soyabean and Soya Oil is an example of .

(a) Inter commodity spread
(b) Intra commodity spread
(c) Cash and carry arbitrage
(d) Future Hedge

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.

Example: Spread between Guar Seed and Guar Gum; Spread between Soyabean and Soya Oil.

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