NISM Series XVI: Commodity Derivative Certification Last Day 1

Explanation:

Comparative movement in the value of a currency of a country in relation to the major global currencies is very important for prices of commodities in that particular country. Most of the commodities globally are denominated in the US dollar (USD). Hence, when the currency of a particular country appreciates against the USD, the price of the commodity in that particular country becomes cheaper and vice versa.

Explanation:

In the commodity Pay in process the clearing member will transfer the warehouse receipt to the clearing corporation.

(A Warehouse Receipt is a document of title to goods issued by a warehouse service provider to a person depositing commodities in the warehouse, evidencing storage of goods.)

Explanation:

Settlement process involves matching the outstanding buy and sell instructions, by transferring the commodities ownership against funds between buyer and seller.

In other words, settlement refers to the process of adjusting financial positions of the parties to the trade transactions to reflect the net amounts due to them or due from them.

Explanation:

In a forward contract, the terms of the contract is tailored to suit the needs of the buyer and the seller. Generally, no money changes hands when the contract is first negotiated and it is settled at maturity. These forward contracts, many a times are not honored by either of the contracting parties due to price changes and market conditions. Hence, counter-party credit risk exists and settlement failure is a possibility in case of forwards contracts.

Explanation:

The Securities Contract (Regulation) Act, 1956 (SCRA) gives SEBI the jurisdiction over stock exchanges through recognition and supervision. It also gives SEBI the jurisdiction over contracts in securities and listing of securities on stock exchanges.

Explanation:

By selling gold in the forward contract, the bank has already gone short.

Now it has to hedge its position to avoid losses in case price of gold rises.

Buy buying a call option, it will protect it self against any rise in gold prices by paying the option premium

In case the prices fall, it will benefit as it has already sold gold in the forward contract. The only loss in this will be the small call option premium it has paid.

Explanation:

Volatility is the magnitude of movement in the underlying asset’s price, either up or down. It affects both call and put options in the same way.

Higher volatility = Higher premium, Lower volatility = Lower premium (for both call and put options).

Explanation:

Position Traders are the subset of speculators who maintain overnight positions, which may run into weeks or even months, in anticipation of favourable movement in the commodity futures prices.

They may hold positions in which they run huge risks and with a possibility to earn big profits if their directional call proved to be correct.

Explanation:

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

Explanation:

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

Explanation:

SEBI Complaints Redress System (SCORES) is a web based centralized grievance redress system of SEBI. Complaints can be made online and acknowledgement is generated instantaneously acknowledging the receipt of the complaint.

Explanation:

The formula for calculating a premium is –

C – P = S – K / ( 1+r*t)

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 – 400 = 600 – 850 / 1+ (0.06 ∗ 0.25)
C – 400 = 600 – 850 / 1.015
C – 400 = 600 – 837.43
C – 400 = – 237.43
C = – 237.43 + 400
C = 162.57

Explanation:

Algo trading is permitted in commodity exchanges subject to the broad SEBI guidelines dated 27th September 2016.
High-Frequency Trading (HFT) is part of algorithmic trading that comprises latency-sensitive trading strategies and deploys technology including high-speed networks to connect and trade on the trading platform.

Explanation:

With all the other factors remaining constant, increase in strike price of option increases the intrinsic value of the put option which in turn increases its option value.

For a put option which is in-the-money, intrinsic value is the excess of strike price (X) over the spot price.

Explanation:

Basically, three delivery options are available in the commodity market:
– Compulsory delivery
– Both option
– Seller’s option
In the compulsory delivery option, both buyer and seller having an open position during the tender/delivery period of the contract are obligated to take/give delivery of the commodity.

Explanation:

Suresh has purchased and Mahesh has sold Gold futures. The prices have risen from Rs 38000 to Rs 40000. So Suresh will make a profit on his long position and Mahesh will make a loss on his short position.

The lot size is 1 kg i.e. 1000 grams. The price quoted is for 10 grams.

So the amount will be Rs 2000 x 1000 / 10 = Rs 200000

The correct option from the above is – Suresh made a profit of Rs 200000 on this futures position.

Explanation:

Forward contracts, more often than not, were not honored by either of the contracting parties due to price changes and market conditions. A buyer also backed out from executing the contract on maturity if he was able to get the commodity at a cheaper price from the spot market.

Futures emerged as an alternative financial product to address these concerns of counterparty default, as the Exchange guaranteed the performance of the contract in case of the Futures.

Explanation:

Globally, exchange-traded commodity derivatives have emerged as an investment product often used by institutional investors, hedge funds, sovereign wealth funds besides retail investors. There has been a growing sophistication of commodities investments with the introduction of exotic products such as weather derivatives, power derivatives and environmental emissions trading (carbon credits trading).

Explanation:

On exercise, option position shall devolve into underlying futures position as follows:
– Long call position shall devolve into long position in the underlying futures contract
– Long put position shall devolve into short position in the underlying futures contract
– Short call position shall devolve into short position in the underlying futures contract
– Short put position shall devolve into long position in the underlying futures contract

Explanation:

As the cost of carry determines the differential between spot and futures price and is associated with costs involved in holding the commodity till the date of delivery, it follows that the cost of carry diminishes with each passing day and the differential must narrow and on the date of delivery, the cost of carry becomes zero and the spot and futures price converge. This is known as Convergence.

Explanation:

If all other factors affecting an option’s price remain same, the time value portion of an option’s premium will decrease with the passage of time. This is 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.

Explanation:

Futures Price = Spot Price + Cost of carry

(The cost of carry is the Spot price X interest cost for 4 months)

= 40000 + ( 40000 x 12% x 4/12)

= 40000 + ( 40000 x .12 x 0.33333)

= 40000 + (40000 x 0.04)

= 40000 + 1600

= 41600

Explanation:

Out of the money (OTM) option is one with strike price worse than the spot price for the holder of option. In other words, this option would give the holder a negative cash flow if it were exercised immediately. A call option is said to be OTM, when spot price is lower than strike price. And a put option is said to be OTM when spot price is higher than strike price.

Explanation:

Hedging is a two-step process. For instance, if the hedger has plans to buy a commodity in the spot market at a future date, he buys the futures contract now. This is the first step.

Subsequently, on the Futures Expiry date, he takes the delivery from the futures position. Alternately, if the hedger manages to buy the required commodity from the spot market in the interim, then he squares off his futures contract. This is the second step.

Explanation:

Commodities Transaction Tax (CTT) is applicable on sale transactions of commodity futures, except for exempted agricultural commodities.

Explanation:

Agricultural commodities, have a convenience yield because they form part of production processes and having them readily available helps in the uninterrupted production process.

Explanation:

Position Limits are set at the client level and member level to prevent any members and clients from building up large position on the buy side or sell side to manipulate short-term price movements to their advantage. Numerical position limits are set both for agricultural and nonagricultural commodities as per the guidelines of the regulator.

Explanation:

Commodity derivatives markets play an increasingly important role in the commodity market value chain by performing key economic functions such as risk management through risk reduction and risk transfer, price discovery and transactional efficiency.

Explanation:

The correct answer is “Close to the money (CTM).” This term is used to describe the option series that are closest to the at-the-money (ATM) strike price.

Options that are close to the ATM strike price are highly sensitive to changes in the underlying asset’s price and are often referred to as being close to the money. These options typically have strike prices that are slightly above or below the current price of the underlying asset.

This terminology helps traders and investors to categorize options based on their proximity to the current market price, which can be useful for making informed trading decisions based on the anticipated movement of the underlying asset.

Explanation:

Generally there is a direct relationship between spot and future prices. If the spot prices rise, the future prices will also tend to rise and if spot prices fall the future prices will also tend to fall.

So a seller of a future contract will make money if the spot prices fall as the future prices will also fall and he will be able to square up his position at a lower price. (Eg. Sold at Rs 100 and bought back at Rs 90 – profit of Rs 10)

Explanation:

Volatility refers to the range to which the price of a commodity may increase or decrease.
A trader who is with short positions anticipates a decrease in volatility and are having short positions
in volatility / vega.
Similarly, Investors with Long options anticipates an increase in volatility and they are long on vega i.e., volatilities.

Explanation:

Theta is a measure of an option’s sensitivity to time decay. It is the change in option price given a one-day decrease in time to expiration.

Explanation:

Fair Value of a Futures Contract = Spot Price ( 1 + Interest Rate / No. of times compounding)^ No. of compounding in a year X Number of years

In the above question, Spot price is Rs. 33000, Interest Rate is 12% = .12, Compounding is semi annually which means 2 times a year, Number of years = 1

Substituting –

33000 ( 1 + .12 / 2) ^ 2×1

33000 ( 1 + .06 ) ^ 2

33000 (1.06) ^ 2

On the Scientific Calculator of your computer, enter 1.06 , X^Y, 2 and you will get 1.1236

33000 x 1.1236 = 37078.80

Explanation:

To qualify for hedge accounting, the accounting standards require the hedge to be highly effective. There are separate tests to be applied prospectively and retrospectively.

Retrospective effectiveness testing is performed at each reporting date throughout the life of the hedge following a methodology set out in the hedge documentation. The objective is to demonstrate that the hedging relationship has been highly effective by showing that actual results of the hedge are within the range of 80-125%.

Explanation:

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

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

Explanation:

Comparative movement in the value of a currency of a country in relation to the major global currencies is very important for prices of commodities in that particular country. Most of the commodities globally are denominated in the US dollar (USD). Hence, when the currency of a particular country depreciates against the USD, the price of the commodity in that particular country becomes expensive and vice versa.

Explanation:

Black-Scholes option pricing model is used to calculate a theoretical price of options using the five key determinants of an option’s price: underlying price, strike price, volatility, time to expiration, and short-term (risk free) interest rate.

Explanation:

Mr. Mehta has bought a Put Option which means he is expecting the gold prices to fall (Bearish view). His view proved to be correct the prices have fallen from Rs.39000 to Rs. 37000. This means he has made a profit of Rs 2000.

Rs 2000 is for 10 grams. So for 1 kg i.e. 1000 grams, the profit is 2000 x 1000 / 10 = Rs 2,00,000. This is Gross Profit

When a person buys a Put Option, he pays a premium.

Mr. Mehta has paid a premium of Rs 250 per 10 gram. So for a lot of 1 kg ie. 1000 grams he pays a premium of 250 x 1000 / 10 = 25000

So his Net Profit will be Gross Profit less Premium paid = 200000 – 25000 = Rs. 175000

Explanation:

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

Explanation:

Immediate or Cancel (IOC) is an order requiring all or part of the order to be executed immediately after it has been placed. Any portion not executed immediately is automatically cancelled. Such orders will not remain in the order book.

Explanation:

Speculation is a practice of engaging in trading to make quick profits from fluctuations in prices.

Short speculators are those who sell first and expect the price to decrease from current level.
Long speculators are those who buy first and expect the price to increase from current level.

Explanation:

Forward contracts, more often than not, were not honored by either of the contracting parties due to price changes and market conditions. A seller pulled out of the contract if the spot price was more profitable for him than the contracted price. A buyer also backed out from executing the contract on maturity if he was able to get the commodity at a cheaper price from the spot market.

Futures emerged as an alternative financial product to address these concerns of counterparty default, as the Exchange guaranteed the performance of the contract in case of the Futures.

Explanation:

Algo trading is permitted in commodity exchanges subject to the broad SEBI guidelines dated 27th Sept 2016.
High Frequency Trading (HFT) is part of algorithmic trading that comprises latency-sensitive trading strategies and deploys technology including high speed networks to connect and trade on the trading platform.

Explanation:

Trader P has purchased and Trader Q has sold Gold futures. The prices have fallen from Rs 39000 to Rs 38500. So trader P will make a loss on his long position and trader Q will make a profit on his short position.

The lot size is 1 kg i.e. 1000 grams. The price quoted is for 10 grams. The fall in price is of Rs 500

So the amount will be Rs 500 x 1000 / 10 = Rs 50000

The correct option from the above is – Trader Q made a profit of Rs 50000 on this futures position.

Explanation:

As per the Guidance Note of ICAI – When sales of the hedged inventory occur in the future, the hedging related fair value adjustment to inventory will be released to the statement of profit and loss and can be classified as part of ‘cost of goods sold’.

Explanation:

The above question implies that if the oil content in castor seed is below 47 percent but within 45 percent,
the contracted price will attract discount. For every 1 percent decrease in oil content or part thereof, there will be a discount of 2 percent or part thereof in price.

Contracted price of castor seeds i.e., Rs 9000 will be discounted by 2 percent because the quality content has decreased by 1 percent (from 47 percent to 46 percent).

Contracted price of castor seeds (at discount) = 9000 – 2% of 9000 = 9000 – 180 = Rs. 8820

Explanation:

If all the other factors remain constant but the strike price of option increases, intrinsic value of the call option will decrease and hence its value will also decrease.

For eg. The Spot price is Rs. 100 and the Strike Price is Rs 90. Here the Intrinsic value for a call option is Rs 10 ( 100 – 90)
The Intrinsic value for a Rs 95 strike price will be Rs 5. ( 100 – 95) .
So as the Strike price increase, the intrinsic value decreases for a Call option.

Explanation:

Volatility refers to the range to which the price of a commodity may increase or decrease.

Investors with Long options anticipates an increase in volatility and they are long on vega i.e., volatilities. Similarly, one who is with short positions anticipates a decrease in volatility and are having short positions in volatility / vega.

Explanation:

To qualify for hedge accounting, the accounting standards require the hedge to be highly effective. There are separate tests to be applied prospectively and retrospectively.

Retrospective effectiveness testing is performed at each reporting date throughout the life of the hedge following a methodology set out in the hedge documentation.

Explanation:

Theta is the change in option price given a one-day decrease in time to expiration. It is a measure of time decay. Theta is generally used to gain an idea of how time decay is affecting your option positions.