Commodity Derivatives Certification Free Demo Test 1

Explanation:

The most important of the ‘Greeks’ is the option’s “Delta”. This measures the sensitivity of the option value to a given small change in the price of the underlying asset.
Delta = Change in option premium / Unit change in price of the underlying asset

Explanation:

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

Explanation:

Hedging means taking a position in the derivatives market that is opposite of a position in the physical market with the objective of reducing or limiting risks associated with the price changes.

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

Explanation:

Clearing and Settlement Process –

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.

Explanation:

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

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

Explanation:

Option premium consists of two components : Intrinsic value and Time value.

Time value is the difference between the option premium and intrinsic value.

Explanation:

Vega (ν) is a measure of the sensitivity of an option price to changes in market volatility. It is the
change of an option premium for a given change (typically 1%) in the underlying volatility.

Vega = Change in an option premium / Change in volatility

(Note – Please memorise the features of all – Delta, Gamma, Rho, Theta and Vega)

Explanation:

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

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

Explanation:

Clearing banks play an important role in the smooth transfer of funds between the clearing members and clearing corporation to effect settlement of funds.

The clearing corporation computes and advises the clearing member’s obligation and the clearing member makes funds available in the clearing account for the pay-in and receives funds in case of a pay-out. The clearing banks communicate the status of fund flow in respect of each trading and clearing member to the clearing house to facilitate monitoring.

Explanation:

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