Commodity Derivatives Certification Free Demo Test 3

Explanation:

A hedger seeks to transfer price risk by taking a futures position opposite to an existing position in the underlying commodity.

By hedging, the hedger reduces to a large extent or even eliminates the possibility of a loss from a decline in the price of the commodity. However, he has also eliminated the possibility of a gain from a price increase.

Explanation:

The option premium of an option is made up of Intrinsic Value + Time Value.

Only ‘In the Money’ options have Intrinsic Value.

In the above question, the Call Option is ‘Out of the Money’ as Market Price is lower than Strike Price. So there is no intrinsic value.

So the option premium is entirely due to Time Value.

The option premium is Rs 25 and this is the Time Value

(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)

Explanation:

A covered short call position is created by combining a long underlying position ie. holding the commodity stock 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.

Explanation:

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

Swap is a pure financial transaction that is used to lock in the long-term price and there is no physical delivery of the commodity and there is net cash settlement on maturity.

Explanation:

An E-registry maintains electronic records of ownership of goods against negotiable warehouse receipts (NWRs) and warehouse receipts (WRs) and effects transfer of ownership of such goods by electronic process.

Explanation:

A futures contract is a legally binding agreement between the buyer and the seller, entered on an exchange, to buy or sell a specified amount of an asset, at a certain time in the future, for a price that is agreed at the time of entering into the contract.

Explanation:

The term “securities” has been defined in the Section 2(h) of the Securities Contract (Regulation) Act, 1956 (SCRA).

The term ‘Securities’ include:

– Shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate
– Derivative
– Units or any other instrument issued by any collective investment scheme to the investors in such schemes
– Government securities etc.

Explanation:

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:

When a person buys a Put option, it means he is bearish on the commodity.

On exercise, the commodity options devolve into commodity futures in India. So, this means on exercise the long PUT option will be short position (bearish) in underlying commodity futures.

Explanation:

A bought CALL option can only be squared up by selling the same CALL option.