Commodity Derivatives Certification Free Demo Test 4

Explanation:

All the commodities are not suitable for futures trading. For a commodity to be suitable for futures trading, it must possess the following characteristics:
(i) The commodity should have a suitable demand and supply conditions i.e., volume and marketable surplus should be large.
(ii) Prices should be volatile to necessitate hedging through derivatives. As a result, there would be a demand for hedging facilities.
(iii) The commodity should be free from substantial control from Government regulations (or other bodies) imposing restrictions on supply, distribution and prices of the commodity.
(iv) The commodity should be homogenous or, alternately it must be possible to specify a standard, as it is necessary for the futures exchange to deal in standardized contracts.
(v) The commodity should be storable. In the absence of this condition, arbitrage would not be possible and there would be no relationship between spot and futures markets.

Explanation:

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

Explanation:

Mark-to-market (MTM) margin is calculated on each trading day by taking the difference between the closing price of a contract on that particular day and the price at which the trade was initiated (for new positions taken during the day) or is based on the previous day’s closing price (for carry forward positions from previous day).

When a new short position is initiated, it means the trader has sold the futures believing that prices will fall. If the prices rise and is higher than the transaction price at the end of day, there will be a Mark to Margin loss which the trader has to pay.

Explanation:

If the Seller gives delivery of .999 purity, he will get a proportionate premium and sale proceeds will be calculated as under:

Rate of delivery ie. Contract Rate X 999/ 995

If the quality is less than 995, it is rejected.

Explanation:

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

Put option contracts give the buyer the right to sell a specified quantity of an asset at a particular price on or before a certain future date.

Explanation:

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

Explanation:

Selling a call option means the view is bearish (price to fall). Mr. A has sold a call option but the price has risen from Rs.40000 to Rs. 42000. This means there is a loss of Rs. 2000. He has however earned a premium of Rs.600.

So his net loss is Rs. 2000 – Rs. 600 = Rs. 1400

Rs 1400 is the loss for 10 grams.

So for 1 kg or 1000 grams (lot size) the loss is (1000 x 1400 / 10) = Rs 140000.

Explanation:

Basis is a measure of the difference between the spot and the futures prices.

Basis= Spot Price – Futures Price

Remember – Weakening of basis happens when basis becomes less positive or more negative.

In the above question, a change of basis from +70 Rupees to +60 Rupees is weakening of basis because the basis is becoming less positive.

Explanation:

There are two main types of commodities that trade in the spot and derivatives markets:

– Hard commodities: These are natural resources that are mined or processed such as the crude oil, gold, silver, etc.

– Soft commodities: These are the perishable agricultural products such as corn, wheat, coffee, cocoa, sugar, soybean, etc.

Explanation:

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

For eg. if there are three BUY orders at Rs 100, Rs 101 and Rs 99, the buy order at Rs 101 will be ranked first and then Rs 100 and Rs 99 orders.

If there are two buy orders at Rs 101, then the order received first (time basis) will be ranked first.