Commodity Derivatives Certification Free Demo Test 5

Explanation:

If a gold futures contract is bought for Rs 50,000 per 10 grams of gold with a quality specification of .995 fineness and on the delivery date, if .999 fineness gold is delivered, the price is recalculated as follows:

Gold price = 50000 x 999/995 = Rs 50,201. The buyer will pay Rs 50,201 as against the original contract price of Rs 50,000 per 10 grams.

Explanation:

Most commodities follow a certain schedule of production cycle, which impacts the price trend. For example, in agricultural commodities, during the harvesting season, due to an increased supply, prices tend to come down, whereas during the sowing season the overall supply (availability) remains lower, which leads to an increase in prices.

Explanation:

If a trader is expecting a large decrease in volatility, he will try to gain from it by selling a call and a put with same expiry dates but with different strike prices. This is known as Short Strangle.

Explanation:

Algorithmic trading is defined as trading in financial instruments where a computer algorithm automatically determines individual parameters of orders such as initiation of order, timing, price or quantity, managing the order post submission with / without limited human intervention.

Any order that is generated using automated execution logic is known as algorithmic trading. Algorithmic trading permits the use of programs and computers to generate and execute orders in markets with electronic access and do not require human intervention.

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 and is valid for both call and put options.

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 time decay is slower in the initial days and speeds up as expiry approaches.

Explanation:

The difference between the Spot price and the Futures price is the Cost of Carry. The main components associated with cost of carry include finance cost (interest), storage cost and insurance

The cost of carry diminishes with each passing day and on the date of delivery, the cost of carry becomes zero and the spot and futures price converge. This is known also known as convergence.

Explanation:

When a person is selling a Put, he will receive the option premium.

If the prices rise, he gains on the option but loses on the actual commodity purchases

If the prices falls, he loses on the option but gains on the actual commodity purchases

So in both the cases he is not affected by the price rise or fall. But he will gain by the option premium he has received thus lowering his purchase price.

Explanation:

If the farmer didn’t want to deliver his soya bean, he could pass on his contractual obligation to another farmer. The price of the contract would increase or decrease depending on what was happening in the soya bean market.

Explanation:

The exchange traded commodity options in India devolves into their futures contracts.

Explanation:

In a Forwards commodity contract, the terms of the contract are decided by the buyer and the seller and there is no commodity exchange involved. So there is an inherent credit or default risk since the counter-parties of the forward transaction may fail either to deliver the commodity or to pay the agreed price at maturity.

(A futures contract is a legally binding agreement between the buyer and the seller, entered on an exchange. The exchange guarantees the delivery/payment even if the parties defaults)