Commodity Derivatives Certification Free Demo Test 6

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:

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:

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:

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:

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:

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:

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:

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:

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:

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.