Commodity Derivatives Certification Free Demo Test 7

Explanation:

Theta is the change in option price given a one-day decrease in time to expiration. It is a measure of time decay. Theta is generally used to gain an idea of how time decay is affecting your option positions.

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.

Explanation:

Volatility refers to the range to which the price of a commodity may increase or decrease.

Investors with Long options anticipates an increase in volatility and they are long on vega i.e., volatilities. Similarly, one who is with short positions anticipates a decrease in volatility and are having short positions in volatility / vega.

Explanation:

If all the other factors remain constant but the strike price of option increases, intrinsic value of the call option will decrease and hence its value will also decrease.

For eg. The Spot price is Rs. 100 and the Strike Price is Rs 90. Here the Intrinsic value for a call option is Rs 10 ( 100 – 90)
The Intrinsic value for a Rs 95 strike price will be Rs 5. ( 100 – 95) .
So as the Strike price increase, the intrinsic value decreases for a Call option.

Explanation:

The above question implies that if the oil content in castor seed is below 47 percent but within 45 percent,
the contracted price will attract discount. For every 1 percent decrease in oil content or part thereof, there will be a discount of 2 percent or part thereof in price.

Contracted price of castor seeds i.e., Rs 9000 will be discounted by 2 percent because the quality content has decreased by 1 percent (from 47 percent to 46 percent).

Contracted price of castor seeds (at discount) = 9000 – 2% of 9000 = 9000 – 180 = Rs. 8820

Explanation:

As per the Guidance Note of ICAI – When sales of the hedged inventory occur in the future, the hedging related fair value adjustment to inventory will be released to the statement of profit and loss and can be classified as part of ‘cost of goods sold’.

Explanation:

Trader P has purchased and Trader Q has sold Gold futures. The prices have fallen from Rs 39000 to Rs 38500. So trader P will make a loss on his long position and trader Q will make a profit on his short position.

The lot size is 1 kg i.e. 1000 grams. The price quoted is for 10 grams. The fall in price is of Rs 500

So the amount will be Rs 500 x 1000 / 10 = Rs 50000

The correct option from the above is – Trader Q made a profit of Rs 50000 on this futures position.

Explanation:

Algo trading is permitted in commodity exchanges subject to the broad SEBI guidelines dated 27th Sept 2016.
High Frequency Trading (HFT) is part of algorithmic trading that comprises latency-sensitive trading strategies and deploys technology including high speed networks to connect and trade on the trading platform.

Explanation:

Forward contracts, more often than not, were not honored by either of the contracting parties due to price changes and market conditions. A seller pulled out of the contract if the spot price was more profitable for him than the contracted price. A buyer also backed out from executing the contract on maturity if he was able to get the commodity at a cheaper price from the spot market.

Futures emerged as an alternative financial product to address these concerns of counterparty default, as the Exchange guaranteed the performance of the contract in case of the Futures.

Explanation:

Speculation is a practice of engaging in trading to make quick profits from fluctuations in prices.

Short speculators are those who sell first and expect the price to decrease from current level.
Long speculators are those who buy first and expect the price to increase from current level.