Commodity Derivatives Certification Free Demo Test 9

Explanation:

Reduction in interest rate increases put option price but reduces call option price.

Lower interest rate leads to lower cost of finance of paying the call option premium, so the value of call option decreases.

For put options, the opposite holds true, that is, the lower the interest rates the higher the put option price.

Explanation:

Types of hedge accounting – The Guidance Note of ICAI recognizes the following types of hedging:

– The fair value hedge accounting model is applied when hedging the risk of a fair value change of assets and liabilities already recognized in the balance sheet, or a firm commitment that is not yet recognized.

– The cash flow hedge accounting model is applied when hedging the risk of changes in highly probable future cash flows or a firm commitment in a foreign currency.

Explanation:

Strike price is the price for which the underlying security may be purchased (in case of call) or sold (in case of put) by the option holder, by exercising the option.

Explanation:

If futures price is lower than spot price of an asset, market participants may expect the spot price to come down in future. This expectedly falling market is called “Backwardation market”.

This backwardation inspite of cost-of-carry arises due to seasonality factors in commodities especially in agricultural products. For e.g. during sowing season, spot supplies are less while it increases during harvesting month which will come after around 3 months. Hence, spot prices are expected to be lower during harvesting months (i.e., 3 months later) than the present spot price (i.e., while sowing).

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:

Intrinsic Value = Market price – Strike price

= 1900 – 2000 = -100

Intrinsic value can never be negative, so it will be considered as Zero.

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.

Only an ‘In the Money’ ie. a profitable option will have an intrinsic value. Otherwise it will have only time value.

In the above question, the market price (Rs 1900) is below the Strike price (Rs 2000). So this is an Out of the Money Call Option and will have NIL intrinsic value. The option premium of Rs 200 is only the time value.

Explanation:

Weights of commodities in the index are decided by the Exchanges, based on their scoring on production value and liquidity value.

Production Value is average value of deliverable supply in the past 5 financial years. Liquidity Value is the average trading volume of its futures in the last 12 months. Deliverable supply is Production plus Import.

Explanation:

In the case of a both option, the delivery will be executed only when both buyers and sellers agree to take/give delivery. If they do not give intention for delivery, such open positions are cash settled at the Due Date Rate (DDR).

Due date rate is the rate at which contracts is settled by the exchange. Usually it is the average of spot prices (polled) in last few days of Futures contract which is defined under the contract specification of the exchange. It is also referred as final settlement price of the contract.

Explanation:

Index Futures and Index Options are cash settled and hence, delivery period margins do not apply to it. Option on Commodity Futures devolve into Commodity Futures before those futures go into staggered delivery period. Thus, delivery period margin does not apply to Options on Futures.

Explanation:

A Stop Loss order has two prices ie. Trigger Price and Limit Price.

For eg. A trader has sold a commodity at Rs 96 and wants to restrict his losses to Rs 5. For this, he will use a Stop Loss purchase order, the trigger price will be Rs 100 and the Limit price will be Rs 101. Which means if the price rises and reaches Rs 100, it will trigger the Buy Order and the commodity will be bought till Rs 101.

Thus, stop loss trigger acts as the maximum price level to buy.