ICAR AICE-JRF/SRF (PhD admission and fellowship) · India · National Testing Agency for ICAR
Original practice questions written to the published syllabus · not past papersHow commodity exchanges let farmers, processors and traders manage price risk, how contracts, margins and settlement work, and how the market is regulated.
In the exams: agricultural economics PhD entrance and fellowship examinations, forward trading and futures markets (present); agribusiness management PhD entrance and fellowship examinations, marketing (present); commodity derivatives certification examinations
How our questions for ICAR AICE-JRF/SRF spread across the units of Commodity Markets, Futures & Options. Difficulty: 10 easy, 25 medium, 23 hard.
| Basis | 9 | |
| Hedging | 8 | |
| Price discovery and market efficiency | 8 | |
| Speculation | 7 | |
| Commodity derivatives and price-risk management | 6 | |
| Forwards, futures and options compared | 6 | |
| Regulation of commodity derivatives markets | 4 | |
| Organisation of commodity exchanges | 2 | |
| Contract specifications | 2 | |
| Settlement and delivery | 2 | |
| Market surveillance and risk control | 2 | |
| Clearing house, margins and mark-to-market | 1 | |
| Warehouse receipts and collateralised financing | 1 |
Choose an answer, then open the working. Each explanation says why the right answer is right and why the others are not.
A derivative is best defined as a contract whose value:
A. Depends on the price of an underlying asset or commodity
A derivative derives its value from an underlying price, such as the price of wheat or cotton. It is not a government-set price, and cost of production does not determine its value; the market price of the underlying does.
Further reading: Hull, Options, Futures, and Other Derivatives; Purcell and Koontz, Agricultural Futures and Options; NISM Series XVI workbook
A developing country wants to launch a maize futures contract. Which condition would most likely make the contract fail?
C. The government fixes the maize price and controls inter-state movement of stocks
Futures need a free, large cash market with volatile prices and reliable grading. If the state fixes the price and controls movement, there is little price risk to hedge and cash prices do not respond to information, so hedgers and speculators stay away. The other three are conditions for success.
Further reading: Hull, Options, Futures, and Other Derivatives; Purcell and Koontz, Agricultural Futures and Options; NISM Series XVI workbook
The minimum-variance hedge ratio is equal to:
D. The slope from regressing changes in the cash price on changes in the futures price
h* = ρσS/σF, which is the OLS slope when cash-price changes are regressed on futures-price changes. The correlation alone ignores relative volatility; the ratio of price levels is not a variance-minimising quantity; a ratio of one is the naive hedge.
Further reading: Hull, Options, Futures, and Other Derivatives; Purcell and Koontz, Agricultural Futures and Options; NISM Series XVI workbook
Using the convention of most textbooks, basis is defined as:
C. Local cash price minus futures price
Basis = cash − futures in this convention. Some traders reverse it, so always check. Futures minus strike is the intrinsic value of a call on futures, and MSP is unrelated to basis.
Further reading: Hull, Options, Futures, and Other Derivatives; Purcell and Koontz, Agricultural Futures and Options; NISM Series XVI workbook
Which factor does NOT normally explain the basis at a particular local market?
D. The number of speculators trading the futures contract
Basis reflects transport, quality, storage to the futures month and local supply and demand. The number of speculators affects liquidity in futures but is not a structural component of local basis.
Further reading: Hull, Options, Futures, and Other Derivatives; Purcell and Koontz, Agricultural Futures and Options; NISM Series XVI workbook
Spot maize is 2,000 currency units per quintal. Storage costs 15 currency units per quintal per month and the interest rate is 12 per cent a year (simple interest). Under full carry, the theoretical 3-month futures price is:
A. 2,105 currency units
F = S(1 + r × t) + storage = 2,000 × (1 + 0.12 × 3/12) + 15 × 3 = 2,000 × 1.03 + 45 = 2,105. Leaving out storage gives 2,060; leaving out interest gives 2,045; using a full year's interest gives 2,285.
Further reading: Hull, Options, Futures, and Other Derivatives; Purcell and Koontz, Agricultural Futures and Options; NISM Series XVI workbook
Which of the following is a surveillance indicator of a possible squeeze in an expiring agricultural contract?
B. A long position that is large relative to deliverable stocks in accredited warehouses
A squeeze arises when longs hold more than can be delivered, forcing shorts to buy back at high prices. Surveillance compares concentrated open interest with deliverable stocks. The other features indicate a healthy market.
Further reading: Hull, Options, Futures, and Other Derivatives; Purcell and Koontz, Agricultural Futures and Options; NISM Series XVI workbook
Milton Friedman's argument about speculation is that:
C. Profitable speculation must be stabilising, since profitable speculators buy low and sell high
Friedman argued that speculators who destabilise prices would lose money and be driven out. Critics point to herding, trend-following and manipulation, where the argument does not hold.
Further reading: Hull, Options, Futures, and Other Derivatives; Purcell and Koontz, Agricultural Futures and Options; NISM Series XVI workbook
An arbitrageur differs from a speculator mainly because the arbitrageur:
D. Locks in a near-riskless profit from a price difference between related markets
Arbitrage exploits price discrepancies (cash and futures, two exchanges, two months) with offsetting positions, bearing little price risk; speculators accept price risk. Neither needs to take delivery or be a member.
Further reading: Hull, Options, Futures, and Other Derivatives; Purcell and Koontz, Agricultural Futures and Options; NISM Series XVI workbook
Why may a farmer prefer a put option to a short futures hedge when implied volatility is low, but hesitate when a drought scare has pushed implied volatility very high?
D. Option premiums rise with volatility, so the same floor costs far more when it is most wanted
Premiums increase with the volatility of the underlying. In a drought scare, puts become expensive, reducing the net floor they provide. Futures margins also rise with volatility rather than falling to zero.
Further reading: Hull, Options, Futures, and Other Derivatives; Purcell and Koontz, Agricultural Futures and Options; NISM Series XVI workbook
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