ICAR AIEEA-PG (Master's admission and PG scholarship) · 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 AIEEA-PG spread across the units of Commodity Markets, Futures & Options. Difficulty: 10 easy, 8 medium, 1 hard.
| Basis | 4 | |
| Commodity derivatives and price-risk management | 3 | |
| Forwards, futures and options compared | 2 | |
| Hedging | 2 | |
| Price discovery and market efficiency | 2 | |
| Organisation of commodity exchanges | 1 | |
| Contract specifications | 1 | |
| Settlement and delivery | 1 | |
| Market surveillance and risk control | 1 | |
| Regulation of commodity derivatives markets | 1 | |
| Speculation | 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
Which exchange is correctly matched with its main focus?
D. NCDEX (India) - mainly agricultural commodities
NCDEX concentrates on agricultural commodities, while MCX trades mainly metals and energy. Bursa Malaysia's benchmark is crude palm oil; live cattle trade on CME, and ICE Futures Europe lists robusta coffee, London cocoa and white sugar.
Further reading: Hull, Options, Futures, and Other Derivatives; Purcell and Koontz, Agricultural Futures and Options; NISM Series XVI workbook
The main risk borne by a farmer who sells wheat to a trader through a private forward contract, which a futures hedge would remove, is:
C. Counterparty risk: the trader may refuse to take delivery or pay if prices fall
A forward has no clearing house, so each side depends on the other honouring the contract. Basis risk and margin calls are features of futures hedges, not forwards, and forwards carry no premium.
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
A stockist buys grain at a basis of -200 and hedges it by selling futures. When he sells the grain and lifts the hedge, the basis is -120. Ignoring storage costs, his result per quintal from the hedged position is:
A. A gain of 80
For a short hedger, result = closing basis − opening basis = -120 − (-200) = +80. The basis strengthened, which helps short hedgers. A hedge is perfect only if the basis does not change.
Further reading: Hull, Options, Futures, and Other Derivatives; Purcell and Koontz, Agricultural Futures and Options; NISM Series XVI workbook
As a futures contract approaches its delivery period, its price tends to move towards the cash price at the delivery location. This is called:
C. Convergence
Arbitrage through the delivery mechanism forces convergence. Contango and backwardation describe the slope of the futures curve, and novation is the clearing house becoming the counterparty.
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
In the United States, futures markets are regulated under:
B. The Commodity Exchange Act, 1936
The Commodity Exchange Act of 1936 is the basic law; the CFTC (1974) administers it. Dodd-Frank (2010) extended oversight to swaps; the Securities Exchange Act governs securities; the Warehouse Act licenses warehouses.
Further reading: Hull, Options, Futures, and Other Derivatives; Purcell and Koontz, Agricultural Futures and Options; NISM Series XVI workbook
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