NISM Series XVI: Commodity Derivatives Certification · India · National Institute of Securities Markets (SEBI-mandated)
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
NISM Series XVI: Commodity Derivatives
Contract specifications, trading and clearing mechanics, margins (initial, extreme loss, additional, delivery), mark-to-market, delivery logics, option payoffs and strategies, position limits and surveillance, investor protection and Indian (SEBI) regulation.
How our questions for NISM Series XVI spread across the units of Commodity Markets, Futures & Options. Difficulty: 14 easy, 22 medium, 5 hard.
| Forwards, futures and options compared | 7 | |
| Clearing house, margins and mark-to-market | 7 | |
| Market surveillance and risk control | 5 | |
| Organisation of commodity exchanges | 4 | |
| Settlement and delivery | 4 | |
| Contract specifications | 3 | |
| Hedging | 3 | |
| Speculation | 3 | |
| Basis | 2 | |
| Regulation of commodity derivatives markets | 2 | |
| 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.
Demutualisation of a commodity exchange means:
D. Separating ownership, management and trading rights of the exchange
In a mutual exchange the owners are also the traders. Demutualisation separates ownership, management and trading rights to reduce conflicts of interest. It has nothing to do with delivery or with the regulator.
Further reading: Hull, Options, Futures, and Other Derivatives; Purcell and Koontz, Agricultural Futures and Options; NISM Series XVI workbook
An agricultural futures contract has a lot of 10 tonnes and is quoted in currency units per quintal with a tick of 1 currency unit. What is the tick value per lot? (1 tonne = 10 quintals)
B. 100 currency units
10 tonnes = 100 quintals, so one currency unit per quintal is worth 1 × 100 = 100 currency units per lot. 10 currency units comes from forgetting to convert tonnes to quintals; 1,000 currency units from converting to kilograms per tonne wrongly.
Further reading: Hull, Options, Futures, and Other Derivatives; Purcell and Koontz, Agricultural Futures and Options; NISM Series XVI workbook
A contract specifies a basis grade of wheat with a maximum of 12 per cent moisture, and allows delivery of wheat with up to 13 per cent moisture. What normally happens when wheat at 12.8 per cent moisture is delivered?
D. It is accepted at a discount set in the contract specification
Goods within the permitted tolerance band but below the basis grade are accepted at the discount stated in the specification. Goods outside the tolerance are rejected. Higher moisture is worse quality, so a premium would be wrong.
Further reading: Hull, Options, Futures, and Other Derivatives; Purcell and Koontz, Agricultural Futures and Options; NISM Series XVI workbook
A call option on soybean futures has a strike of 4,800 and a premium of 260 when the futures price is 5,000. What are its intrinsic value and time value?
D. Intrinsic 200, time 60
Intrinsic value of a call = max(F − K, 0) = max(5,000 − 4,800, 0) = 200. Time value = premium − intrinsic = 260 − 200 = 60. Treating the whole premium as intrinsic ignores the chance of further gains; treating it all as time value ignores that the call is in the money.
Further reading: Hull, Options, Futures, and Other Derivatives; Purcell and Koontz, Agricultural Futures and Options; NISM Series XVI workbook
A trader is short one lot of a contract quoted in currency units per quintal with a lot size of 10 tonnes. He sold at 6,000 currency units; today's settlement price is 6,080 currency units. What is today's mark-to-market settlement?
A. He pays 8,000 currency units
A short position loses when the price rises. Loss = 80 × 100 quintals (10 tonnes) = 8,000 currency units, paid to the clearing house. 800 currency units forgets the quintal conversion; 80,000 currency units converts to kilograms instead of quintals.
Further reading: Hull, Options, Futures, and Other Derivatives; Purcell and Koontz, Agricultural Futures and Options; NISM Series XVI workbook
SPAN, used by many exchanges to calculate initial margin, stands for:
D. Standard Portfolio Analysis of Risk
SPAN (Standard Portfolio Analysis of Risk) was developed at CME and computes margin from the worst likely loss on a portfolio across price and volatility scenarios.
Further reading: Hull, Options, Futures, and Other Derivatives; Purcell and Koontz, Agricultural Futures and Options; NISM Series XVI workbook
A daily price limit (circuit filter) on a futures contract:
B. Prevents trading beyond a set band around the previous settlement price
The daily price range stops trades beyond a set percentage from the previous close. Position limits cap holdings; the tick sets the minimum change.
Further reading: Hull, Options, Futures, and Other Derivatives; Purcell and Koontz, Agricultural Futures and Options; NISM Series XVI workbook
Trades in which the same beneficial owner is effectively on both sides, creating artificial volume without a change in ownership, are called:
A. Wash trades
Wash (or circular) trades create misleading volume and are prohibited. Block trades are large negotiated trades under exchange rules; spreads and cross hedges are legitimate positions.
Further reading: Hull, Options, Futures, and Other Derivatives; Purcell and Koontz, Agricultural Futures and Options; NISM Series XVI workbook
An exchange sees prices of a thinly traded contract rise sharply, with 40 per cent of long open interest held by a group of related clients. Which response is the most proportionate first step?
C. Impose additional margins on the concentrated longs and investigate how the clients are related
Graduated tools come first: special or additional margins on the side causing concentration, closer surveillance and investigation of related entities. Suspending all trading or cancelling trades is a last resort; reducing margins would increase risk.
Further reading: Hull, Options, Futures, and Other Derivatives; Purcell and Koontz, Agricultural Futures and Options; NISM Series XVI workbook
Buying the near-month contract and selling a deferred-month contract of the same commodity is an example of:
B. A calendar (intra-commodity) spread
Two months of the same commodity form a calendar spread. An inter-commodity spread uses two related commodities; a cross hedge uses a related commodity's futures against a cash position; a straddle is an options strategy.
Further reading: Hull, Options, Futures, and Other Derivatives; Purcell and Koontz, Agricultural Futures and Options; NISM Series XVI workbook
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