Unit ko samjho · NISM Series XVI
Uses of Commodity Derivatives
23 questions is unit mein
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- A producer will sell 20 tonnes of a metal. It sells futures for the full quantity at ₹6,000 per tonne. At hedge close-out, it sells the metal at ₹5,650 and buys back futures at ₹5,700 per tonne. What are the combined sale proceeds, ignoring costs?
- A fabricator buys futures covering 8,000 kg at ₹200 per kg. It later buys the physical input at ₹218 and closes the futures at ₹215 per kg. What is its net input cost after the futures result? Ignore charges.
- A buyer needs 100 tonnes and hedges 80 tonnes with long futures. Spot and futures prices then both rise by ₹500 per tonne before the purchase and hedge close-out. Relative to unchanged prices, by how much does the combined purchase cost increase? Ignore costs and basis changes.
- An inventory holder sells a full-quantity futures hedge at ₹4,800 per unit. At close-out, basis, defined as spot minus futures, is −₹35 per unit. What is the effective selling price after the hedge, ignoring costs?
- A producer’s full short hedge was planned using a closing basis of −₹60. Actual closing basis is −₹10, using spot minus futures in both cases. With the same futures entry price and no costs, how does the effective sale price compare with the plan?
- A buyer plans a full long hedge using an expected closing basis of +₹25 per unit. Actual closing basis is −₹5, defined as spot minus futures. Other assumptions are unchanged. What happens to its net purchase cost relative to the plan?
- A user buys a specialised grade of copper but hedges with a standard-grade copper futures contract. The specialised grade develops a supply shortage while standard-grade supplies remain normal. Which risk is most directly left by this hedge?
- An inventory holder sells a near futures contract at ₹1,020 per unit. It later buys it back at ₹1,000 and sells a farther contract at ₹1,030. At the final sale, spot is ₹980 and the farther futures is ₹990. What is the combined receipt per unit? Ignore costs.
- In a hypothetical deliverable market, a trader can buy a commodity at ₹1,000 per unit and sell a six-month forward at ₹1,080. Purchase money is borrowed at 8% annual simple interest. Storage and insurance of ₹20 are paid at maturity. Delivery is feasible and there are no other costs. What is the locked maturity surplus per unit?
- A hypothetical market allows borrowing and selling one unit of a commodity for ₹2,000 now. The proceeds earn 5% annual simple interest for one year. A forward purchase fixes the replacement unit at ₹2,040. The commodity borrowing fee is ₹15, payable at maturity. What is the maturity surplus after returning the replacement unit?
- On the same commodity futures and expiry, a trader buys a ₹500-strike call for ₹28 and sells a ₹540-strike call for ₹11. What is the maximum net profit per unit at expiry? Ignore costs and immediately close any futures created by exercise.
- A trader buys a ₹900-strike put for ₹32 and sells a ₹850-strike put for ₹14 on the same underlying and expiry. At expiry the underlying futures is ₹870. What is the net result per unit? Ignore costs and immediately close any resulting futures.
- A trader buys a call and a put, both with strike ₹1,000 and the same expiry. Premiums are ₹36 and ₹24 per unit. What are the two expiry break-even prices? Ignore costs.
- A trader buys a ₹700-strike put for ₹18 and a ₹760-strike call for ₹12, with the same expiry and underlying. Ignoring costs, in which region is the combined expiry net profit positive?
- A producer holds one unit of a commodity and sells a call with strike ₹600 for a premium of ₹20. At expiry, spot and the option’s underlying futures both equal ₹650. It sells the commodity and immediately closes the futures created by call assignment. What are its combined receipts per unit before production costs?
- A producer buys a ₹2,000-strike put for ₹45 per unit to protect its entire output. At sale, local spot and the option’s reference price are equal. With no other costs, what is the minimum combined receipt per unit, before production cost?
- A buyer purchases a ₹110-strike call for ₹6 and sells a ₹90-strike put for ₹4 for each unit it will buy. At expiry, the physical price and option reference both equal ₹80. What is its net purchase cost per unit, including both premiums and settlements? Ignore other costs.
- A processor has fixed conversion yields but has not fixed prices for either next month’s raw-material purchases or finished-product sales. In a hypothetical market with matching futures for both, which hedge most directly protects its processing margin?
- A trader buys near-month futures at ₹500 and sells far-month futures at ₹530, each for 1,000 units. It closes the near leg at ₹510 and the far leg at ₹535. What is the combined result before costs?
- Using the gross-exposure definition in SEBI’s 15 November 2018 commodity-risk disclosure format, a company reports commodity exposure of ₹12 crore on the asset side and ₹8 crore on the liability side. What is the combined gross exposure, assuming these are the only exposures?
- A trader buys one commodity future and sells another for the same notional amount. The contracts have historically moved together but represent different commodities. Which statement is most accurate?
- A diversified commodity portfolio has a value of ₹48 lakh. A risk model specifies short index-futures notional equal to 0.75 times portfolio value. Each futures contract has notional value ₹1.2 lakh. How many contracts does the model require?
- A manufacturer must hedge a purchase of 47 tonnes. A hypothetical futures lot covers 10 tonnes, and its policy prohibits hedging more than the purchase quantity. What is the largest allowed futures hedge and the remaining unhedged quantity?
Zaroori ideas
Practice bank se · 1
A producer will sell 20 tonnes of a metal. It sells futures for the full quantity at ₹6,000 per tonne. At hedge close-out, it sells the metal at ₹5,650 and buys back futures at ₹5,700 per tonne. What are the combined sale proceeds, ignoring costs?
A short hedge combines the physical selling price with the gain or loss on the short futures position. Physical receipt = 20 × ₹5,650 = ₹1,13,000. Short futures gain = 20 × (₹6,000 − ₹5,700) = ₹6,000. Combined receipt = ₹1,13,000 + ₹6,000 = ₹1,19,000. The effective price is ₹5,950 per tonne, not necessarily the initial futures price. Remember: Add the signed hedge result to physical receipts. A residual basis can keep the result away from the initial futures price.
Hint Common mistake: Assuming a full quantity hedge also removes every difference in grade, location or close-out basis.
XVI-037Practice bank se · 2
A fabricator buys futures covering 8,000 kg at ₹200 per kg. It later buys the physical input at ₹218 and closes the futures at ₹215 per kg. What is its net input cost after the futures result? Ignore charges.
A prospective buyer offsets a rising physical purchase price with gains on a long futures hedge. Physical payment = 8,000 × ₹218 = ₹17,44,000. Long futures gain = 8,000 × (₹215 − ₹200) = ₹1,20,000. Net purchase cost = ₹17,44,000 − ₹1,20,000 = ₹16,24,000, or ₹203 per kg. Remember: For a buyer, subtract hedge gains from the physical purchase cost and add hedge losses.
Hint Common mistake: Using the same addition rule for a buyer’s cost and a seller’s receipt without considering cash-flow signs.
XVI-038Practice bank se · 3
A buyer needs 100 tonnes and hedges 80 tonnes with long futures. Spot and futures prices then both rise by ₹500 per tonne before the purchase and hedge close-out. Relative to unchanged prices, by how much does the combined purchase cost increase? Ignore costs and basis changes.
A partial hedge leaves the unhedged quantity exposed even when prices move together perfectly. The physical purchase becomes 100 × ₹500 = ₹50,000 more expensive. The futures hedge earns 80 × ₹500 = ₹40,000. The remaining increase is ₹50,000 − ₹40,000 = ₹10,000, matching the unhedged 20 tonnes × ₹500. Remember: A matched partial hedge offsets price changes only on its covered quantity.
Hint Common mistake: Treating an 80% hedge as either no hedge or complete protection.
XVI-039Practice bank se · 4
An inventory holder sells a full-quantity futures hedge at ₹4,800 per unit. At close-out, basis, defined as spot minus futures, is −₹35 per unit. What is the effective selling price after the hedge, ignoring costs?
For a full short hedge, physical sale proceeds plus futures profit equal the initial futures price plus the closing basis. Let the close-out prices be S and F. Combined receipt per unit is S + (4,800 − F). Rearrange to 4,800 + (S − F). The stated basis is −35. Effective receipt = ₹4,800 − ₹35 = ₹4,765 per unit. No separate forecast of S or F is needed. Remember: Write the basis definition before applying an effective-price formula.
Hint Common mistake: Memorising a plus or minus sign without checking whether basis means spot minus futures or the reverse.
XVI-040Practice bank se · 5
A producer’s full short hedge was planned using a closing basis of −₹60. Actual closing basis is −₹10, using spot minus futures in both cases. With the same futures entry price and no costs, how does the effective sale price compare with the plan?
The outcome of a short hedge is affected by the closing basis, even with a full quantity match. The effective short-hedge price is the initial futures price plus closing basis. Actual basis is ₹50 higher than expected: −10 − (−60) = +50. The effective selling price is therefore ₹50 higher than planned. Remember: An unexpectedly stronger closing basis benefits a short hedger under a spot-minus-futures definition.
Hint Common mistake: Calling a less negative basis a weakening because the absolute number became smaller.
XVI-041Practice bank se · 6
A buyer plans a full long hedge using an expected closing basis of +₹25 per unit. Actual closing basis is −₹5, defined as spot minus futures. Other assumptions are unchanged. What happens to its net purchase cost relative to the plan?
A buyer’s effective hedged cost also equals the initial futures price plus the closing basis, before costs. Net cost per unit = spot purchase price − long futures gain = S − (F − F₀) = F₀ + basis. Actual minus planned basis = −5 − 25 = −30. The actual net cost is ₹30 lower. The sign of the futures gain alone does not establish the complete cost. Remember: A weaker-than-expected closing basis lowers a long hedger’s effective purchase cost.
Hint Common mistake: Judging hedge success by the derivatives leg instead of the combined physical and derivatives result.
XVI-042Practice bank se · 7
A user buys a specialised grade of copper but hedges with a standard-grade copper futures contract. The specialised grade develops a supply shortage while standard-grade supplies remain normal. Which risk is most directly left by this hedge?
A proxy hedge leaves basis risk when the physical exposure differs in grade, location or other pricing characteristics. The futures contract references a standard grade, not the exact specialised input. A shortage specific to the specialised grade can lift its premium without a matching move in the futures benchmark. The hedge can still offset common copper-price movements, but it need not offset the grade-specific premium. Remember: Identify the risk factor the contract actually hedges and the premium it leaves uncovered.
Hint Common mistake: Assuming a common commodity name means the physical purchase and derivative are interchangeable.
XVI-043Practice bank se · 8
An inventory holder sells a near futures contract at ₹1,020 per unit. It later buys it back at ₹1,000 and sells a farther contract at ₹1,030. At the final sale, spot is ₹980 and the farther futures is ₹990. What is the combined receipt per unit? Ignore costs.
A rolled hedge has a realised result on the first contract and a separate result on the replacement contract. First short futures gain = ₹1,020 − ₹1,000 = ₹20. Replacement short futures gain = ₹1,030 − ₹990 = ₹40. Add both to the physical receipt: ₹980 + ₹20 + ₹40 = ₹1,040. Equivalently, initial futures price + roll spread + final basis = 1,020 + (1,030 − 1,000) + (980 − 990) = 1,040. Remember: Keep each holding period separate when reconciling a rolled hedge.
Hint Common mistake: Treating the replacement contract as though it had been sold at the original contract’s entry price.
XVI-044Practice bank se · 9
In a hypothetical deliverable market, a trader can buy a commodity at ₹1,000 per unit and sell a six-month forward at ₹1,080. Purchase money is borrowed at 8% annual simple interest. Storage and insurance of ₹20 are paid at maturity. Delivery is feasible and there are no other costs. What is the locked maturity surplus per unit?
A cash-and-carry calculation must deduct financing and physical carry costs from the forward sale proceeds. Borrow ₹1,000 to buy the commodity and enter the forward sale. Loan repayment in six months = ₹1,000 × (1 + 0.08 × 0.5) = ₹1,040. The stored commodity meets delivery. Surplus = forward receipt ₹1,080 − loan repayment ₹1,040 − storage/insurance ₹20 = ₹20. This is a result under the stated borrowing, storage and delivery assumptions, not a claim of a live arbitrage. Remember: An apparent spot-forward gap is not a surplus until all carry costs and timing are included.
Hint Common mistake: Calling the gross forward premium an arbitrage profit.
XVI-045Practice bank se · 10
A hypothetical market allows borrowing and selling one unit of a commodity for ₹2,000 now. The proceeds earn 5% annual simple interest for one year. A forward purchase fixes the replacement unit at ₹2,040. The commodity borrowing fee is ₹15, payable at maturity. What is the maturity surplus after returning the replacement unit?
Reverse carry requires the ability to borrow and return the physical commodity, not merely an attractive quoted price difference. Borrow the unit, sell it and invest the ₹2,000 proceeds. No initial commodity purchase is funded. The investment becomes ₹2,000 × 1.05 = ₹2,100. Use ₹2,040 to buy the replacement under the forward, return it and pay the ₹15 borrowing fee. Remaining cash = ₹2,100 − ₹2,040 − ₹15 = ₹45. Remember: Check physical borrowability and include the cost of returning an equivalent eligible unit.
Hint Common mistake: Assuming every commodity can be sold short physically without availability or borrowing costs.
XVI-046Practice bank se · 11
On the same commodity futures and expiry, a trader buys a ₹500-strike call for ₹28 and sells a ₹540-strike call for ₹11. What is the maximum net profit per unit at expiry? Ignore costs and immediately close any futures created by exercise.
A bull call spread exchanges some upside for a lower net premium outlay. Net premium paid = ₹28 − ₹11 = ₹17 per unit. Once the underlying futures reaches or exceeds ₹540, the difference in intrinsic payoffs is capped at ₹540 − ₹500 = ₹40. Maximum net profit = ₹40 − ₹17 = ₹23 per unit. Remember: For a debit vertical spread, maximum profit is width less the net debit.
Hint Common mistake: Deducting only the purchased premium while forgetting the premium received.
XVI-047Practice bank se · 12
A trader buys a ₹900-strike put for ₹32 and sells a ₹850-strike put for ₹14 on the same underlying and expiry. At expiry the underlying futures is ₹870. What is the net result per unit? Ignore costs and immediately close any resulting futures.
A put debit spread has a net premium cost and different payoff regions on either side of its two strikes. Net premium cost = ₹32 − ₹14 = ₹18. At ₹870, the purchased put pays ₹900 − ₹870 = ₹30. The sold ₹850 put is . Net profit = ₹30 − ₹18 = ₹12 per unit. Remember: Find each leg’s payoff at the stated settlement before applying a spread’s maximum-profit formula.
Hint Common mistake: Using the strike width at a settlement that lies between the strikes.
XVI-111Practice bank se · 13
A trader buys a call and a put, both with strike ₹1,000 and the same expiry. Premiums are ₹36 and ₹24 per unit. What are the two expiry break-even prices? Ignore costs.
A purchased straddle needs an absolute price movement large enough to recover both premiums. Total premium = ₹36 + ₹24 = ₹60. Below the strike, profit is 1,000 − settlement − 60. Zero profit occurs at ₹940. Above the strike, profit is settlement − 1,000 − 60. Zero profit occurs at ₹1,060. Remember: For a long straddle, both prices use the total premium of both options.
Hint Common mistake: Treating the winning leg as though the other leg had been acquired without cost.
XVI-112Practice bank se · 14
A trader buys a ₹700-strike put for ₹18 and a ₹760-strike call for ₹12, with the same expiry and underlying. Ignoring costs, in which region is the combined expiry net profit positive?
A long strangle profits only after the relevant option payoff exceeds the combined premium. The total premium is ₹18 + ₹12 = ₹30. On the downside, net profit = 700 − settlement − 30, so settlement must be below ₹670. On the upside, net profit = settlement − 760 − 30, so settlement must be above ₹790. Equality at either boundary gives zero profit. Remember: Distinguish exercise regions from net-profit regions.
Hint Common mistake: Assuming any in-the-money option makes the whole combination profitable.
XVI-113Practice bank se · 15
A producer holds one unit of a commodity and sells a call with strike ₹600 for a premium of ₹20. At expiry, spot and the option’s underlying futures both equal ₹650. It sells the commodity and immediately closes the futures created by call assignment. What are its combined receipts per unit before production costs?
A covered call combines a physical long exposure with a short call, limiting favourable price upside. Physical sale receives ₹650. The written call creates a ₹50 loss when its resulting short futures is immediately closed at ₹650 against strike ₹600. Add the ₹20 premium: ₹650 − ₹50 + ₹20 = ₹620. This is a receipt, not profit after an unspecified production cost. Remember: Covered call receipts are capped at strike plus premium when prices finish above the strike, under matched-price assumptions.
Hint Common mistake: Counting the call premium as extra income while ignoring the obligation sold with it.
XVI-114Practice bank se · 16
A producer buys a ₹2,000-strike put for ₹45 per unit to protect its entire output. At sale, local spot and the option’s reference price are equal. With no other costs, what is the minimum combined receipt per unit, before production cost?
A protective put creates a floor for matched physical sale receipts after deducting the insurance premium. Combined receipt is S + max(2,000 − S, 0) − 45. For S below ₹2,000, physical receipt and put payoff add to ₹2,000 before premium. After paying ₹45, the floor is ₹1,955. Above the strike, the producer retains higher receipts less the same premium. Remember: A purchased put’s protected net selling-price floor is strike minus premium when exposure and reference prices match.
Hint Common mistake: Quoting the strike as a cost-free guaranteed selling price.
XVI-115Practice bank se · 17
A buyer purchases a ₹110-strike call for ₹6 and sells a ₹90-strike put for ₹4 for each unit it will buy. At expiry, the physical price and option reference both equal ₹80. What is its net purchase cost per unit, including both premiums and settlements? Ignore other costs.
A buyer collar reduces premium cost by selling downside participation, so a low market price may create a put liability. The call expires without payoff at ₹80. The sold put costs ₹90 − ₹80 = ₹10. Net premium paid = ₹6 − ₹4 = ₹2. Total cost = physical purchase ₹80 + put liability ₹10 + net premium ₹2 = ₹92. Under the same matching assumptions, the cost floor is ₹92 and the cost cap is ₹112. Remember: A collar’s sold option is an obligation, not merely a funding source for the purchased option.
Hint Common mistake: Deducting only the call payoff and forgetting the short put when prices fall.
XVI-116Practice bank se · 18
A processor has fixed conversion yields but has not fixed prices for either next month’s raw-material purchases or finished-product sales. In a hypothetical market with matching futures for both, which hedge most directly protects its processing margin?
A processing is output sale value minus input purchase cost, not simply the direction of one commodity price. A rise in input prices increases costs, so a long input hedge is the offset. A fall in output prices reduces revenues, so a short output hedge is the offset. The hedge quantities should reflect conversion yields and the actual exposures. Equal contract counts or equal physical quantities need not do so. Remember: Hedge the input and output sides of a processing margin separately, using the conversion relationship.
Hint Common mistake: Treating a processor as only a buyer or only a seller.
XVI-117Practice bank se · 19
A trader buys near-month futures at ₹500 and sells far-month futures at ₹530, each for 1,000 units. It closes the near leg at ₹510 and the far leg at ₹535. What is the combined result before costs?
A calendar spread responds to the relative change between two maturities, not to the outright movement of either leg alone. Near-month long profit = (510 − 500) × 1,000 = ₹10,000. Far-month short loss = (530 − 535) × 1,000 = −₹5,000. Combined profit = ₹10,000 − ₹5,000 = ₹5,000. The far-minus-near spread narrows from ₹30 to ₹25. Remember: Write a signed payoff for each maturity before interpreting a spread change.
Hint Common mistake: Calling an initial calendar-price gap a profit already earned.
XVI-118Practice bank se · 20
Using the gross-exposure definition in SEBI’s 15 November 2018 commodity-risk disclosure format, a company reports commodity exposure of ₹12 crore on the asset side and ₹8 crore on the liability side. What is the combined gross exposure, assuming these are the only exposures?
The specified disclosure definition includes exposure on both asset and liability sides rather than substituting a net directional balance. The Annexure defines exposure on a gross basis and includes the asset and liability sides. Gross exposure = ₹12 crore + ₹8 crore = ₹20 crore. A net difference of ₹4 crore may answer a different risk question, but it is not the requested gross measure. Remember: Use the reporting definition stated in the source, rather than replacing gross exposure with net risk.
Hint Common mistake: Treating every risk-disclosure quantity as a net long or short position.
XVI-119Practice bank se · 21
A trader buys one commodity future and sells another for the same notional amount. The contracts have historically moved together but represent different commodities. Which statement is most accurate?
A spread can reduce some common price exposure while retaining relative-price and correlation risk. The two payoffs depend on different reference prices. Equal starting notionals do not force equal subsequent returns. A supply or demand event affecting only one commodity can move the spread adversely. Historical co-movement is information, not a contract that guarantees future offsetting cash flows. Remember: Risk reduction from related legs is different from a cash-flow identity.
Hint Common mistake: Calling a correlated two-leg position an arbitrage without proving all terminal cash flows.
XVI-120Practice bank se · 22
A diversified commodity portfolio has a value of ₹48 lakh. A risk model specifies short index-futures notional equal to 0.75 times portfolio value. Each futures contract has notional value ₹1.2 lakh. How many contracts does the model require?
An index hedge count converts the desired hedge notional into contract units while retaining the required direction. Required short notional = ₹48 lakh × 0.75 = ₹36 lakh. Number of contracts = ₹36 lakh ÷ ₹1.2 lakh = 30. The model specifies a short hedge. Its ratio is an input, not a guarantee of perfect future tracking. Remember: Convert portfolio risk into desired notional first, then into signed contract count.
Hint Common mistake: Ignoring a supplied hedge ratio or treating contract quantity as independent of the futures multiplier.
XVI-121Practice bank se · 23
A manufacturer must hedge a purchase of 47 tonnes. A hypothetical futures lot covers 10 tonnes, and its policy prohibits hedging more than the purchase quantity. What is the largest allowed futures hedge and the remaining unhedged quantity?
Whole contract sizes can prevent an exact quantity hedge, so the rounding policy matters. Four lots cover 4 × 10 = 40 tonnes. Five lots cover 50 tonnes, which would exceed the 47-tonne purchase. The policy therefore permits at most four lots. A prospective buyer uses a long hedge. Unhedged quantity = 47 − 40 = 7 tonnes. Five lots would overhedge by 3 tonnes, not leave 3 tonnes unhedged. Remember: Use the stated rounding constraint and distinguish an unhedged balance from an overhedge.
Hint Common mistake: Rounding to the nearest without checking the organisation’s quantity constraint.
XVI-122The strike price is the level at which an option can be exercised.
Aage padhoMoneyness describes where an option's strike sits relative to the current level of the underlying.
Aage padhoBreakeven is the point at which a defined result is exactly zero.
Aage padhoMargin is the money a participant must keep in place to carry a leveraged position.
Aage padhoLot size is the number of units of the underlying that one derivatives contract stands for.
Aage padho