Introduction to Commodity Markets
15 questions. Each answer is explained.
Question 1 of 10Practice · Series XVI — Commodity Derivatives
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Learn these topics
More units in NISM Series XVI
- Commodity Futures22
- Commodity Options22
- Commodity Indices12
- Uses of Commodity Derivatives23
- Trading Mechanism13
- Clearing Settlement and Risk Management of Commodity Derivatives20
- Accounting and Taxation8
- Legal & Regulatory Environment of Commodity Derivatives8
- Code of Conduct and Investor Protection Measures7
Exam format
| Questions | 100 · 1 mark each |
|---|---|
| Duration | 120 min · 2 hours |
| Pass mark | 60% · 60 of 100 marks |
| Negative marking | 25% · 0.25 marks off per wrong answer |
| Certificate validity | 3 years · from the date of the examination |
| Marks for this unit | Not published by NISM |
NISM Series XVI Commodity Derivatives
Exam rules read on NISM's site on 3 October 2026. Check the current rules on NISM's site (opens in a new tab)
What these answers assume, and when it was last checked
Each question uses the rules listed below. We last checked them on 5 September 2026. A Budget or SEBI circular can change a rate, lot size or expiry day. If a rule changes before your exam, treat the linked questions as out of date and check NISM's current workbook.
- NSE uses Tuesday expiry and BSE uses Thursday expiry. This applies from 1 September 2025.
- The January 2026 index lot sizes are NIFTY 65, BANKNIFTY 30, FINNIFTY 60, MIDCPNIFTY 120 and NIFTYNXT50 25.
- The October 2024 SEBI framework sets a minimum index contract value of Rs 15–20 lakh. Each exchange may list one weekly benchmark index.
- Option buyers pay the premium upfront from 1 February 2025. A short index option has an extra 2% Extreme Loss Margin on expiry day from 20 November 2024.
- Equity short-term capital gains are taxed at 20%. Long-term gains are taxed at 12.5% above Rs 1.25 lakh. Both rates apply from 23 July 2024.
- F&O income is non-speculative business income in ITR-3. NSE equity derivatives trade from 9:15 a.m. to 3:40 p.m.
- The final ten-minute session began on 3 August 2026. It aligns with the cash market Closing Auction Session.
- Most Securities Transaction Tax questions test the base and who pays. On an option sale, it is the premium and the seller pays. On a futures sale, it is the traded value and the seller pays.
- On exercise, Securities Transaction Tax uses intrinsic value: settlement price minus strike price. The buyer pays it.
- Two questions test the current rate. From 1 April 2026, option sales carry 0.15% on the premium and futures sales carry 0.05% on traded price. The earlier rates were 0.10% and 0.02% from 1 October 2024.
- This section uses the T+1 rolling settlement cycle. Obligations are fixed on T+1. A short delivery goes to buy-in auction on T+1 and settles on T+2.
- The trade-for-trade surveillance segment uses direct close-out. Funds pay in by 10:30 a.m. and pay out on or after 1:30 p.m. on settlement day.
- Securities pay in to the settlement pool by 10:30 a.m. They pay out directly to the client’s demat account by 3:30 p.m.
- The 3:30 p.m. deadline replaced 1:30 p.m. under SEBI’s 10 October 2024 circular. Direct client credit was required by SEBI’s 5 June 2024 circular.
- The optional T+0 cycle trades until 1:30 p.m. Obligations are fixed by 2:30 p.m. on the trade day. An early pay-in shortage is closed out directly.
- Cash-market Value at Risk margin is six times exponentially weighted moving-average volatility. It has a 9% floor for Group I, a 21.5% floor for Group II, and a fixed 50% or 75% level for Group III.
- Extreme Loss Margin is 3.5% for a share and 2% for a broad-market-index exchange traded fund. Mark-to-market margin is collected before the next day’s trading. The trade-for-trade segment has 100% upfront margin.
- Close-out uses the higher of the highest price from trade day to auction day and 20% above the auction day’s official close.
- A funds shortage costs 0.07% a day. The trading facility is withdrawn at a shortage of Rs 5 lakh or more.
- SCORES allows 21 calendar days, then two 15-day review levels. Online Dispute Resolution moves from conciliation to arbitration after the market participant and SCORES steps.
- At NSE, the Investor Protection Fund limit is Rs 35 lakh per investor for each defaulting or expelled member. This applies to claims arising after 13 August 2024.
- A Basic Services Demat Account has no annual maintenance charge up to Rs 4 lakh of holdings. It costs up to Rs 100 above that, until the Rs 10 lakh eligibility ceiling. These slabs apply from 1 September 2024.
- The rupee pairs are USD-INR, EUR-INR, GBP-INR and JPY-INR. The cross-currency pairs are EUR-USD, GBP-USD and USD-JPY.
- Each contract covers 1,000 units of the foreign currency, except JPY-INR. JPY-INR covers 100,000 yen and is quoted in rupees per 100 yen.
- The tick is 0.25 paise, or Rs 0.0025. It equals Rs 2.50 a contract.
- Rupee pairs trade from 9:00 a.m. to 5:00 p.m. A monthly contract stops trading at 12:30 p.m. two working days before the expiry month’s last business day.
- Final settlement is in cash at the FBIL reference rate on expiry day. FBIL, Financial Benchmarks India, has published this rate in place of the Reserve Bank since 2018. Premium-style European options are quoted in rupees. The buyer pays the premium in cash on T+1.
- Daily settlement is on T+1 and final settlement is on T+2.
- NSE Clearing circular 026/2020 sets SPAN margin plus Extreme Loss Margin. The futures margin is 0.50% for USD-INR, 0.15% for EUR-INR, 0.25% for GBP-INR and 0.35% for JPY-INR. A short option has 0.75%. These figures apply from 1 June 2020.
- A USD-INR client may hold 6% of total open interest or USD 20 million, whichever is higher. A trading member may hold 15% or USD 100 million.
- A resident user has one USD 100 million equivalent limit across all rupee pairs and exchanges. No document is needed below that limit, but a valid underlying contracted exposure must still exist. This clarification applies from 3 May 2024.
- The currency segment has no Securities Transaction Tax.
The exam figures (questions, time, pass mark, negative marking and certificate validity) come from NISM's own pages, read on 3 October 2026. Timed practice uses the same figures. Study with the official workbook as well.
The written-out answers on this page are hidden while your timed set runs.
All 15 questions on Introduction to Commodity Markets, with answers
Q1A mill buys a specified grade of grain for delivery tomorrow and separately agrees today to buy another lot in three months at a fixed price. Which description fits the two transactions?
Option A. Two spot purchases because prices are agreed today
Why it is wrong: Fixing a price today is common to spot and forward trades. It does not make future delivery a spot transaction.
Option B. A spot purchase and a forward purchase — Correct answer
Option C. Two futures purchases because delivery is later
Why it is wrong: Future delivery alone does not establish an exchange-traded, standardised futures contract.
Option D. A forward purchase and a purchased call
Why it is wrong: The first purchase is not the three-month commitment, and the second creates an obligation rather than an option right.
Answer: B. Transactions are distinguished by their delivery arrangement and contractual rights, not just by the day on which a price is agreed. The near-immediate purchase is a spot-market transaction. Spot delivery need not mean that a truck arrives at the exact instant of agreement. The separately negotiated three-month commitment fixes a future purchase. Nothing states that it is exchange-traded or gives the mill an option to walk away. Remember: Identify delivery timing and the nature of the obligation before naming the instrument.
Hint, shown before you answer in practice mode: Common mistake: Treating every trade with a future delivery date as an exchange-traded future.
XVI-001easyconceptual
Q2Two lots of the same spice have equal weight but different moisture levels. Why may an exchange reject one lot for delivery even though both are saleable in the spot market?
Option A. Spot-market acceptance overrides exchange specifications
Why it is wrong: A bilateral spot buyer may accept terms that the standardised exchange contract does not.
Option B. Equal weight automatically establishes equal delivery quality
Why it is wrong: Weight measures quantity, not moisture or other grade characteristics.
Option C. Exchange delivery must satisfy the contract’s specified quality — Correct answer
Option D. A futures trade permits the seller to choose any grade
Why it is wrong: The seller’s delivery obligation is constrained by the agreed specifications.
Answer: C. Commercial saleability is different from eligibility for settlement of a standardised contract. Moisture affects the usable quality and storability of the goods. A common name and weight do not establish identical grade. The deliverable lot must meet the specified quality criteria. A permitted premium or discount applies only within the contract’s acceptance rules, not to every rejected grade. Remember: Check quality eligibility before calculating quantity or price adjustments.
Hint, shown before you answer in practice mode: Common mistake: Assuming a quality discount can make any grade deliverable.
XVI-002mediumconceptual
Q3A processor has agreed to sell finished products at fixed prices but will buy its raw material next month. What price movement is the processor principally exposed to on that unpriced input?
Option A. A fall in the already fixed selling price
Why it is wrong: The question fixes the selling price, so this is not the unpriced risk being asked about.
Option B. A fall in the raw-material purchase price
Why it is wrong: A lower input price would improve, not damage, this stated margin.
Option C. A rise in the quantity already sold
Why it is wrong: Quantity is not a price movement and no change in the committed quantity is given.
Option D. A rise in the raw-material purchase price — Correct answer
Answer: D. A fixed output price with an unpriced input leaves a business exposed to its future input cost. The sales price has already been agreed. A later rise in input cost reduces the margin on those sales. This is a buy-side exposure. Choosing a hedge would also require matching the commodity, amount and timing, but the direction of this exposure is clear. Remember: A future buyer is exposed to rising prices of the input it still has to purchase.
Hint, shown before you answer in practice mode: Common mistake: Looking only at the output sale and overlooking the unpriced input.
XVI-003easyconceptual
Q4A participant with no physical metal holding or purchase commitment buys metal futures solely because a price rise is expected. How is this position best classified?
Option A. A short hedge of inventory
Why it is wrong: A short hedge would normally involve selling futures against price-sensitive holdings or sales.
Option B. A speculative long position — Correct answer
Option C. A delivery-quality arbitrage
Why it is wrong: No simultaneous quality-related price discrepancy and offsetting transactions are identified.
Option D. A long hedge of a committed purchase
Why it is wrong: The facts explicitly exclude a purchase commitment or other stated buy-side exposure.
Answer: B. The economic purpose of a position depends on the exposure it offsets, not on the instrument alone. There is no identified physical exposure to offset. The position deliberately takes directional price risk. A gain is possible if futures rise, but a fall would produce a loss. Calling the trade a hedge would not create an offsetting underlying exposure. Remember: The same futures instrument can hedge an existing exposure or create a new speculative exposure.
Hint, shown before you answer in practice mode: Common mistake: Classifying all commodity futures positions as hedges.
XVI-004easyconceptual
Q5A delivery lot is stored safely, but its purity is disputed. Which specialist function directly addresses whether it meets the specified purity?
Option A. Matching purchase and sale orders
Why it is wrong: Order matching establishes trades, not the purity of stored material.
Option B. Collecting the daily futures settlement
Why it is wrong: Daily settlement transfers gains and losses without testing the goods.
Option C. Registering a client’s trading account
Why it is wrong: Account registration identifies the client and does not certify a delivery lot.
Option D. Assaying or testing the commodity — Correct answer
Answer: D. Different institutions handle trading, money settlement, storage and quality assurance. Secure storage does not by itself prove chemical purity or grade. The disputed attribute must be tested. An assayer or testing agency evaluates quality against the relevant specification. The exchange and clearing arrangements determine how the accepted result is used. Remember: Match the problem to the relevant institution: quality disputes require quality testing.
Hint, shown before you answer in practice mode: Common mistake: Assuming that a warehouse receipt alone replaces every quality check.
XVI-005easyconceptual
Q6A larger-than-expected harvest raises the quantity offered immediately. Demand, import policy and storage capacity are unchanged. What is the direct supply-side pressure on the spot price?
Option A. No pressure because futures prices determine all spot prices
Why it is wrong: Spot supply and demand remain relevant even when futures markets exist.
Option B. Downward pressure from the increased available supply — Correct answer
Option C. Upward pressure because every harvest creates scarcity
Why it is wrong: The facts describe a larger supply, not a shortage.
Option D. Upward pressure merely because production increased
Why it is wrong: Production growth increases supply rather than creating demand in the stated scenario.
Answer: B. A change in available supply must be distinguished from changes in demand and other price drivers. More goods are offered at the same time while the stated demand conditions are unchanged. Sellers compete to place the additional output. This creates downward price pressure, not a guarantee about the eventual observed price if other conditions later change. Remember: Hold the stated conditions fixed when tracing a supply shock.
Hint, shown before you answer in practice mode: Common mistake: Turning a conditional supply effect into an unconditional forecast.
XVI-006mediumconceptual
Q7Which feature most directly distinguishes holding physical copper from holding an ordinary equity share?
Option A. Physical copper and equity shares have the same carrying-cost structure
Why it is wrong: Physical storage, handling and condition costs are not the same as the carrying arrangements for an ownership security.
Option B. Physical copper can require storage, handling and quality protection — Correct answer
Option C. Physical copper represents ownership of the producer’s profits
Why it is wrong: Buying copper does not give a claim on the producer’s business profits.
Option D. Physical copper has no quality differences once its weight is recorded
Why it is wrong: Weight alone does not establish purity, grade or condition of the physical metal.
Answer: B. A physical good and an ownership security expose the holder to different rights and carrying requirements. Copper is material inventory whose quantity and condition must be maintained. It is not a share in the company that produced it. An ordinary share is an ownership interest. Storage and material deterioration are therefore not interchangeable with the financial rights of a shareholder. Remember: Distinguish ownership of a good from ownership of an enterprise.
Hint, shown before you answer in practice mode: Common mistake: Treating a commodity holding as a dividend-paying financial security.
XVI-007easyconceptual
Q8An imported material costs USD 400 per tonne. The price rises to USD 420 while USD-INR falls from 85 to 82. Ignoring every other cost, what is the change in its INR cost per tonne?
Option A. A decrease of ₹440
Why it is wrong: The magnitude is right but the direction is reversed.
Option B. An increase of ₹1,700
Why it is wrong: This applies the USD 20 rise at the old exchange rate and ignores the rupee’s strengthening.
Option C. A decrease of ₹1,200
Why it is wrong: This captures only the currency saving on the original USD 400 price.
Option D. An increase of ₹440 — Correct answer
Answer: D. A domestic currency price can reflect both the foreign commodity price and the currency conversion rate. Initial cost = USD 400 × ₹85 per USD = ₹34,000 per tonne. New cost = USD 420 × ₹82 per USD = ₹34,440 per tonne. The change is ₹34,440 − ₹34,000 = ₹440 higher. Currency appreciation offsets part, but not all, of the foreign-price increase. Remember: Recalculate the complete converted price when both price and currency move.
Hint, shown before you answer in practice mode: Common mistake: Adding isolated percentage changes without accounting for their combined effect.
XVI-008mediumconceptual
Q9A grower sells futures for an expected crop of 100 tonnes. A storm reduces actual production to 70 tonnes, and the 100-tonne short futures position is left unchanged. Ignoring basis differences, how does the futures quantity compare with the remaining crop?
Option A. It automatically reduces to 70 tonnes when the storm occurs.
Why it is wrong: No automatic or instructed futures reduction is provided in the scenario.
Option B. It exceeds the remaining crop by 30 tonnes. — Correct answer
Option C. It creates physical replacement output of 30 tonnes through financial settlement.
Why it is wrong: A derivative cash flow is not physical production and does not replace the destroyed crop.
Option D. It exactly matches the remaining crop because the selling price was hedged.
Why it is wrong: A price hedge does not make the two physical quantities equal.
Answer: B. A price hedge does not insure production quantity. A smaller actual crop can leave part of an unchanged hedge without an offsetting physical exposure. The outstanding short futures quantity remains 100 tonnes under the stated facts. Actual physical output is now 70 tonnes. The hedge exceeds that output by 100 − 70 = 30 tonnes. Price-risk protection for expected output does not automatically replace destroyed goods or resize the derivative position. Remember: Reassess hedge quantity when the underlying physical exposure changes.
Hint, shown before you answer in practice mode: Common mistake: Treating a price hedge as production insurance or assuming it automatically resizes after a crop loss.
XVI-076mediumconceptual
Q10For one month, a manufacturer has a cash-settled swap on 2,000 kg of metal. The manufacturer pays the floating metal price and receives a fixed ₹600 per kg. The floating price is ₹625. What is the manufacturer’s net swap payment?
Option A. ₹50,000 received
Why it is wrong: This reverses the direction of the payment legs stated in the question.
Option B. ₹12,50,000 paid net
Why it is wrong: This is the gross floating leg before offsetting the fixed receipt.
Option C. ₹50,000 paid — Correct answer
Option D. ₹12,00,000 received net
Why it is wrong: This is the gross fixed receipt rather than the net obligation.
Answer: C. A swap’s net cash flow is the difference between its two agreed payment legs. The floating leg paid is ₹625 × 2,000 = ₹12,50,000. The fixed leg received is ₹600 × 2,000 = ₹12,00,000. Net amount paid = (₹625 − ₹600) × 2,000 = ₹50,000. There is no physical transfer of 2,000 kg under the stated cash-settled swap. Remember: Write down which leg is paid and which is received before netting a swap.
Hint, shown before you answer in practice mode: Common mistake: Automatically treating every commodity swap as a receive-floating hedge.
XVI-077mediumnumerical
Q11What did the Indian exchange integration effective from 1 October 2018 permit, as described in SEBI’s commodity-derivatives FAQ?
Option A. All commodity contracts were converted into ordinary equity-share contracts
Why it is wrong: Contract types and underlying economic exposures remain distinct.
Option B. Anyone holding commodity futures automatically became a shareholder of the exchange
Why it is wrong: A derivative position does not confer shareholder rights in the exchange or commodity producer.
Option C. Every physical commodity spot market was turned into a full stock exchange
Why it is wrong: The change did not convert all physical spot marketplaces into stock exchanges.
Option D. A single exchange could operate commodity and other securities-market segments — Correct answer
Answer: D. Integration of exchange segments concerns the markets an exchange can operate, not conversion of the underlying instruments. The change allowed a single exchange to operate different segments, including commodity derivatives and other securities-market segments. A metal future remains a commodity derivative. Exchange integration does not turn a physical commodity or a futures position into company ownership. Remember: Institutional integration does not make different financial products identical.
Hint, shown before you answer in practice mode: Common mistake: Confusing a common exchange operator with a common type of underlying asset.
XVI-078easyregulatory
Q12The same eligible grade trades at ₹20,000 per tonne at a port and ₹20,600 inland. Transport and handling between the locations cost ₹700 per tonne. Ignoring other risks, does this gap alone establish a profitable buy-port/sell-inland trade?
Option A. No. Prices at two locations are required to be identical
Why it is wrong: Location costs can support different prices for the same grade.
Option B. No. The price gap is smaller than the stated transfer cost — Correct answer
Option C. Yes. Quality equality makes transport costs irrelevant
Why it is wrong: Identical grade does not eliminate the physical cost of moving the goods.
Option D. Yes. Any positive difference between the prices is profit
Why it is wrong: The observed price difference is gross of logistics, not net profit.
Answer: B. Price comparisons across locations require the cost of making the goods available at the sale location. The apparent selling premium is ₹600 per tonne. Transferring the goods costs ₹700 per tonne. Before any other expense or risk, the proposed trade loses ₹100 per tonne. A price difference is not the same as an executable net arbitrage profit. Remember: Compare like-for-like delivered costs rather than bare price quotations.
Hint, shown before you answer in practice mode: Common mistake: Calling every spatial price difference an arbitrage opportunity.
XVI-079mediumconceptual
Q13For a hypothetical commodity, opening stocks are 80 tonnes, production 500, imports 60, domestic use 550 and exports 30. With no losses or other flows, what are closing stocks?
Option A. 60 tonnes — Correct answer
Option B. 90 tonnes
Why it is wrong: This omits the 30 tonnes of exports from total uses.
Option C. 120 tonnes
Why it is wrong: This counts the 60 tonnes of imports twice.
Option D. −20 tonnes
Why it is wrong: This omits the opening stock of 80 tonnes. A negative result here reflects that incomplete calculation.
Answer: A. A stock balance reconciles available supplies with all uses during a period. Total available quantity = opening stocks + production + imports = 80 + 500 + 60 = 640 tonnes. Total uses = domestic use + exports = 550 + 30 = 580 tonnes. Closing stocks = 640 − 580 = 60 tonnes. The balance does not by itself predict the next market price. Remember: Opening inventory is part of supply, while both domestic consumption and exports are uses.
Hint, shown before you answer in practice mode: Common mistake: Subtracting domestic use but forgetting exports or opening stocks.
XVI-080mediumnumerical
Q14Which pair contains one energy commodity and one base metal?
Option A. Gold and silver
Why it is wrong: Both are precious metals rather than the requested two categories.
Option B. Silver and natural gas
Why it is wrong: Silver is a precious metal, not the base metal required here.
Option C. Natural gas and copper — Correct answer
Option D. Wheat and crude oil
Why it is wrong: Wheat is agricultural. The pair has no base metal.
Answer: C. Commodity categories describe the nature and economic use of the underlying goods. Natural gas is an energy commodity. Copper is a base or industrial metal. Classification is independent of whether a particular contract is currently listed, suspended or actively traded. No current listing is implied by this question. Remember: Distinguish energy, agricultural, base-metal and precious-metal groups.
Hint, shown before you answer in practice mode: Common mistake: Treating every metal, including bullion, as a base metal.
XVI-081easyconceptual
Q15A processor uses a liquid commodity futures quotation when negotiating a forward supply price. Which interpretation of that quotation is most appropriate?
Option A. It fixes the future spot price at every delivery location across the country
Why it is wrong: Different locations and later supply-demand conditions are not fixed by one futures quotation.
Option B. It is a market price benchmark, not a guaranteed future spot price — Correct answer
Option C. It removes the need to consider the grade and delivery terms of the deal
Why it is wrong: The benchmark has its own specifications, so differences cannot simply be ignored.
Option D. It guarantees the seller’s physical production
Why it is wrong: A market price does not insure the supplier’s output.
Answer: B. Price discovery provides information from market transactions without guaranteeing every future outcome. A futures quote reflects tradable expectations and carrying conditions for a specified contract. It can inform negotiations. A supply agreement may differ in grade, location, timing and credit terms. Those differences still matter, and future spot conditions can change. Remember: Use a futures price as a specified market benchmark, not an unconditional prediction.
Hint, shown before you answer in practice mode: Common mistake: Confusing price discovery with certainty about the future.
XVI-082mediumconceptual
Introduction to Commodity Markets: common questions
How many practice questions are there on Introduction to Commodity Markets?
15 questions, all written out on this page with the correct answer and why each other option is wrong. This unit is one of the 10 practice topics for NISM Series XVI, which has 150 questions in total.
Are these real NISM Series XVI questions on Introduction to Commodity Markets?
No. LearnNifty wrote every question from NISM's public syllabus. NISM does not publish its question bank, so nobody can offer you the real paper. Use these questions to check that an idea has gone in. Use the official NISM workbook to see what is examined.
Does negative marking apply to NISM Series XVI?
Yes. NISM takes off 25% of a question's marks for a wrong answer. On a 1-mark question that is 0.25 marks off. A blank question earns nothing and loses nothing, so a wrong guess costs marks on this paper. Timed practice here uses the same rule.
Are these practice questions kept up to date?
Each question is written against the rules printed on this page, last checked on 5 September 2026. A Budget or a SEBI circular can change a rate, a lot size or an expiry day. If one of those rules changes before your exam, treat the questions that use it as out of date. Then check NISM's current workbook.
Commodity Futures
22 questions on Commodity Futures. Its quiz opens on that unit.
Open Commodity Futures