Trading Mechanism
13 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
- Introduction to Commodity Markets15
- Commodity Futures22
- Commodity Options22
- Commodity Indices12
- Uses of Commodity Derivatives23
- 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 If a rule changes before your exam, treat the linked questions as out of date and check NISM's current workbook.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 13 questions on Trading Mechanism, with answers
Q1A small manufacturer wants to hedge through a commodity exchange without becoming an exchange member. Which route is consistent with SEBI’s investor onboarding description?
Option A. Ask an assayer to execute orders directly using the manufacturer’s tax registration.
Why it is wrong: An assayer’s quality-testing role does not authorise it to act as the client’s trading broker.
Option B. Open the required trading account with a registered broker and complete the applicable onboarding. — Correct answer
Option C. Obtain a warehouse receipt, which automatically creates an exchange trading membership.
Why it is wrong: A warehouse receipt records goods and related rights, not exchange membership.
Option D. Use a clearing corporation’s settlement account as a substitute for a broker trading account.
Why it is wrong: Clearing arrangements do not replace the client’s trading relationship and onboarding.
Answer: B. An investor can access exchange trading through a registered intermediary rather than becoming a member of the exchange itself. SEBI’s onboarding description directs the investor to a registered stock broker, with KYC, risk documentation and the relevant account arrangements. Warehousing, assaying and clearing perform different functions. Possessing a commodity or a tax registration is not itself a trading-access authorisation. Remember: Distinguish the client’s account-opening route from the intermediary’s exchange membership.
Hint, shown before you answer in practice mode: Common mistake: Assuming physical commodity ownership is sufficient authorisation to enter exchange orders.
XVI-048easyregulatory
Q2For one contract, sell order X offers 2 lots at ₹501 and arrived before Y, which offers 3 lots at ₹500. A valid buy limit order for 4 lots at ₹501 enters an unchanged price-time-priority book. Existing sell-order prices determine executions. What is the average buying price?
Option A. ₹500.25 — Correct answer
Option B. ₹500.40
Why it is wrong: It averages all five available lots, although the buyer requests only four.
Option C. ₹501.00
Why it is wrong: It assumes every fill occurs at the incoming order’s limit rather than the stated resting-order prices.
Option D. ₹500.50
Why it is wrong: It gives time priority to X before considering the better price at Y.
Answer: A. Price priority selects the better price before arrival time, and the average fill must be weighted by executed quantities. Y’s ₹500 offer has priority over X’s ₹501 offer despite arriving later. The buyer takes 3 lots at ₹500 and 1 lot at ₹501. Average price = (3 × 500 + 1 × 501) ÷ 4 = ₹500.25. One lot of X remains unfilled. Remember: Apply price priority first, then calculate the quantity-weighted price of the actual fills.
Hint, shown before you answer in practice mode: Common mistake: Using the time stamp to override a better executable price.
XVI-049mediumnumerical
Q3A valid sell stop-limit order has trigger ₹490 and limit ₹488. The trigger condition occurs, but the highest available bid is ₹485. Under the stated limit-order rules, what happens immediately?
Option A. The order is activated but cannot execute against the ₹485 bid. — Correct answer
Option B. The order must execute at ₹490 because that was the trigger.
Why it is wrong: A trigger price is an activation condition, not an assured transaction price.
Option C. The order must execute at ₹488 even without a buyer at that price.
Why it is wrong: An executable counter-order is still needed at an acceptable price.
Option D. The order becomes an unrestricted market sell and executes at ₹485.
Why it is wrong: The order was specified as stop-limit, not stop-market. Its limit cannot simply be discarded.
Answer: A. A trigger activates a stop order, while the limit still controls the worst permitted execution price. The trigger has been reached, so the order is no longer dormant. The activated order is a sell limit at ₹488. It requires ₹488 or better. A ₹485 bid is worse for the seller, so no fill occurs against that bid. Triggering is not a promise of execution. Remember: Separate activation, price protection and actual execution.
Hint, shown before you answer in practice mode: Common mistake: Treating a stop trigger as a guaranteed stop-loss exit price.
XVI-050mediumregulatory
Q4A valid, non-algorithmic IOC buy order is submitted for 12 lots. Five lots execute immediately at acceptable prices and no further match is available. What happens to the remaining quantity?
Option A. All 12 lots are cancelled, including the executed trades.
Why it is wrong: A cancellation of unfilled quantity does not erase completed trades.
Option B. The 7 lots are converted into a next-day order.
Why it is wrong: IOC does not carry an unfilled balance to another session.
Option C. 7 lots remain for the rest of the day.
Why it is wrong: That would be inconsistent with the stated IOC validity.
Option D. 7 lots are cancelled. — Correct answer
Answer: D. An immediate-or-cancel instruction prevents its unfilled balance from waiting in the order book. The order requested 12 lots and has already executed 5. The unfilled balance is 12 − 5 = 7 lots. Under IOC validity it is cancelled, while the five executions remain trades. Remember: IOC can leave a valid partial fill and a cancelled remainder.
Hint, shown before you answer in practice mode: Common mistake: Confusing immediate-or-cancel with an instruction requiring the whole quantity to execute or none to execute.
XVI-051easyconceptual
Q5A client submits an order for 10 lots. The exchange confirms 4 fills, then acknowledges cancellation of the remaining 6. The client now wants no market exposure. Which statement is correct?
Option A. The cancellation removes all 10 lots from the trade history.
Why it is wrong: It incorrectly extends the cancellation to trades that already occurred.
Option B. The broker can delete the fills because the client changed its intention.
Why it is wrong: A client’s change of intention is not a normal basis for deleting valid exchange executions.
Option C. The 4 filled lots remain a position unless closed by a separate valid trade. — Correct answer
Option D. The 4 filled lots are automatically reclassified as unexecuted orders.
Why it is wrong: Completed trades do not become pending orders because another quantity is cancelled.
Answer: C. An order instruction and a completed trade are different records with different consequences. The cancellation confirmation applies to the six lots that were still pending. The four completed trades create a position and remain in the trade record. A separate offsetting trade would be required to close that position in the ordinary course. Remember: Check filled quantity separately from cancelled quantity before judging the remaining exposure.
Hint, shown before you answer in practice mode: Common mistake: Assuming an order cancellation is an undo button for all associated executions.
XVI-052easyconceptual
Q6A customer asks for the September copper futures contract but the order ticket displays October copper futures. The direction and lot count are otherwise correct. What is the most appropriate action before submission?
Option A. Submit it because equal quantities ensure equal hedge outcomes.
Why it is wrong: Equal quantities do not remove calendar-basis or timing differences.
Option B. Change only the price and leave the October contract selected.
Why it is wrong: Changing a limit price does not change the selected expiry month.
Option C. Correct the expiry month to the instructed contract. — Correct answer
Option D. Submit it because the commodity name is the same.
Why it is wrong: The common underlying name does not make expiries interchangeable.
Answer: C. Contract identity includes its expiry and specifications, not merely the commodity name. September and October futures are separate contracts and can have different prices, liquidity and delivery dates. The client instructed September. Correcting price or quantity does not convert the October contract into September. Remember: Verify the commodity, expiry, instrument type, side and quantity before transmitting an order.
Hint, shown before you answer in practice mode: Common mistake: Matching the commodity name while overlooking the delivery or expiry month.
XVI-053easyconceptual
Q7Which characteristic most directly supports a reliable physically deliverable commodity futures contract?
Option A. Quality differences that cannot be tested by independent methods.
Why it is wrong: Untestable quality makes it difficult to decide whether tendered goods conform.
Option B. A reasonably standardisable grade with verifiable quantity and deliverable supplies. — Correct answer
Option C. Frequent spoilage that prevents storage through the required delivery period.
Why it is wrong: A delivery timetable that exceeds practical storability makes performance more difficult.
Option D. Supply controlled by one holder with no practical substitute delivery source.
Why it is wrong: Extreme control of deliverable supply can increase squeeze or manipulation concerns.
Answer: B. Deliverable futures need a credible specification and a practical way of delivering conforming goods. Standardisation and verifiable quantity/quality help buyers and sellers understand what satisfies the contract. Unmeasurable quality, concentrated deliverable supply or inability to store can weaken delivery reliability and price integrity. Remember: A useful underlying must support credible standardisation, price discovery and delivery.
Hint, shown before you answer in practice mode: Common mistake: Judging suitability only by whether the commodity’s price moves frequently.
XVI-123mediumconceptual
Q8An automated strategy sends commodity orders whenever its signal changes. A coding error repeats the same intended order many times. Which control most directly limits the resulting position build-up before execution?
Option A. A year-end profit report prepared by the accounts team after all trades settle.
Why it is wrong: It can identify a past result but cannot prevent the current order burst.
Option B. A display setting that hides duplicate orders from the user’s screen to avoid confusion.
Why it is wrong: Display filtering does not enforce a trading limit in the order or risk system.
Option C. A warehouse quality test performed only when the goods are finally delivered.
Why it is wrong: It addresses delivery quality, not repeated electronic instructions.
Option D. A pre-trade order or position limit that rejects orders beyond the allowed exposure. — Correct answer
Answer: D. Automation can amplify an operational error, so controls must operate before or during order transmission. The immediate hazard is unauthorised accumulation of exposure through repeated orders. A pre-trade size or exposure limit can reject the excess before it becomes additional trades. Post-trade reports and physical quality tests address different stages and risks. Hiding an order does not stop it executing. Remember: Choose a control that acts before the identified error creates an irreversible exposure.
Hint, shown before you answer in practice mode: Common mistake: Treating an automated strategy or a clean display as a substitute for enforced risk checks.
XVI-124mediumregulatory
Q9A buy order falls within the contract’s allowed price band and passes the broker’s funds check. There is no seller at its limit price or lower. What follows?
Option A. The order can be accepted without being executed. — Correct answer
Option B. Passing the funds check guarantees a fill at the previous closing price.
Why it is wrong: Funds availability does not turn a historical closing price into an executable quote.
Option C. The limit price is automatically increased until a seller is found.
Why it is wrong: A valid limit cannot be raised solely to force a trade without a corresponding instruction.
Option D. Passing the price band obliges the clearing corporation to sell to the buyer.
Why it is wrong: The clearing function does not supply a sell order merely to fill an accepted buy order.
Answer: A. An admissible order still needs a matching counter-order to become a trade. Price-band and funds checks establish whether the order may enter the system. They do not create a willing seller at an acceptable price. The buy limit may remain unfilled under its validity instruction. Remember: Acceptance, execution and clearing are distinct stages.
Hint, shown before you answer in practice mode: Common mistake: Interpreting a successful order acknowledgement as proof of a completed trade.
XVI-125easyregulatory
Q10A contract’s last traded price is ₹800. The current bid is ₹798 and ask is ₹804. A customer immediately buys 200 units at the displayed ask. How much more is paid than a calculation using the last traded price? Assume full availability and ignore charges.
Option A. ₹800 — Correct answer
Option B. ₹0
Why it is wrong: It assumes a previous traded price is necessarily available for the current order.
Option C. ₹400
Why it is wrong: It compares the last price with the bid, even though the customer is buying.
Option D. ₹1,200
Why it is wrong: It multiplies the full ₹6 bid-ask spread rather than the ₹4 ask-minus-last-price gap.
Answer: A. The last traded price describes a previous execution, whereas the ask is the displayed selling price available to an immediate buyer. An immediate purchase at the stated ask costs ₹804 per unit, not the earlier ₹800. Difference from the last-trade benchmark = (₹804 − ₹800) × 200 = ₹800. The bid-ask spread of ₹6 is a different comparison from the ₹4 difference asked here. Remember: Use the correct side of the current quote for a trade and the specified price for a benchmark comparison.
Hint, shown before you answer in practice mode: Common mistake: Using last traded price as an assured executable price.
XVI-126mediumnumerical
Q11For this question, a broker charges ₹20 per executed order and another charge is ₹5 per contract per side. A trader opens 10 contracts in one order and closes all 10 in a second order, earning ₹2,000 before these charges. There are no other charges. What is the net result?
Option A. ₹1,960 profit
Why it is wrong: It deducts brokerage but ignores the per-contract charge.
Option B. ₹1,900 profit
Why it is wrong: It deducts the per-contract charges but omits order brokerage.
Option C. ₹1,930 profit
Why it is wrong: It charges only one order and one side of the round trip.
Option D. ₹1,860 profit — Correct answer
Answer: D. Trading costs may use different bases, including orders, contracts and each side of a round trip. Brokerage = 2 executed orders × ₹20 = ₹40. The per-contract charge applies to 10 buys and 10 sells: 20 contract-sides × ₹5 = ₹100. Net profit = ₹2,000 − ₹40 − ₹100 = ₹1,860. The supplied rates are hypothetical, not current exchange tariffs. Remember: Keep the unit of each fee visible and include both entry and exit where the fee is per side.
Hint, shown before you answer in practice mode: Common mistake: Applying an order-based fee as though it were per lot, or charging only the entry leg.
XVI-127mediumnumerical
Q12An exchange report shows rising open interest in a commodity futures contract. What can be concluded from that information alone?
Option A. Only long positions have increased, because open interest counts the buyers alone.
Why it is wrong: Outstanding contracts have both a long and a short side.
Option B. All the new contracts were opened by traders who expect the price to move upward.
Why it is wrong: The statistic does not identify who initiated each transaction or why.
Option C. More contracts are outstanding, but this does not show each participant’s motive. — Correct answer
Option D. Every newly opened position is a producer’s hedge against falling prices.
Why it is wrong: Producer hedges are only one possible reason for positions.
Answer: C. An exchange statistic measures a defined market quantity, not the private economic purpose of each participant. Open interest counts outstanding contracts. Each open contract has a long side and a short side. A rise does not, by itself, distinguish hedging, speculation, arbitrage or other portfolio activity. Additional evidence is needed to infer motives. Remember: Use published market data for what it measures, not as proof of an unobserved trading motive.
Hint, shown before you answer in practice mode: Common mistake: Treating a rise in open interest as a guaranteed bullish signal.
XVI-128mediumconceptual
Q13A trader finds an old general trading-hours chart and a newer exchange notice specifically changing the session for the contract and date it plans to trade. Which information should be used to determine that session?
Option A. The broker’s fill time from the previous trading day, regardless of what the new notice says.
Why it is wrong: An earlier fill is historical evidence, not a substitute for the current notice.
Option B. The longest trading session used by any commodity on that exchange.
Why it is wrong: A session for another commodity does not establish this contract’s hours.
Option C. The applicable contract-specific exchange notice, checked for its effective date and scope. — Correct answer
Option D. The old chart, because a trading session that has been published once can never be changed.
Why it is wrong: A general chart can be superseded by a later applicable notice.
Answer: C. Trading sessions can depend on the contract, date and applicable exchange notices. The task is to establish the session for a specified contract and date, not a general historical timetable. The effective and applicable exchange notice is the relevant operational reference. The trader should also check for a further applicable update. Remember: Check contract and effective date before applying operational timings.
Hint, shown before you answer in practice mode: Common mistake: Copying an old commodity-hours table as a universal rule.
XVI-129easyregulatory
Trading Mechanism: common questions
How many practice questions are there on Trading Mechanism?
13 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 Trading Mechanism?
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.
Clearing Settlement and Risk Management of Commodity Derivatives
20 questions on Clearing Settlement and Risk Management of Commodity Derivatives. Its quiz opens on that unit.
Open Clearing Settlement and Risk Management of Commodity Derivatives