Uses of Commodity Derivatives
23 questions. Each answer is explained.
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Learn these topics
More units in NISM Series XVI
- Introduction to Commodity Markets15
- Commodity Futures22
- Commodity Options22
- Commodity Indices12
- 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 If a rule changes before your exam, treat the linked questions as out of date and check NISM's current workbook.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 23 questions on Uses of Commodity Derivatives, with answers
Q1A 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?
Option A. ₹1,19,000 — Correct answer
Option B. ₹1,13,000
Why it is wrong: It omits the hedge gain and reports only the physical receipt.
Option C. ₹1,20,000
Why it is wrong: It assumes perfect convergence. The closing spot price is ₹50 below futures.
Option D. ₹1,07,000
Why it is wrong: It subtracts the futures gain as though the producer held a long futures position.
Answer: A. 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, shown before you answer in practice mode: Common mistake: Assuming a full quantity hedge also removes every difference in grade, location or close-out basis.
XVI-037mediumnumerical
Q2A 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.
Option A. ₹16,00,000
Why it is wrong: It assumes the closing physical and futures prices are identical, although they differ by ₹3 per kg.
Option B. ₹18,64,000
Why it is wrong: It adds the gain as another cost rather than using it to offset the purchase.
Option C. ₹17,44,000
Why it is wrong: It ignores the futures gain.
Option D. ₹16,24,000 — Correct answer
Answer: D. 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, shown before you answer in practice mode: Common mistake: Using the same addition rule for a buyer’s cost and a seller’s receipt without considering cash-flow signs.
XVI-038mediumnumerical
Q3A 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.
Option A. ₹90,000
Why it is wrong: It adds the purchase increase and hedge gain instead of offsetting them.
Option B. ₹40,000
Why it is wrong: It reports the futures gain rather than the remaining purchase-cost increase.
Option C. ₹10,000 — Correct answer
Option D. ₹50,000
Why it is wrong: It ignores the gain on the 80-tonne hedge.
Answer: C. 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, shown before you answer in practice mode: Common mistake: Treating an 80% hedge as either no hedge or complete protection.
XVI-039mediumnumerical
Q4An 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?
Option A. ₹4,800
Why it is wrong: It assumes the closing basis is zero.
Option B. ₹4,765 — Correct answer
Option C. ₹35
Why it is wrong: It reports the size of the basis alone, not the total selling price.
Option D. ₹4,835
Why it is wrong: It subtracts a negative basis and reverses its effect.
Answer: B. 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, shown before you answer in practice mode: Common mistake: Memorising a plus or minus sign without checking whether basis means spot minus futures or the reverse.
XVI-040mediumnumerical
Q5A 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?
Option A. It is ₹50 per unit lower.
Why it is wrong: It reverses the benefit of basis strengthening to a short hedger.
Option B. It is ₹70 per unit higher.
Why it is wrong: It adds the magnitudes 60 and 10 instead of subtracting signed values.
Option C. It is ₹50 per unit higher. — Correct answer
Option D. It is unchanged because quantity was fully hedged.
Why it is wrong: Quantity matching does not remove the difference between local spot and futures prices.
Answer: C. 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, shown before you answer in practice mode: Common mistake: Calling a less negative basis a weakening because the absolute number became smaller.
XVI-041mediumconceptual
Q6A 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?
Option A. It is unchanged if the futures gain is positive.
Why it is wrong: A favourable futures result is only one component. The physical payment must also be considered.
Option B. It is ₹30 per unit higher.
Why it is wrong: It reverses the effect of a weaker basis on the buyer.
Option C. It is ₹30 per unit lower. — Correct answer
Option D. It is ₹20 per unit lower.
Why it is wrong: It subtracts magnitudes 25 and 5 instead of preserving the negative actual basis.
Answer: C. 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, shown before you answer in practice mode: Common mistake: Judging hedge success by the derivatives leg instead of the combined physical and derivatives result.
XVI-042mediumconceptual
Q7A 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?
Option A. The specialised-grade premium may rise relative to the futures benchmark. — Correct answer
Option B. The futures contract automatically changes its deliverable grade to match the user.
Why it is wrong: Contract grades are established by specifications, not by an individual hedger’s needs.
Option C. A long futures hedge changes into a short position when grade prices diverge.
Why it is wrong: Price divergence does not reverse the direction of an existing futures position.
Option D. The physical input price must equal the futures price because both are copper.
Why it is wrong: Related commodities can have different scarcity and quality premiums.
Answer: A. 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, shown before you answer in practice mode: Common mistake: Assuming a common commodity name means the physical purchase and derivative are interchangeable.
XVI-043mediumconceptual
Q8An 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.
Option A. ₹1,010
Why it is wrong: It ignores the roll spread and uses initial futures plus final basis only.
Option B. ₹1,040 — Correct answer
Option C. ₹980
Why it is wrong: It ignores both futures transactions.
Option D. ₹1,020
Why it is wrong: It includes the replacement-contract gain but omits the first-contract gain.
Answer: B. 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, shown before you answer in practice mode: Common mistake: Treating the replacement contract as though it had been sold at the original contract’s entry price.
XVI-044hardnumerical
Q9In 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?
Option A. −₹20
Why it is wrong: It deducts a full year of interest instead of six months.
Option B. ₹20 — Correct answer
Option C. ₹40
Why it is wrong: It deducts financing but omits storage and insurance.
Option D. ₹80
Why it is wrong: It ignores both financing and storage costs.
Answer: B. 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, shown before you answer in practice mode: Common mistake: Calling the gross forward premium an arbitrage profit.
XVI-045hardnumerical
Q10A 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?
Option A. ₹45 — Correct answer
Option B. ₹60
Why it is wrong: It ignores the commodity borrowing fee.
Option C. ₹85
Why it is wrong: It subtracts the borrowing fee from the ₹100 interest earned but omits the ₹40 increase in replacement cost.
Option D. −₹55
Why it is wrong: It ignores the interest earned on the sale proceeds.
Answer: A. 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, shown before you answer in practice mode: Common mistake: Assuming every commodity can be sold short physically without availability or borrowing costs.
XVI-046hardnumerical
Q11On 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.
Option A. ₹40
Why it is wrong: It is the maximum gross payoff before the premium debit.
Option B. ₹23 — Correct answer
Option C. ₹17
Why it is wrong: It is the net debit and maximum loss, not the maximum profit.
Option D. ₹57
Why it is wrong: It adds the premium debit to the strike width instead of subtracting it.
Answer: B. 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 strike width less the net debit.
Hint, shown before you answer in practice mode: Common mistake: Deducting only the purchased premium while forgetting the premium received.
XVI-047mediumnumerical
Q12A 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.
Option A. ₹12 profit — Correct answer
Option B. ₹18 loss
Why it is wrong: It reports the maximum premium loss as though both puts expired without value.
Option C. ₹32 profit
Why it is wrong: It reports the maximum profit of ₹50 − ₹18, although the settlement is above the lower strike.
Option D. ₹30 profit
Why it is wrong: It ignores the premium cost.
Answer: A. 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 out of the money. 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, shown before you answer in practice mode: Common mistake: Using the strike width at a settlement that lies between the strikes.
XVI-111mediumnumerical
Q13A 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.
Option A. ₹976 and ₹1,036
Why it is wrong: It subtracts the put premium and adds the call premium separately instead of using the combined cost.
Option B. ₹940 and ₹1,060 — Correct answer
Option C. ₹964 and ₹1,024
Why it is wrong: It applies only one premium on each side and mismatches the relevant legs.
Option D. ₹988 and ₹1,012
Why it is wrong: It uses the difference between premiums, ₹12, rather than their sum.
Answer: B. 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 break-even prices use the total premium of both options.
Hint, shown before you answer in practice mode: Common mistake: Treating the winning leg as though the other leg had been acquired without cost.
XVI-112mediumnumerical
Q14A 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?
Option A. Below ₹670 or above ₹790 — Correct answer
Option B. Below ₹700 or above ₹760
Why it is wrong: These are the exercise strikes. Just crossing a strike does not recover both premiums.
Option C. Between ₹700 and ₹760
Why it is wrong: Both options expire without intrinsic value within this inner interval.
Option D. Between ₹670 and ₹790
Why it is wrong: Most of this interval produces a loss, and the endpoints only break even.
Answer: A. 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, shown before you answer in practice mode: Common mistake: Assuming any in-the-money option makes the whole combination profitable.
XVI-113mediumconceptual
Q15A 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?
Option A. ₹620 — Correct answer
Option B. ₹580
Why it is wrong: It subtracts the ₹20 premium as though it had been paid, although the producer receives it.
Option C. ₹600
Why it is wrong: It includes the cap at the strike but omits the premium received.
Option D. ₹670
Why it is wrong: It omits the written call’s settlement loss.
Answer: A. 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, shown before you answer in practice mode: Common mistake: Counting the call premium as extra income while ignoring the obligation sold with it.
XVI-114mediumnumerical
Q16A 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?
Option A. ₹45
Why it is wrong: It confuses the cost of insurance with the minimum sale receipt.
Option B. ₹2,045
Why it is wrong: It adds a premium that the producer pays, rather than receives.
Option C. ₹1,955 — Correct answer
Option D. ₹2,000
Why it is wrong: It ignores the premium paid for protection.
Answer: C. 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, shown before you answer in practice mode: Common mistake: Quoting the strike as a cost-free guaranteed selling price.
XVI-115mediumnumerical
Q17A 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.
Option A. ₹82
Why it is wrong: It ignores the obligation on the sold put.
Option B. ₹88
Why it is wrong: It subtracts the net premium even though the combination has a debit.
Option C. ₹112
Why it is wrong: It reports the above-call-strike cap, not the cost at the stated low price.
Option D. ₹92 — Correct answer
Answer: D. 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, shown before you answer in practice mode: Common mistake: Deducting only the call payoff and forgetting the short put when prices fall.
XVI-116hardnumerical
Q18A 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?
Option A. Buy input futures and sell output futures in the conversion quantities. — Correct answer
Option B. Sell input futures and buy output futures in the conversion quantities.
Why it is wrong: It magnifies adverse input-cost increases and output-price declines.
Option C. Buy both input and output futures in equal currency amounts.
Why it is wrong: A long output position does not protect expected sales against a price fall. Equal currency amounts need not match the yields.
Option D. Sell both input and output futures in equal physical quantities.
Why it is wrong: A short input position does not protect a future purchase against rising prices, and equal physical quantities ignore yields.
Answer: A. A processing margin 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, shown before you answer in practice mode: Common mistake: Treating a processor as only a buyer or only a seller.
XVI-117hardconceptual
Q19A 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?
Option A. ₹15,000 profit
Why it is wrong: It treats both legs as long positions.
Option B. ₹30,000 profit
Why it is wrong: It treats the starting price difference as an immediate profit without closing both legs.
Option C. ₹5,000 profit — Correct answer
Option D. ₹5,000 loss
Why it is wrong: It reverses the actual long-near, short-far strategy.
Answer: C. 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, shown before you answer in practice mode: Common mistake: Calling an initial calendar-price gap a profit already earned.
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Q20Using 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?
Option A. ₹20 crore — Correct answer
Option B. ₹4 crore
Why it is wrong: It nets the liability side against the asset side.
Option C. ₹8 crore
Why it is wrong: It omits the asset-side exposure.
Option D. ₹12 crore
Why it is wrong: It omits the liability-side exposure.
Answer: A. 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, shown before you answer in practice mode: Common mistake: Treating every risk-disclosure quantity as a net long or short position.
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Q21A 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?
Option A. Historical correlation fixes the future conversion ratio between the commodities.
Why it is wrong: Correlation measures co-movement, not a guaranteed conversion or settlement ratio.
Option B. Relative prices can diverge, so equal notionals do not remove spread risk. — Correct answer
Option C. Equal notionals make the combined payoff zero at every future price pair.
Why it is wrong: A zero payoff for every price pair would require an identity that these different commodities do not provide.
Option D. A gain on the long leg must always equal the loss on the short leg.
Why it is wrong: The long leg and short leg can have unequal gains or losses, or both contribute an adverse result.
Answer: B. 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, shown before you answer in practice mode: Common mistake: Calling a correlated two-leg position an arbitrage without proving all terminal cash flows.
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Q22A 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?
Option A. 40 short contracts
Why it is wrong: It ignores the 0.75 ratio and hedges the entire ₹48 lakh notional.
Option B. 30 long contracts
Why it is wrong: The quantity is right but the long direction contradicts the model.
Option C. 30 short contracts — Correct answer
Option D. 64 short contracts
Why it is wrong: It divides 48 by 0.75 and mistakes the result for a contract count, instead of multiplying by the ratio and dividing by ₹1.2 lakh per contract.
Answer: C. 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, shown before you answer in practice mode: Common mistake: Ignoring a supplied hedge ratio or treating contract quantity as independent of the futures multiplier.
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Q23A 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?
Option A. 4 long contracts and 7 tonnes unhedged — Correct answer
Option B. 4 short contracts and 7 tonnes unhedged
Why it is wrong: It uses the wrong direction for a future purchase.
Option C. 5 long contracts and 3 tonnes unhedged
Why it is wrong: Five contracts cover 50 tonnes and create a 3-tonne overhedge, breaching the stated policy.
Option D. 47 long contracts and no quantity unhedged
Why it is wrong: It treats each tonne as a contract even though one contract covers 10 tonnes.
Answer: A. 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, shown before you answer in practice mode: Common mistake: Rounding to the nearest lot without checking the organisation’s quantity constraint.
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Uses of Commodity Derivatives: common questions
How many practice questions are there on Uses of Commodity Derivatives?
23 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 Uses of Commodity Derivatives?
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.
Trading Mechanism
13 questions on Trading Mechanism. Its quiz opens on that unit.
Open Trading Mechanism