NISM Series XVI: Commodity Derivative Cert. - Full-Length Test

Fair Value of a Futures Contract = Spot Price ( 1 + Interest Rate / No. of times compounding)^ No. of compounding in a year X Number of years

In the above question, Spot price is Rs. 33000, Interest Rate is 12% = .12, Compounding is semi annually which means 2 times a year, Number of years = 1

Substituting –

33000 ( 1 + .12 / 2) ^ 2×1

33000 ( 1 + .06 ) ^ 2

33000 (1.06) ^ 2

On the Scientific Calculator of your computer, enter 1.06 , X^Y, 2 and you will get 1.1236

33000 x 1.1236 = 37078.80

To qualify for hedge accounting, the accounting standards require the hedge to be highly effective. There are separate tests to be applied prospectively and retrospectively.

Retrospective effectiveness testing is performed at each reporting date throughout the life of the hedge following a methodology set out in the hedge documentation. The objective is to demonstrate that the hedging relationship has been highly effective by showing that actual results of the hedge are within the range of 80-125%.

For call option which is in-the-money, intrinsic value is the excess of the assets spot price over the strike price.

For put option which is in-the-money, intrinsic value is the excess of strike price over the assets spot price.

Black-Scholes option pricing model is used to calculate a theoretical price of options using the five key determinants of an option’s price: underlying price, strike price, volatility, time to expiration, and short-term (risk free) interest rate.

Commodity options, on exercise, devolve into the underlying futures contracts. All such devolved futures positions are considered to be acquired at the strike price of exercised options, on the expiry date of options, during the EOD processing.

Mr. Mehta has bought a Put Option which means he is expecting the gold prices to fall (Bearish view). His view proved to be correct the prices have fallen from Rs.39000 to Rs. 37000. This means he has made a profit of Rs 2000.

Rs 2000 is for 10 grams. So for 1 kg i.e. 1000 grams, the profit is 2000 x 1000 / 10 = Rs 2,00,000. This is Gross Profit

When a person buys a Put Option, he pays a premium.

Mr. Mehta has paid a premium of Rs 250 per 10 gram. So for a lot of 1 kg ie. 1000 grams he pays a premium of 250 x 1000 / 10 = 25000

So his Net Profit will be Gross Profit less Premium paid = 200000 – 25000 = Rs. 175000

Speculation is a practice of engaging in trading to make quick profits from fluctuations in prices.

Short speculators are those who sell first and expect the price to decrease from current level. Long speculators are those who buy first and expect the price to increase from current level.

Forward contracts, more often than not, were not honored by either of the contracting parties due to price changes and market conditions. A seller pulled out of the contract if the spot price was more profitable for him than the contracted price. A buyer also backed out from executing the contract on maturity if he was able to get the commodity at a cheaper price from the spot market.

Futures emerged as an alternative financial product to address these concerns of counterparty default, as the Exchange guaranteed the performance of the contract in case of the Futures.

Algo trading is permitted in commodity exchanges subject to the broad SEBI guidelines dated 27th Sept 2016. High Frequency Trading (HFT) is part of algorithmic trading that comprises latency-sensitive trading strategies and deploys technology including high speed networks to connect and trade on the trading platform.

The above question implies that if the oil content in castor seed is below 47 percent but within 45 percent, the contracted price will attract discount. For every 1 percent decrease in oil content or part thereof, there will be a discount of 2 percent or part thereof in price.

Contracted price of castor seeds i.e., Rs 9000 will be discounted by 2 percent because the quality content has decreased by 1 percent (from 47 percent to 46 percent).

Contracted price of castor seeds (at discount) = 9000 – 2% of 9000 = 9000 – 180 = Rs. 8820

Trader P has purchased and Trader Q has sold Gold futures. The prices have fallen from Rs 39000 to Rs 38500. So trader P will make a loss on his long position and trader Q will make a profit on his short position.

The lot size is 1 kg i.e. 1000 grams. The price quoted is for 10 grams. The fall in price is of Rs 500

So the amount will be Rs 500 x 1000 / 10 = Rs 50000

The correct option from the above is – Trader Q made a profit of Rs 50000 on this futures position.

As per the Guidance Note of ICAI – When sales of the hedged inventory occur in the future, the hedging related fair value adjustment to inventory will be released to the statement of profit and loss and can be classified as part of ‘cost of goods sold’.

increases, intrinsic value of the call option will decrease and hence its value will also decrease.

For eg. The Spot price is Rs. 100 and the Strike Price is Rs 90. Here the Intrinsic value for a call option is Rs 10 ( 100 – 90) The Intrinsic value for a Rs 95 strike price will be Rs 5. ( 100 – 95) . So as the Strike price increase, the intrinsic value decreases for a Call option.

Theta is the change in option price given a one-day decrease in time to expiration. It is a measure of time decay. Theta is generally used to gain an idea of how time decay is affecting your option positions

To qualify for hedge accounting, the accounting standards require the hedge to be highly effective. There are separate tests to be applied prospectively and retrospectively.

Retrospective effectiveness testing is performed at each reporting date throughout the life of the hedge following a methodology set out in the hedge documentation.

In a forward contract, the terms of the contract is tailored to suit the needs of the buyer and the seller. Generally, no money changes hands when the contract is first negotiated and it is settled at maturity. These forward contracts, many a times are not honored by either of the contracting parties due to price changes and market conditions. Hence, counter-party credit risk exists and settlement failure is a possibility in case of forwards contracts.

Settlement process involves matching the outstanding buy and sell instructions, by transferring the commodities ownership against funds between buyer and seller.

In other words, settlement refers to the process of adjusting financial positions of the parties to the trade transactions to reflect the net amounts due to them or due from them.

In the commodity Pay in process the clearing member will transfer the warehouse receipt to the clearing corporation.

(A Warehouse Receipt is a document of title to goods issued by a warehouse service provider to a person depositing commodities in the warehouse, evidencing storage of goods.)

Comparative movement in the value of a currency of a country in relation to the major global currencies is very important for prices of commodities in that particular country. Most of the commodities globally are denominated in the US dollar (USD). Hence, when the currency of a particular country appreciates against the USD, the price of the commodity in that particular country becomes cheaper and vice versa.

The Securities Contract (Regulation) Act, 1956 (SCRA) gives SEBI the jurisdiction over stock exchanges through recognition and supervision. It also gives SEBI the jurisdiction over contracts in securities and listing of securities on stock exchanges.

By selling gold in the forward contract, the bank has already gone short.

Now it has to hedge its position to avoid losses in case price of gold rises.

Buy buying a call option, it will protect it self against any rise in gold prices by paying the option premium

In case the prices fall, it will benefit as it has already sold gold in the forward contract. The only loss in this will be the small call option premium it has paid.

In a market order, the trade is executed at the immediately available current market price, prevailing at the time of placing the order.

Volatility is the magnitude of movement in the underlying asset’s price, either up or down. It affects both call and put options in the same way.

Higher volatility = Higher premium, Lower volatility = Lower premium (for both call and put options).

Position Traders are the subset of speculators who maintain overnight positions, which may run into weeks or even months, in anticipation of favourable movement in the commodity futures prices.

They may hold positions in which they run huge risks and with a possibility to earn big profits if their directional call proved to be correct.

In a limit order, the buyer or seller specifies the price at which the trade should be executed. For a buyer, the limit order generally remains below the on-going asking price and for a seller the limit order remains above the then bid price.

Basically, three delivery options are available in the commodity market:

– Compulsory delivery

– Both option

– Seller’s option

In the compulsory delivery option, both buyer and seller having an open position during the tender/delivery period of the contract are obligated to take/give delivery of the commodity.

With all the other factors remaining constant, increase in strike price of option increases the intrinsic value of the put option which in turn increases its option value.

For a put option which is in-the-money, intrinsic value is the excess of strike price (X) over the spot price.

The formula for calculating a premium is-

C – P = S – K / ( 1+r*t)

where C is Call Premium, P is Put Premium, S is Underlying Price, K is Strike Price, r is rate of interest and t is time period. Here time is 3 months ie. 3/12 = .25

C – 400 = 600 – 850 / 1+ (0.06 ∗ 0.25)

C – 400 = 600 – 850 / 1.015

C – 400 = 600 – 837.43

C – 400 = – 237.43

C = – 237.43 + 400

C = 162.57

Algo trading is permitted in commodity exchanges subject to the broad SEBI guidelines dated 27th September 2016.

High Frequency Trading (HFT) is part of algorithmic trading that comprises latency-sensitive trading strategies and deploys technology including high speed networks to connect and trade on the trading platform.

Suresh has purchased and Mahesh has sold Gold futures. The prices have risen from Rs 38000 to Rs 40000. So Suresh will make a profit on his long position and Mahesh will make a loss on his short position.

The lot size is 1 kg i.e. 1000 grams. The price quoted is for 10 grams.

So the amount will be Rs 2000 x 1000 / 10 = Rs 200000

The correct option from the above is – Suresh made a profit of Rs 200000 on this futures position.

Forward contracts, more often than not, were not honored by either of the contracting parties due to price changes and market conditions. A buyer also backed out from executing the contract on maturity if he was able to get the commodity at a cheaper price from the spot market.

Futures emerged as an alternative financial product to address these concerns of counterparty default, as the Exchange guaranteed the performance of the contract in case of the Futures.

As the cost of carry determines the differential between spot and futures price and is associated with costs involved in holding the commodity till the date of delivery, it follows that the cost of carry diminishes with each passing day and the differential must narrow and on the date of delivery, the cost of carry becomes zero and the spot and futures price converge. This is known as Convergence.

On exercise, option position shall devolve into underlying futures position as follows:

– long call position shall devolve into long position in the underlying futures contract

– long put position shall devolve into short position in the underlying futures contract

– short call position shall devolve into short position in the underlying futures contract

– short put position shall devolve into long position in the underlying futures contract

If all other factors affecting an option’s price remain same, the time value portion of an option’s premium will decrease with the passage of time. This is known as time decay.

Options are known as ‘wasting assets’, due to this property where the time value gradually falls to zero by the time the contract reaches the expiry.

Globally, exchange-traded commodity derivatives have emerged as an investment product often used by institutional investors, hedge funds, sovereign wealth funds besides retail investors. There has been a growing sophistication of commodities investments with the introduction of exotic products such as weather derivatives, power derivatives and environmental emissions trading (carbon credits trading).

Futures Price = Spot Price + Cost of carry

(The cost of carry is the Spot price X interest cost for 4 months)

= 40000 + ( 40000 x 12% x 4/12)

= 40000 + ( 40000 x .12 x 0.33333)

= 40000 + (40000 x 0.04)

= 40000 + 1600

= 41600

Out of the money (OTM) option is one with strike price worse than the spot price for the holder of option. In other words, this option would give the holder a negative cash flow if it were exercised immediately. A call option is said to be OTM, when spot price is lower than strike price. And a put option is said to be OTM when spot price is higher than strike price.

Hedging is a two-step process. For instance, if the hedger has plans to buy a commodity in the spot market at a future date, he buys the futures contract now. This is the first step.

Subsequently, on the Futures Expiry date, he takes the delivery from the futures position. Alternately, if the hedger manages to buy the required commodity from the spot market in the interim, then he squares off his futures contract. This is the second step

Commodities Transaction Tax (CTT) is applicable on sale transactions of commodity futures, except for exempted agricultural commodities.

Agricultural commodities, have a convenience yield because they form part of production processes and having them readily available helps in the uninterrupted production process.

Position Limits are set at the client level and member level to prevent any members and clients from building up large position on the buy side or sell side to manipulate short-term price movements to their advantage. Numerical position limits are set both for agricultural and nonagricultural commodities as per the guidelines of the regulator.

Generally there is a direct relationship between spot and future prices. If the spot prices rise, the future prices will also tend to rise and if spot prices fall the future prices will also tend to fall.

So a seller of a future contract will make money if the spot prices fall as the future prices will also fall and he will be able to square up his position at a lower price. (Eg. Sold at Rs 100 and bought back at Rs 90 – profit of Rs 10)

Theta is a measure of an option’s sensitivity to time decay. It is the change in option price given a one-day decrease in time to expiration.

Commodity derivatives markets play an increasingly important role in the commodity market value chain by performing key economic functions such as risk management through risk reduction and risk transfer, price discovery and transactional efficiency.

The SC(R)A ie. the Securities Contract (Regulation) Act of 1956 is the act mainly responsible for governing the trading of securities in India.

Volatility refers to the range to which the price of a commodity may increase or decrease.

A trader who is with short positions anticipates a decrease in volatility and are having short positions in volatility / vega.

Similarly, Investors with Long options anticipates an increase in volatility and they are long on vega i.e., volatilities.

On expiry day, the option series with a strike price closest to the Daily Settlement Price (DSP) of Futures is called the At the Money (ATM) option.

• The ATM option, plus the two strike prices immediately above and below it, are collectively referred to as the Close to the Money (CTM) option series.

• This classification is important for physical settlement and assignment processes in derivatives trading.

Reduction in interest rate increases put option price but reduces call option price.

Lower interest rate leads to lower cost of finance of paying the call option premium, so the value of call option decreases.

For put options, the opposite holds true, that is, the lower the interest rates the higher the put option price.

Types of hedge accounting – The Guidance Note of ICAI recognizes the following types of hedging:

– The fair value hedge accounting model is applied when hedging the risk of a fair value change of assets and liabilities already recognized in the balance sheet, or a firm commitment that is not yet recognized.

– The cash flow hedge accounting model is applied when hedging the risk of changes in highly probable future cash flows or a firm commitment in a foreign currency.

Strike price is the price for which the underlying security may be purchased (in case of call) or sold (in case of put) by the option holder, by exercising the option.

Intrinsic Value = Market price – Strike price

= 1900 – 2000 = -100

Intrinsic value can never be negative, so it will be considered as Zero.

A Call Option is ‘In the Money’ when Market Price is greater than Strike Price. Its ‘At the Money’ when Market Price is equal to Strike Price and its ‘Out of the Money’ when Market Price is less than Strike Price.

Only an ‘In the Money’ ie. a profitable option will have an intrinsic value. Otherwise it will have only time value.

In the above question, the market price (Rs 1900) is below the Strike price (Rs 2000). So this is an Out of the Money Call Option and will have NIL intrinsic value. The option premium of Rs 200 is only the time value.

Most commodities follow a certain schedule of production cycle, which impacts the price trend. For example, in agricultural commodities, during the harvesting season, due to an increased supply, prices tend to come down, whereas during the sowing season the overall supply (availability) remains lower, which leads to an increase in prices.

Weights of commodities in the index are decided by the Exchanges, based on their scoring on production value and liquidity value.

Production Value is average value of deliverable supply in the past 5 financial years. Liquidity Value is the average trading volume of its futures in the last 12 months. Deliverable supply is Production plus Import.

If futures price is lower than spot price of an asset, market participants may expect the spot price to come down in future. This expectedly falling market is called “Backwardation market”.

This backwardation inspite of cost-of-carry arises due to seasonality factors in commodities especially in agricultural products. For e.g. during sowing season, spot supplies are less while it increases during harvesting month which will come after around 3 months. Hence, spot prices are expected to be lower during harvesting months (i.e., 3 months later) than the present spot price (i.e., while sowing).

In the case of a both option, the delivery will be executed only when both buyers and sellers agree to take/give delivery. If they do not give intention for delivery, such open positions are cash settled at the Due Date Rate (DDR).

Due date rate is the rate at which contracts is settled by the exchange. Usually it is the average of spot prices (polled) in last few days of Futures contract which is defined under the contract specification of the exchange. It is also referred as final settlement price of the contract.

Index Futures and Index Options are cash settled and hence, delivery period margins do not apply to it. Option on Commodity Futures devolve into Commodity Futures before those futures go into staggered delivery period. Thus, delivery period margin does not apply to Options on Futures.

Delta measures the sensitivity of the option value to a given small change in the price of the underlying asset.

Delta for put option buyer is negative. The value of the contract increases as the underlying price falls. This is similar to a short or ‘bear’ position in the underlying asset. Delta for put option seller will be same in magnitude but with the opposite sign (positive).

The fair value of a futures price with continuous/daily compounding can be expressed as

: F = S*e^ (r*n)

Where – F:Futures price S: Spot price r: Cost of financing in percentage n: time till the expiry of the contract (number of years) e = 2.71828 = A Constant number used in continuous compounding in mathematics

Stock, Currency and Bond Futures are all financial futures. Gold Futures is a commodity futures.

A Stop Loss order has two prices ie. Trigger Price and Limit Price.

For eg. A trader has sold a commodity at Rs 96 and wants to restrict his losses to Rs 5. For this, he will use a Stop Loss purchase order, the trigger price will be Rs 100 and the Limit price will be Rs 101. Which means if the price rises and reaches Rs 100, it will trigger the Buy Order and the commodity will be bought till Rs 101.

Thus, stop loss trigger acts as the maximum price level to buy.

Once obligations for delivery are assigned, seller will raise the bill on buyer at Final Settlement Price. The bill will be inclusive of appropriate GST levied on Final Settlement Price.

Even though the trades might have happened at some other traded rates on trade date, the bills are raised at Final Settlement Price. The difference between these two rates was already adjusted earlier during daily MTM obligations.

In barter system, goods were exchanged between two parties with matching and opposite needs (for example, bags of wheat were exchanged for cattle).

In Commodity Exchanges globally, there are various commodity indices.

A few of these are: S&P World Commodity Index , CME Commodity Index , Bloomberg Commodity Index (BCOM) , S&P GSCI Commodity Index at Chicago Mercantile Exchange , LME Commodity Index etc.

Russell 1000 index is not a commodity index and it represents the top 1000 companies by market capitalisation in the United States.

Index Futures are like any other normal Futures with cash settlement without delivery and payment obligations.

On Expiry day of Index Futures, Final Settlement Price (FSP) of index is determined after 5:00 pm. It is based on index calculation on weighted average traded price of constituents’ future contract during 4:00 pm to 5:00 pm.

If FSP of option falls exactly mid-way between two strike prices, then there is no ATM option. In that case, three contracts of strike price above FSP and three contracts of strike price below FSP are considered as CTM options (i.e., total of 6 strike prices)

Once Index is constructed with certain weights of each commodity futures, those weights can remain fixed for one year. Index weights and constituents must be rebalanced atleast once in a year.

In case of rebalancing is proposed, new proposed rebalanced index should be disclosed atleast 3 months before actual rebalancing date.

On expiry of Options, Final Settlement Price (FSP) is determined which is same as Daily Settlement Price (DSP) of respective Futures. The difference between FSP and Strike price is considered MTM gain / loss of the players which is received / credited on T+1 basis i.e., on the next morning.

Exercise window is opened to determine which options are going to be exercised and devolved on Futures.

MPOR is Margin Period of Risk. This is a period in terms of number of days, for which settlement risk is required to be covered by collecting margins.

In India there have been various equity market indices (like Nifty, Sensex including market cap related and sector related indices). There have been debt market indices as well (such as I-Bex, Composite Bond Index, etc).

These indices serve as comparison of portfolios and their returns with a benchmark to see how much deviation portfolios are taking to earn additional return above markets.

Commodity Exchanges prescribe different eligibility criterion for different classes of membership.

While admitting members, the commodity exchanges generally take into account specific factors such as corporate structure, capital adequacy, track record, education, experience, infrastructure set-up, manpower, etc. to ensure that the members are equipped to offer quality broking services so as to build and sustain confidence among investors in the Exchange’s operations.

In Commodity spot markets, the counterparties meet at common places where goods are brought for immediate sale and delivery at the market price decided by the demand and supply forces.

Thus in Commodity spot markets, traders sell goods such as rice, wheat etc. for immediate delivery against cash.

In Commodity spot markets, the counterparties meet at common places where goods are brought for immediate sale and delivery at the market price decided by the demand and supply forces.

Thus in Commodity spot markets, traders sell goods such as rice, wheat etc. for immediate delivery against cash.

Explanation

CTT is determined at the end of each trading day. For each client code, all the sell transactions for a trading day shall be aggregated at contract level. CTT is levied on sellers of Futures and Options.

The exchanges need spot price information on a daily basis to be used as the basis for the commodity futures contracts traded on their platforms.

As per the regulatory guidelines, all the exchanges need to disclose following information regarding spot price polling of the commodities:

Details of the contract ; Mechanism of spot prices polling ; How spot prices are arrived at ; Whether these prices include or exclude taxes and other levies ; Whether the spot price polling has been outsourced to any agency and if so, the details thereof ; Criteria for selection of these participants ; Any other information that exchange may consider useful for improving transparency in arriving at spot prices

SPAN scenarios take into account possible changes in the underlying asset’s price and changes in the underlying asset’s price volatility , time to expiry etc.

The Securities Contracts (Regulation) Act, 1956 (SCRA), provides for direct and indirect control of virtually all aspects of securities trading and the running of stock exchanges.

SCRA gives SEBI the jurisdiction over stock exchanges through recognition and supervision. It also gives SEBI the jurisdiction over contracts in securities and listing of securities on stock exchanges.

F = S + C – Y – where F: Futures Price, S: Spot Price, C: Cost of carry and Y: Convenience Yield.

Mutual funds are currently not allowed to invest in physical commodities (except Gold) as this requires custodians to be geared up to take up commodity level activities. As of now, custodians are allowed to offer their services only for Gold for the purpose of Gold ETF. (Gold Exchange Traded Funds)

When the futures price is less than the spot price, it is known as backwardation market.

The order matching is done on a price-time priority basis. This means that all the orders received are sorted on ‘best-price’ basis i.e., orders are first ranked according to their prices and similar priced orders are then sorted on a time-priority basis. Highest buy orders and lowest sell orders are matched first for trade, after which next highest buy order or next lowest sell order comes up for trade match.

Maximum order size is represented as a quantity. For eg. The maximum order size for Gold futures is 10 kg.

Minimum Support Price (MSP) declared by the Government for its procurement can be considered as a put option for the farmers. These are the guaranteed procurement prices by the Government for its procurement from the farmers.

For eg – For Maize Kharif crop, if MSP = Rs 1,850 per quintal and Market price = Rs 1,350 per quintal: Thus, farmers get a price protection (put option buy position) at a price of Rs 1,850. If the market price continues to remain far below MSP, farmers will sell the farm output post harvesting to Government at Rs 1,850 instead of selling it in the market at Rs 1,350.

The government, like a put option seller, has to take delivery of purchased crop at Rs 1,850 instead of buying from market at Rs 1,350. By chance, actual market price goes above MSP (say, to Rs 2,000, which is greater than the MSP), then farmer may not exercise this option of selling to government but may sell in the market directly.

By buying a put option on goods, the put option buyer has created a hedge to protect any downward fall in the price of the goods. For this he has to pay a premium.

So, when he sells the goods, he has to reduce the premium paid from the sale proceeds to get the correct picture.

Trading Unit: It is the quantity for which trading price is shown. For example, price for 10 grams of Gold.

Lot size: It is the minimum quantity which will go for trading or delivery (eg: Silver 30 Kilos lot, Wheat 10 MT lot, etc.). Lot size is equal to or higher than minimum trading unit.

Tick size: It is the minimum price movement in terms of change in price or change in quotation for order.

Tick size is significant for Algo traders as well as Hedgers / Speculators. In most cases, higher tick size benefits Algo traders while lower tick size benefits hedgers.

Client level limits and member level limits are set by the exchange to avoid concentration risk and market manipulation by a trading member or group acting in concert.

Position Limits are set at the client level and member level to prevent any members and clients from building up large position on the buy side or sell side to manipulate short-term price movements to their advantage.

Weights of commodities in the index are decided by the Exchanges, based on their scoring on production value and liquidity value.

Production Value is average value of deliverable supply in the past 5 financial years. Liquidity Value is the average trading volume of its futures in the last 12 months. Deliverable supply is production plus import.

Client registration documents are to be executed with any new client before allowing the client to start trading in commodity exchanges. Documents obtained from the clients would include: “Know your client (KYC) form”, execution of Client-Member constituent agreement (MCA) and Risk Disclosure document (RDD).

Convenience yield indicates the benefit of owning a commodity rather than buying a futures contract on that commodity.

Producers may face losses, if they do not have enough inventory at all times for uninterrupted production. Therefore, a commodity’s convenience yield is the benefit in rupee term that a user realizes for carrying sufficient stock of physical goods over and above his immediate needs.

A Broker while onboarding a client should satisfy himself about Know your Customer (KYC) norms and KYC documents of the client.

Warehouse service providers have to comply with Know Your Depositor (KYD) Policy to be able to identify the depositor of the goods deposited in registered warehouses.

A Crush Spread is an option trading strategy used in the Soyabean futures market. The general term for this is Crush Margin or Gross processing margin.

For a put option which is in-the-money, intrinsic value is the excess of strike price (X) over the spot price (S). Thus, intrinsic value of put option can be calculated as X-S.

So a put option with higher strike price would have a higher option premium

SEBI allowed Portfolio Management Services (PMS) to take exposure in the commodity derivatives. This is subject to condition of agreement with the client and adequate risk disclosures. As Foreign Portfolio Investors (FPIs) are not allowed to have exposure in commodity derivatives, no onboarding of FPIs in these schemes of PMS is allowed.

Selling a PUT option means the view is bullish (price to rise). Mr. Harshad has sold a PUT option but the price has fallen from Rs.45000 to Rs. 44000. This means there is a loss of Rs. 1000. He has however earned a premium of Rs.250.

So his net loss is Rs. 1000 – Rs. 250 = Rs. 750

Rs 750 is the loss for 10 grams.

So for 1 kg or 1000 grams (lot size) the loss is (1000 x 750 / 10) = Rs 75000 Loss

Options on Goods have one specific advantage against Option on Futures: as futures contracts themselves being used as tools in lot of speculative trades, they may sometime lead to inconsistent price movements.

Weights of commodities in the index are decided by the Exchanges, based on their scoring on production value and liquidity value. These two scores should be in a ratio which should provide minimum 25% weightage to each parameter i.e., production and liquidity should have a minimum of 25% weightage each