Commodity Derivatives

Syllabus and chapter weightage

Weightages are taken from the official syllabus table published in the NISM workbook, so you can see exactly where the marks are.

Every chapter can be read free, no account needed — tap a chapter to open its plain-English Foundation lesson.

Sample questions

5 questions from the chapter tests, one per chapter. Pick your answer before you open the explanation.

1. Question 1 · Chapter 1: Introduction to Commodity Markets

   In ________ system, goods were exchanged between two parties with matching and opposite needs.

   1. A.Barter
   2. B.Bullion
   3. C.OTC
   4. D.Monetary
   Show the answer

   Answer: A. Barter

   This is the workbook sample question. "In a BARTER SYSTEM, goods were exchanged between TWO PARTIES WITH MATCHING AND OPPOSITE NEEDS (for example, BAGS OF WHEAT WERE EXCHANGED FOR CATTLE)."

   ⚠️ The phrase "matching and opposite needs" names the system's fatal limitation — you must find someone who both has what you want and wants what you have. That double coincidence is precisely what money removed.

   The sequence the chapter traces: barter → commodities exchanged for gold and silver → money as a medium of exchange, which was A PARADIGM SHIFT with the value of commodity being expressed in monetary terms → spot markets → forward contracts → futures.

   Option (d) "Monetary" is the system that SOLVED the barter problem, not the one that had it. Bullion is a commodity category (gold and silver); OTC is a mode of trading derivatives bilaterally.

2. Question 2 · Chapter 2: Commodity Indices

   Indian commodity indices are constructed from the prices of which of the following?

   1. A.The spot prices of the constituent commodities
   2. B.The nearby futures contracts of the constituent commodities
   3. C.The far month futures contracts of the constituent commodities
   4. D.The average of spot and futures prices of the constituents
   Show the answer

   Answer: B. The nearby futures contracts of the constituent commodities

   Indian commodity indices are constructed from the prices of the nearby futures contracts of the commodity constituents, instead of the underlying spot prices.

   This single design choice explains almost everything else in the chapter — it is why roll-over is needed (futures expire, shares do not), why the indices are total return indices (the roll is their income), and why index values tend to sit above the corresponding spot basket (carrying cost parity — futures prices are generally higher than spot).

   Option (a) is the equity habit that trips people up: Sensex and Nifty are built on cash market prices.

3. Question 3 · Chapter 3: Commodity Futures

   In a commodity futures contract, what is the position of the buyer and the seller at expiry?

   1. A.The buyer has an obligation to buy and the seller has an obligation to sell
   2. B.The buyer has a right but not an obligation; the seller has an obligation
   3. C.Both buyer and seller have a right but not an obligation
   4. D.The seller has a right but not an obligation; the buyer has an obligation
   Show the answer

   Answer: A. The buyer has an obligation to buy and the seller has an obligation to sell

   A futures contract is a legally binding agreement between the buyer and the seller, in which the buyer enters into an obligation to buy, and the seller is obliged to sell, on the specific date.

   Both sides are bound. This is the single feature that separates a future from an option — and it is why a futures buyer can lose money, which an option buyer never can.

   Option (b) describes a call option from the buyer's side; option (d) describes a put option. The exam frequently mixes these three products in one question, so anchor on the word obligation.

   One consequence worth carrying forward: because the seller's obligation is real, an open short position at expiry must actually be delivered — from spot purchase or existing stock — or a delivery default penalty falls due.

4. Question 4 · Chapter 4: Commodity Options

   An option contract gives its buyer ______ to exercise that option.

   1. A.A right but not an obligation
   2. B.A right and an obligation
   3. C.An obligation but not a right
   4. D.Neither a right nor an obligation
   Show the answer

   Answer: A. A right but not an obligation

   (This is a sample question from the NISM workbook.)

   Options contracts give the right to the buyer but not the obligation to exercise. This provides additional flexibility in managing risk.

   The complete rule covers both sides: in case of both call and put options, the buyer has the right but no obligation, whereas the seller, being the receiver of the premium, has no right but an obligation to the buyer.

   Option (c) describes the seller's position, which is why it is placed there. And notice that the asymmetry is paid for: the premium is non-refundable, and the buyer's maximum loss is limited to the premium while the seller's potential loss can be very high.

   The buyer's three choices at any time: exercise the option on the expiration date, sell the option in the exchange before the expiration date, or let the option expire without being exercised.

5. Question 5 · Chapter 5: Uses of Commodity Derivatives

   Who enters into a derivatives contract to mitigate the risk of adverse price fluctuation in their existing position?

   1. A.Speculator
   2. B.Trader
   3. C.Hedger
   4. D.Arbitrageur
   Show the answer

   Answer: C. Hedger

   (This is a sample question from the NISM workbook.)

   The definition is quoted almost word for word: "A HEDGER ENTERS INTO THE DERIVATIVES CONTRACT TO MITIGATE THE RISK OF ADVERSE PRICE FLUCTUATION IN RESPECT OF HIS EXISTING POSITION."

   The two words carrying the distinction are "existing position". Hedgers have an underlying exposure in the commodity and use the derivatives market to insure themselves. A speculator, by contrast, never utilizes the underlying asset for future physical use, and an arbitrageur is chasing a price difference between two markets rather than protecting anything.

   Who counts as a hedger: importers, exporters, and producers and processors — broadly split into commodity users (processors/consumers) who treat the commodity as raw material, and commodity producers for whom it is finished goods.

Frequently asked questions

What is the passing mark for NISM Series XVI?

You need 60% to pass NISM-Series-XVI: Commodity Derivatives. On a 100-mark paper that is 60 marks.

Is there negative marking in NISM Series XVI?

There is negative marking of 25% of the marks for that question, so a wrong answer costs you 0.25 marks on a 1-mark question. Guess only when you can eliminate at least two options.

How long is the NISM Series XVI exam?

The exam runs for 120 minutes and carries 100 marks in total.

How long is the NISM Series XVI certificate valid?

NISM certifications are generally valid for 3 years from the date of passing, after which they must be renewed. Confirm the current position on nism.ac.in before your certificate lapses.