Test Objectives(w.e.f. May 24, 2021)
NISM-Series-XVI: Commodity Derivatives Certification Examination
1. Introduction to Commodity Markets
1.1. History of commodity trading
1.1.1. Study the history of commodities trading both globally and in India
1.1.2. Understand the evolution of commodity exchanges
1.2. Spot and derivatives trading in commodities
1.2.1. Overview the Electronic spot and Physical spot markets for commodities
1.2.2. Know the key economic functions performed by derivatives markets
1.2.3. Define the derivative instruments such as Forwards, Futures, Options and Swaps
1.3. List major commodities traded in derivatives exchanges in India
1.4. Know various participants of commodity derivatives markets
1.5. Discuss the commodities trading vis-à-vis trading in other financial assets
1.6. List the important entities in the commodity markets ecosystem
1.7. Explain the various factors that have an impact on the commodity prices
1.8. Know the commodity options and index futures
2. Commodity Futures
2.1. Understand the key characteristics of commodity futures
2.2. Know the differences between futures and forwards
2.3. Understand cost-of-carry model for pricing of futures
2.4. Understand the “convergence” of spot and futures prices
2.5. Calculate fair value of futures with various compounding frequencies
2.6. Understand the concept of “convenience yield” and its role in pricing of commodity futures
2.7. Understand the advantages of commodity futures over commodity forwards
2.8. Understand the linear pay-off profile of futures contracts
2.8.1. Long position in futures
2.8.2. Short position in futures
2.9. Describe the spot price polling mechanism
3. Commodity Options
3.1. Understand the key characteristics of commodity options
3.2. Know the key terminology of options: strike price, spot price, option premium, lot size, intrinsic value, time value, etc.
3.3. Understand the non-linear pay-off profile of futures contracts
3.4. Determinants of option premium
3.4.1. Understand the key determinants of option price and how these parameters influence the price of a call option and the price of a put option
3.4.2. Discuss Options pricing models
3.4.3. Discuss the option greeks: delta, gamma, theta, vega and rho
3.4.4. Explain the concept of “moneyness” of an option and how it is determined by the market price and strike price of an option contract (ITM, ATM, CTM and OTM)
3.4.5. Explain Put-call parity with the help of an example
3.5. Understand the commodity options with commodity futures as their underlying (Options on Futures)
3.6. Understand the commodity options with underlying commodity as their underlying (Options on Goods)
4. Commodity Indices
4.1. Know the important commodity market indices in Indian and International markets
4.2. Discuss the salient points of index construction and its constituents
4.3. Explain the trading in derivatives on commodity indices
4.4. Discuss the uses of derivatives on commodity indices
5. Uses of Commodity Derivatives
5.1. Understand the term “Hedging” (Price Risk Management strategies)
5.2. Illustrate long hedge and short hedge strategies using futures and calculate the Hedge Ratio
5.3. Understand the term “Speculation” using long and short positions in futures and options
5.4. Understand the term “Arbitrage”
5.5. Know the meaning of Spread Trading and illustrate various strategies such as buying a spread, selling a spread, Inter-commodity spread and intra-commodity spread with examples
5.6. Understand the concept of “Basis”, strengthening and weakening of basis, basis risk and the basis in contango and backwardation markets
5.7. Discuss various Option trading strategies
5.7.1. Describe the covered option positions
5.7.2. Know the spread trading strategies
5.7.3. Explain the execution of straddle and strangle strategies with combination of call and put options
5.8. Know the hedging strategies disclosure norms for listed companies
6. Trading Mechanism
6.1. Understand Membership on commodity derivatives exchange
6.2. Explain Trading system in commodity derivatives exchanges
6.2.1. Know the fully automated screen-based trading system (SBTS) of exchanges
6.2.2. Briefly introduce the algorithmic trading
6.2.3. Know the trading hours applicable for various types of commodities on Indian Exchanges
6.2.4. Know the trading parameters across contracts and describe the delivery process
6.3. Explain the selection criteria of commodities for trading on derivatives exchanges
6.4. List various elements of a Contract Specifications for commodity derivatives
6.5. Compute Profit/loss per contract for a change of one tick
6.6. Understand the Order types and conditions
6.6.1. Know the price-related condition orders
6.6.2. Know the time-related orders
6.6.3. Know the modification and cancellation of orders
6.7. Know the tracking of commodity futures and options prices
6.8. Understand the type of participants permitted to trade in Commodity markets
6.9. Discuss disclosures by exchanges
7. Clearing, Settlement and Risk Management of Commodity Derivatives
7.1. Understand the concept of clearing corporation
7.2. Explain the clearing and settlement Process
7.3. Understand the delivery process
7.3.1. Know about Compulsory Delivery
7.3.2. Know about Both option to deliver
7.3.3. Know about Seller’s option to deliver
7.4. Understand the entities involved in the clearing and settlement process: clearing corporation, clearing members, clearing banks, custodial services / repositories, warehouses and electronic-registry for warehouse receipts
7.5. Explain premium and discount
7.6. Know the penalties for delivery default by the seller
7.7. Understand the deliveries in case of physical delivery
7.8. Understand various risk management mechanisms implemented by the clearing corporations
7.8.1. Describe counterparty risk
7.8.2. Describe principal risk
7.8.3. Describe market integrity and surveillance related risks
7.8.4. Know about operational risk
7.8.5. Know about legal Risk
7.8.6. Know about systemic Risk
7.9. Understand the Position limits and computation of open position
7.10. Salient features of risk containment measures
7.10.1. Know the importance of capital adequacy
7.10.2. Know about online monitoring
7.10.3. Know about offline surveillance activity
7.10.4. Know the margin requirements
7.10.5. Describe position limits
7.10.6. Describe settlement guarantee fund (SGF)
7.10.7. Describe Investor Protection Fund (IPF)
7.11. Explain Margining mechanism
7.11.1. Know SPAN margin
7.11.2. Know initial margin and extreme loss margin
7.11.3. Know MTM margin
7.11.4. Know additional / special margin and concentration margin
7.11.5. Know tender period / delivery period margin
7.11.6. Know devolvement margin for option on futures
7.12. Understand Additional procedures for other market segments: index futures, options on futures and options on goods
7.13. Briefly discuss raising of bill for delivery
8. Accounting and Taxation
8.1. Understand Important accounting aspects related to trading in commodity derivatives
8.2. Know the key elements of the guidance note issued by ICAI on accounting treatment of derivatives transactions
8.2.1. Describe presentation in the financial statements
8.2.2. Understand types of hedge accounting
8.2.3. Describe disclosures in financial statements
8.3. Explain accounting of options contracts
8.4. Understand important tax aspects related to trading in commodity derivatives
8.4.1. Briefly introduce Commodity Transaction Tax (CTT)
8.4.2. Know stamp duty
8.4.3. Know SEBI turnover fees
8.4.4. Briefly introduce Goods and Services Tax (GST)
9. Legal and Regulatory Environment of Commodity Derivatives in India
9.1. Explain the regulatory framework governing the commodity markets in India: Central Government, Securities and Exchange Board of India (SEBI) and the Exchanges
9.2. Explain Securities Contracts (Regulation) Act, 1956
9.3. Understand Securities and Exchange Board of India Act, 1992
9.4. Describe Other regulatory norms to encourage commodity derivatives
9.5. Describe SEBI’s code of conduct for brokers
9.6. Explain Risk disclosure to client and KYC
9.6.1. Know the importance of risk disclosure at the time of client onboarding
9.6.2. Describe the risks faced by investors trading in commodity derivatives markets
9.6.3. Understand the importance of KYC process and KYC documents
9.6.4. Know the Suspicious Transaction Reporting (STR) to Financial Intelligence Unit (FIU)
9.7. Explain Investors Grievance Redressal Mechanism
9.8. Explain Rights and obligations of members and clients
9.9. Understand Additional Do’s and Don’ts for Investors in Commodity Derivatives markets
