Test Objectives

1. Introduction to Commodity Markets

1.1 History of commodity trading

     Study the history of commodities trading both globally and in India

     Understand the evolution of commodity exchanges

1.2 Spot and derivatives trading in commodities

     Overview the Electronic spot and Physical spot markets for commodities

     Know the key economic functions performed by derivatives markets

 Define the derivative instruments such as Forwards, Futures, Options and Swaps

1.3 Major commodities traded in derivatives exchanges

      List major commodities traded in Indian derivatives exchanges

1.4 Participants in commodity derivatives markets

      Understand the broad classification of market participants and the roles performed by them in the commodity derivatives markets

 1.5 Commodities trading vis-à-vis trading in other financial assets

      Understand the peculiarities of Commodities when compared to other financial assets such as stocks and bonds

 1.6 Commodity markets ecosystem

      List the important entities in the commodity market ecosystem and understand the roles performed by these intermediaries

1.7 Commodity market indices

      Know the important commodity market indices in Indian and International markets

 1.8 Factors impacting the commodity prices

       Understand the Demand-Supply Equation of Commodities

       Know the crucial factors that have an impact on commodity prices such as seasonality, news, geo-political developments, macroeconomic conditions, currency  movement, interest rates, etc.

2. Commodity Futures

2.1 Introduction to Futures

     Understand the key characteristics of commodity futures

2.2 Distinction between forwards and futures

      Know the differences between futures and forwards

      Understand the advantages and limitations of futures over forwards

2.3 Cost-of-carry

      Understand cost-of-carry model and how it explains the relationship between spot and futures prices

2.4 Convergence

     Understand the “convergence” of cash and futures prices

2.5 Fair value of futures contract

      Calculate fair value of futures with various compounding frequencies

2.6 Convenience yield

      Understand the concept of “convenience yield” and its role in pricing of commodity futures

2.7 Commodity futures and commodity forwards

      Understand the advantages of commodity futures over commodity forwards

2.8 Pay-off profile of Futures

     Understand the linear pay-off profile of futures contracts

     Illustrate the pay-off profile of long futures position

     Illustrate the pay-off profile of short futures position

2.9 Spot price polling mechanism

     Describe the spot price polling mechanism

3. Commodity Options

3.1 Introduction to Options

      Understand the key characteristics of commodity options and the choices it provides to the buyer of the option

3.2 Option terminology

Know the key terminology of options: strike price, spot price, option premium, lot size, intrinsic value, time value, etc.

3.3 Pay-off profile of Options

     Understand the non-linear pay-off profile of options contracts

     Illustrate the pay-off profile of long call option position

     Illustrate the pay-off profile of short call option position

     Illustrate the pay-off profile of long put option position

     Illustrate the pay-off profile of short put option position

3.4 Determinants of option premium

      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

      Discuss the option greeks: delta, gamma, theta, vega, rho.

      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)

      Explain Put-call parity with the help of an example

3.5 Options on commodity futures

      Understand the commodity options with commodity futures as their underlying (instead of the spot commodity like in the case of equity derivatives)

      Know how the commodity options positions, on exercise, devolve into the underlying commodity futures

4. Uses of Commodity Derivatives

4.1 Hedging

       Know the meaning of “Hedging”

       Understand how to hedge using futures and options

4.2 Speculation

     Illustrate long hedge and short hedge strategies using futures

     Calculate Hedge Ratio

     Know the benefits and limitations of hedging

4.3 Speculation

     Understand the term “Speculation”

     Understand speculation using long and short positions in futures and options

4.4 Arbitrage

      Understand the term ‘Arbitrage”

      Describe spot-versus-futures arbitrage, cash and carry arbitrage and reverse cash and carry arbitrage with suitable examples

4.5 Spread Trading

     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

4.6 Basis

     Understand the concept of “Basis”, strengthening and weakening of basis, basis risk and the basis in contango and backwardation markets

4.7 Option trading strategies

     Describe the covered option positions: covered short call and covered short put

     Know the spread trading strategies: vertical, horizontal and diagonal spreads

     Explain the execution of straddle and strangle strategies with combination of call and put options

5. Trading Mechanism

5.1 Membership on commodity derivatives exchange

     Classify exchange members based on their trading and clearing functions

5.2 Trading system in commodity derivatives exchanges

      Know the fully automated screen-based trading system (SBTS) of exchanges

      Know the trading hours, trading parameters, delivery process, etc.

      Briefly introduce the algorithmic trading

5.3 Selection criteria of Commodities for trading on derivatives exchanges

      Know the regulatory guidelines for selecting a commodity for derivatives trading on the exchanges

5.4 Contract Specifications for various commodity derivatives contracts

      List various elements of a contract specification and understand these terms

      Sample a few contract specifications to understand the contents of the contract specification

5.5 Profit/loss per contract for a change of one tick

     Compute the impact of one tick change on the value of a derivative contract

     Order types and conditions

     Understand orders with price conditions and time conditions

5.6 Tracking commodity futures and options prices

      Know various sources to track the prices of commodity derivatives

6. Clearing, Settlement and Risk Management of Commodity Derivatives

6.1 Clearing and settlement

      Explain the clearing and settlement process of commodity derivatives contracts

6.2 Delivery process

      Understand the delivery process and the available delivery options

6.3 Entities involved in the clearing and settlement process

     Know the entities involved in the clearing and settlement process and the roles performed by these entities

6.4 Premium / Discount

    Understand the quality variations and how these variations are handled with the help of discounts and premiums

6.5 Penalty for delivery default by the seller

     Know the penalties for delivery default by the seller

6.6 Deliveries in case of physical delivery

      Understand the staggered delivery mechanism

6.7 Risk management for exchange traded commodity derivatives markets

      Understand various risks that exist in commodity derivatives markets

6.8 Position limits and computation of open position

     Understand the position limits and its computation at the client and member level

6.9 Salient features of risk containment measures

     Know the importance of capital adequacy, online monitoring, offline surveillance, margin requirements, position limits, settlement guarantee fund, etc. as risk containment measures in                     commodity derivatives markets

6.10 Margining mechanism

       Know different margins such as SPAN margin, initial margin, MTM margin, special margin and delivery period margin.

7. Accounting and Taxation

7.1 Important Accounting aspects related to trading in commodity derivatives

     Understand the accounting treatment for commodity derivatives

     Know hedge accounting, fair value hedges, cash flow hedges and hedge effectiveness

7.2 Guidance note issued by ICAI on accounting treatment of derivatives transactions

      Know the key elements of the guidance note issued by ICAI on accounting treatment of derivatives transactions

7.3 Important Tax aspects related to trading in commodity derivatives

     Briefly introduce Commodity Transaction Tax and Goods and Services Tax

8. Legal and Regulatory Environment of Commodity Derivatives in India

8.1 Regulatory structure of commodity markets

      Know the regulatory framework governing the commodity markets in India

8.2 Securities Contracts (Regulation) Act, 1956

     Know the key aspects of SCRA and the definitions of ‘securities’ and ‘derivatives’ under this act

8.3 Securities and Exchange Board of India Act, 1992

      Know the powers granted to SEBI under the SEBI Act

8.4 SEBI’s code of conduct for brokers

      Understand the key aspects of SEBI’s code of conduct for brokers

8.5 Risk disclosure to client and KYC

     Know the importance of risk disclosure at the time of client onboarding

     Describe the risks faced by investors trading in commodity derivatives markets Understand the importance of KYC process and KYC documents

8.6 Investors Grievance Redressal Mechanism

     Know the investor grievance redressal mechanism

     List various types of complaints accepted by the derivatives exchanges

     Know the guidelines for filing complaints and introduction to arbitration