Deck 6: Arbitrage and Trading

Question 1

Which statement below is FALSE?

A) Weak-form efficiency asserts that stock prices reflect all relevant information that can be gathered by examining current and past prices.
B) If the market is weak-form efficient,then there are no arbitrage opportunities.
C) Semistrong-form efficiency asserts that stock prices reflect not only historical price information but also all publicly available information that is relevant to those particular stocks.
D) Strong-form efficiency asserts that stock prices reflect all relevant information,both private and public,that may be known to any market participant.
E) None of these answers are correct.

Answer 1

E

Question 2

Which of the following is NOT an example of floor trading abuse?

A) bucketing
B) cross trading
C) ginzy trading
D) prearranged trading
E) rolling the hedge forward

Answer 2

E

Question 3

Suppose a two-year Treasury note is trading at its par value of $1,000.You examine the cash flows and discover that if you sell them individually in the market,you get $46.23 for the six-month coupon,$44.67 for the one-year coupon,$42.21 for the eighteen-month coupon,$40.22 for the two-year coupon,and $831.56 for the principal.The amount of arbitrage profit you can make by trading each security is:

A) $2.58
B) $4.89
C) $10.34
D) $41.78
E) None of these answers are correct.

Answer 3

B

Question 4

Which statement below is FALSE?

A) Technical analysis is useless in weak-form efficient markets.
B) Arbitrage opportunities may be present in semistrong-form efficient markets.
C) Fundamental analysis is worthless in semistrong-form efficient markets.
D) Insider trading restrictions are unnecessary in strong-form efficient markets.
E) Strong-form efficient markets are also weak-form efficient.

Question 5

An index arbitrage involves buying the cheaper portfolio and selling the more expensive portfolio where:

A) the portfolios try to replicate the performance of two different but related stock indexes
B) one portfolio consists of an index future while the other portfolio tries to replicate the performance of the underlying index
C) one portfolio consists of an index option while the other portfolio tries to replicate the performance of the underlying index
D) one portfolio consists of an index future while the other portfolio consists of an index option,where both derivatives are written on the same underlying index
E) None of these answers are correct.

Question 6

Which of the following statements is FALSE? In the United States,to prove market manipulation in a court of law:

A) the manipulator must be shown to have had the ability to set an artificial futures price
B) the manipulator must have intended to set an artificial price
C) the manipulator must have succeeded in setting an artificial price
D) it is difficult to demonstrate that price movements are due to the manipulator's trades and not due to changing market conditions
E) many manipulators are wrongly prosecuted because manipulation trades,like speculation trades,enhance market efficiency by enabling prices to reflect information quickly

Question 7

Which of the following is NOT a characteristic of algorithmic trading (or algos)?

A) Algos are a kind of program trading that try to exploit fleeting mispricings or arbitrage opportunities.
B) An objective of algos is to reduce latency,or the time duration between order placement and execution.
C) Algos require trades to have real-time settlement.
D) Servers for conducting algos are placed near the trading venue for reducing latency.
E) None of these answers are correct.

Question 8

Which of the following is NOT a characteristic of a hedge fund?

A) They allow only wealthy investors to invest.
B) They hedge all of their investment risks.
C) Hedge fund managers tend to specialize in one investment strategy,but enjoy broad investment flexibility.
D) Hedge funds are structured so as to avoid direct regulation and taxation in most countries.
E) Hedge funds have a penchant for secrecy and disclose little information to the public.

Question 9

Arbitrage is:

A) a zero initial wealth trading strategy that has a likelihood of making profits without risk of a loss
B) a way of resolving disputes
C) a risky way of making money for arbitrators
D) a zero-investment trading strategy in which the likelihood of portfolio gain overwhelms the likelihood of loss
E) None of these answers are correct.

Question 10

Which of the following class of arbitrage opportunities is irrelevant for our pricing models?

A) arbitrage across time
B) arbitrage across space
C) the sum of the parts is greater than the whole
D) the sum of the parts is less than the whole
E) government granted tax credits

Question 11

Front running in futures market involves:

A) a floor broker who executes customer orders acting as a dealer in some other transactions on the same day
B) trading based on an impending transaction by another person,for example,a floor trader buying on his own account in front of his customer's buy order
C) taking a customer's order and placing it ahead of accumulated limit orders
D) placing orders during the first few minutes of a trading day
E) None of these answers are correct.

Question 12

The law of one price states that:

A) the same financial security,no matter how it is created,should trade at the same price
B) two financial securities that have the same price today and same risk must have the same price in the future
C) two securities that have the same price today must have the same prices at all future dates
D) two securities that have the same standard deviation and expected return must have the same price
E) None of these answers are correct.