A Trading at Settlement Futures Contract Allows a Trader to Trade

question 10

Multiple Choice

A trading at settlement futures contract allows a trader to trade anytime during the trading day but get a price that is determined during the day's close.Suppose that this price is the settlement price determined by computing a volume-weighted average price (VWAP) during the last two minutes of the trading day.A trader plans to manipulate the market by trading on one side of the market earlier in the day and then trading in the opposite direction during the VWAP's computation period to affect the price to their advantage.Which of the following strategies can she employ?

• A) selling earlier in the day and then steadily buying during the VWAP computation period to create a higher VWAP price at which the earlier sell is executed
• B) buying earlier in the day and then steadily selling during the VWAP computation period to create a lower VWAP price at which the earlier buy is executed
• C) either a or b would work
• D) neither a nor b would work
• E) the strategies in a or b only work in conjunction with index arbitrage

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Definitions:

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The capacity to make an informed, uncoerced decision freely; a crucial aspect of individual freedom and self-determination.

Neutral Stimulus

A stimulus that initially does not elicit any intrinsic response until it is associated with an unconditioned stimulus.

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The act of making spontaneous sounds and movements of the face and body that are expressions of amusement or joy.

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The act of making physical contact with something or someone, which can convey emotional states and facilitate non-verbal communication.