Which of these trades in equity index futures is speculation?
Quiz: Uses and Market Size
Last reviewed: September 24, 2026
This is a draft, shown for review before publication.
4 questions to check your understanding of the chapter “Uses and Market Size”. Choose an answer and select “Check answer” to see the answer and explanation. You can also open “Answer and explanation” to see the answer first.
Question 1
Answer and explanation
Answer: C
Speculation is a trade that takes a position in futures or other contracts based on a view of whether the market will rise or fall, aiming to profit by closing it out with an offsetting trade if prices move as expected. If the view is wrong and prices fall, the result is a loss, and with futures the loss can exceed the margin deposited.
Selling futures to protect stocks you hold against a fall is a short hedge. Buying futures to protect against a rise in stocks you plan to buy is a long hedge. Neither aims to profit from a view on the market; both limit losses from price moves with an opposite trade. Selling futures and buying stocks when the futures are above the theoretical price is cash-and-carry arbitrage. It looks at the gap between the futures price and the cash market price, not at a view of whether the market will rise or fall.
Learn more: Hedging, Speculation and Arbitrage
Question 2
As a hypothetical example, a stock index is at 20,000, and the futures (contract unit: 1,000 times the index) are 60 above the guide to the theoretical price. An investor borrows 200 million yen, buys stocks with the same composition as the index, sells 10 futures contracts, and holds the position to expiry. Assume the stocks can be sold at the same level as the index at expiry, dividends come in as expected, and fees and other costs add up to 1 million yen. What is the profit or loss?
Answer and explanation
Answer: D
A guide to the theoretical futures price is the index plus the interest and minus the dividends. The futures are 60 above that guide, so if dividends come in as expected and there are no costs, the total is 60 times 1,000 times 10, a profit of 600,000 yen. The combined result on the stocks and the futures, including interest and dividends, is the same whatever the index is at expiry, and it is set by the initial overpricing. Subtracting the 1 million yen of costs gives a loss of 400,000 yen.
A profit of 600,000 yen is the value you get by forgetting to subtract the costs. 0 yen is the total when there is no overpricing and no costs. A loss of 1 million yen comes from overlooking the profit from the overpricing and looking only at the costs. The profit from arbitrage equals the overpricing when dividends come in as expected and there are no costs, and it becomes a loss if costs exceed the overpricing.
Learn more: Hedging, Speculation and Arbitrage
Question 3
According to the Bank of Japan's Regular Derivatives Market Statistics, outstanding OTC trades at Japan's 16 major derivatives dealers were 94.8 trillion US dollars in notional amount at end-June 2026. Gross market values were about 1.01 trillion US dollars positive and about 1.06 trillion US dollars negative. Which figure is suited to gauging the size of counterparty credit risk?
Answer and explanation
Answer: B
Market value is the amount you get by netting what you will receive from a trade against what you will pay, and converting that difference into present value. Positive market value, the net amount to be received, is the amount that may not be received if the counterparty defaults, and it corresponds to the amount exposed to credit risk. 1.01 trillion US dollars is about 1% of the 94.8 trillion US dollars in notional amount. Market value changes as interest rates, exchange rates, and other factors move, so the same trade has a different value at different times. In addition, financial institutions take collateral and enter into netting agreements, so the Bank of Japan considers that actual credit risk is even smaller than the total of positive market values.
The notional amount is the base amount used to calculate the cash flows exchanged, and it does not directly represent credit risk. In many interest rate contracts, the notional amount itself is not exchanged. Negative market value is the net amount to be paid from your own point of view, not an amount you may fail to receive if the counterparty defaults.
Learn more: Market Size Statistics (BIS Surveys)
Question 4
Which of these is a correct caution when reading the Japanese figures (end-June 2026) in the Regular Derivatives Market Statistics compiled by the Bank of Japan?
Answer and explanation
Answer: A
The Japanese amounts outstanding are not adjusted for double counting of trades between reporting dealers. If reporting dealers Bank A and Bank B enter into one trade with each other, that trade appears in both Bank A's report and Bank B's report. The global amounts outstanding that the BIS publishes later are adjusted for this double counting.
The Japanese figures are compiled on a consolidated basis that includes the overseas branches and local subsidiaries of Japan's major dealers, and they do not include trades at the Japanese branches of foreign institutions. So they do not show the size of OTC derivatives trading in the Tokyo market. The amount outstanding is the total of all the trades that financial institutions hold at a given time, while the total notional amount of trades newly entered into over a period is a different measure called turnover.
Learn more: Market Size Statistics (BIS Surveys)