Explanation:
Correct answer: B
Speculation is primarily identified by the intent to profit from expected price movements, and it often involves high leverage because derivatives can create large gains or losses relative to the initial cash outlay.
Why the other choices are not the best answer:
Therefore, the feature most indicative of speculation is high leverage.
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Question 707.1. PlanetZim Financial Bank just entered a position in a derivatives contract. Which of the following features of the derivative position is MOST likely to indicate the trade is a case of SPECULATION, in contrast to a case of a hedge, arbitrage, or market-making?
A
If a hedge has no basis risk, then the hedged outcome is always superior to the unhedged outcome
B
In distinguishing from an arbitrage or a hedge, the key feature of a speculation is the use of high leverage
C
Although put options can be used as a hedge or insurance, a position in call options implies the investor is speculating rather than hedging
D
In Hull, the theoretical price of futures contracts and stock options (per Black-Scholes Merton) depend on the assumption that no riskless arbitrage opportunities exist