Series 65- Chapter 11 STC

Which of the following choices will eliminate a short position in a listed option? A. Opening sale B. Closing sale C. Opening purchase D. Closing purchase

D. Closing purchase If an investor has an open short position that he wishes to liquidate, he will do so through a closing purchase. The following table indicates the different opening and closing transactions. Opening Purchase -> Establishes a long position Opening Sale -> Establishes a short position Closing Purchase -> Liquidates an existing short position Closing Sale -> Liquidates an existing long position

On October 25, Thomas purchased 10 listed ABC Corporation Jan 40 puts and paid a $5 premium on each put. The current market price of ABC Corporation is $48 per share. What's the breakeven price for Thomas' put options? A. $35 B. $40 C. $45 D. $53

A. $35 The formula for finding the breakeven point for a put option (regardless of whether it's bought or sold) is the strike price minus the premium. In this question, the breakeven point is $35 ($40 strike price - $5 premium). In other words, Thomas needs ABC stock to decline to $35 so that he can get back the amount of premium he paid to buy the put

XYZ corporation has 7,000,000 shares of common stock ($1 par value) authorized, of which 5,000,000 shares have been issued. There are 500,000 shares of treasury stock. The current market price of XYZ is 20. The market capitalization of XYZ common stock is: A. $90,000,000 B. $100,000,000 C. $4,500,000 D. $5,000,000

A. $90,000,000 A company's market capitalization is found by multiplying the market value by the outstanding shares. $20 market value x 4,500,000 shares outstanding = $90,000,000.

A company has declared a 7-for-5 stock split. If an investor owns 300 shares at $15, what will his position be after the split? A. 420 shares at $10.71 per share B. 420 shares at $15 per share C. 214 shares at $15 per share D. 214 shares at $21.03 per share

A. 420 shares at $10.71 per share A 7-for-5 stock split is a forward split and results in an increase in the number of shares owned and a decrease in the cost basis per share. The effect is that the investor's overall position remains the same. In this case, the 300 original shares are multiplied by 7/5, which equals 420 shares. The original price of $15 is multiplied by 5/7, which equals $10.71. The investor's original position was $4,500 (300 x $15) and, after the split, his position is still $4,500 (420 x $10.71). The cost basis per share could also be determined by dividing the total value before the split ($4,500) by the increased number of shares (420). $4,500 ÷ 420 = $10.71.

What strategy is the portfolio manager of a mutual fund employing when call options are being sold on stock that's held in the portfolio? A. A neutral strategy that's considered a conservative means of generating income when prices are stable. B. A bearish strategy that profits from falling prices. C. An aggressive strategy that's considered a speculative means of generating income when prices are volatile. D. A bullish strategy that profits from rising prices.

A. A neutral strategy that's considered a conservative means of generating income when prices are stable. When a call option is written (sold) against a position in a portfolio, it's referred to as a covered call. The strategy is neither bullish nor bearish; instead, it's a conservative and neutral strategy that's designed to generate income from the receipt of the premium. The writer of the option doesn't believe the value of the underlying stock will rise or fall significantly.

What's the best way to hedge a long stock position? A. Buy a put option B. Take a long futures position C. Sell a call option D. Buy a call option

A. Buy a put option The most effective way to hedge a long stock position is to buy a put on that stock. If the price of the shares fall, the long put option gives the owner the ability to sell the shares at the predetermined strike price. A short call option doesn't give the investor control over when the option is exercised and is not an effective hedge. Buying a call option is a bullish position and gives the investor the ability to buy more shares, which doesn't provide any protection if the price of the stock falls. Taking a long futures position is also bullish and doesn't provide protection if the price of the stock falls

Ms. Brown sells short 100 shares of ABC at 95. Two weeks later, the stock drops to a price of 89. In an attempt to protect her profit, Ms. Brown would enter a: A. Buy stop order at 90 B. Sell stop order at 90 C. Buy limit order at 87 D. Sell limit order at 90

A. Buy stop order at 90 Ms. Brown is seeking to protect her profitable short position should the market price of ABC increase. While a buy stop order at 90 would not guarantee a profit, it would be activated as a market order if the stock rose to 90 or higher. The buy limit order would not be executed if the stock were to rise above 90. Thus, the buy limit would not offer any protection against an increase in the stock

A client portfolio is invested in a well-diversified group of large-cap stocks. Which of the following strategies would minimize the market risk connected with this portfolio? A. Buying puts on a large-cap index B. Selling uncovered calls on a large-cap index C. Selling stocks short D. Buying puts on a mid-cap index

A. Buying puts on a large-cap index Buying puts is a way to hedge a stock portfolio against market downturns. By buying puts on a large-cap index, the investor could minimize her losses in the event of a downturn in the large-cap market.

Which shares of preferred stock may increase the most if the value of the company's common stock appreciates? A. Convertible preferred stock B. Participating preferred stock C. Cumulative preferred stock D. Callable preferred stock

A. Convertible preferred stock Convertible preferred stock can be exchanged for the common stock of the issuer. For that reason, if the common stock's value increases, the market value of the convertible preferred stock will also increase.

A security that pays a fixed amount on a quarterly basis, and also allows the holder to profit if the common stock rises, is known as a: A. Convertible preferred stock B. Warrant C. Convertible bond D. Right

A. Convertible preferred stock Preferred stock pays a dividend to shareholders on a quarterly basis. A convertible bond pays interest on a semiannual basis. A convertible security (bond or preferred stock) would allow an investor to convert the security into shares of the company's common stock, at a predetermined ratio. If a security is convertible into common stock, the price of the security will tend to move with the price of the stock.

On Tuesday, May 1, XYZ Corporation's Board of Directors announced a dividend that's payable on Friday, May 25 to stockholders of record on Monday, May 14. The ex-dividend date is: A. Friday, May 11 B. Thursday, May 24 C. Monday, May 14 D. Tuesday, May 1

A. Friday, May 11 Stocks begin to trade ex-dividend on the business day preceding the record date. Since the record date is Monday, May 14, the ex-dividend date is Friday, May 11 (the business day preceding the record date).

A trader has a long futures position that he wants to offset. This means that: A. He will sell futures on the same exchange in the same delivery month B. He will buy futures because he anticipates a price decline C. He will buy futures because he is short the cash commodity and he anticipates that he will buy cash at a later date D. He will sell futures to match a purchase of the cash commodity

A. He will sell futures on the same exchange in the same delivery month A long position is offset through a sale of the same futures contract on the same exchange in the same delivery month.

A customer opens an options trading account and purchases one STC call option with a strike price of 40. She pays a premium of 3.22. Which of the following statements is/are TRUE? The customer's breakeven point is 43.22 per share The customer is bullish on STC The customer is bearish on STC The customer's breakeven point is 36.78 per share A. I and II only B. III and IV only C. I and III only D. I only

A. I and II only When buying a call option, the breakeven formula is the strike price + the premium. The customer's breakeven point is 43.22 (40 + 3.22). When an investor buys a call option, she is bullish. She wants the value of the underlying security (STC) to increase above her breakeven point. Customers who sell uncovered call options have the opposite strategy, bearish, but the breakeven calculation is the same for the individual who sells an uncovered call (the strike price + the premium)

An individual owns 100 shares of GHI stock. If GHI announces a 3-for-1 stock split, the individual: I. Will receive an additional stock certificate for 200 shares II. Must return his old stock certificate and will be issued a new certificate for 400 shares III. Will see the value of his investment in GHI stock increase due to the split IV. Will not see any increase in the value of his investment in GHI stock due to the split A. I and IV only B. I and III only C. II and III only D. II and IV only

A. I and IV only

A cash forward contract is different from a futures contract because the cash forward contract is: A personal transaction between the buyer and the seller Not for a standard amount of the commodity, but rather for a specific amount and quality of the cash commodity Not negotiated by open outcry in the trading pits and not subject to the rules of a futures exchange A. I, II, and III B. I and II only C. II and III only D. I only

A. I, II, and III A cash forward contract is a personal transaction for a specific amount and quality of the cash commodity and is not subject to the rules of a futures exchange

A customer opens an options trading account and purchases one STC call option with a strike price of 55. She pays a premium of 2.18. Which of the following statements is/are TRUE? The customer's breakeven is 52.82 per share The customer is bullish on STC The customer is bearish on STC The customer's breakeven is 57.18 per share A. II and IV only B. I only C. I and II only D. I and III only

A. II and IV only When trading a call option, the breakeven formula is as follows: strike price + premium. The client's breakeven is 55 + 2.18 = 57.18. When an investor buys a call option, she is bullish. She wants the value of the underlying security to increase above her breakeven point. A customer who sells call options short has the opposite strategy. She is bearish. The breakeven calculation on the call option would be the same for an individual who sells the call short, i.e., strike price + the premium.

Writing covered call options provides a client with: The potential for unlimited gains The potential for unlimited losses More potential income The potential to increase return A. III and IV only B. I only C. II, III, and IV only D. II and III only

A. III and IV only When an investor owns the underlying stock and sells a call option on the same stock, the position is referred to as a covered call. Covered call writing generates income for investors. They receive the proceeds from the sale of the option and increase their potential return. Covered call writing is considered a conservative option trading strategy that generates current income and hedges the stock position to the extent of the premium received.

If ABC is trading at 42 and the ABC April 40 call is trading at 4.50, what's the intrinsic value and the time value of the call premium? A. Intrinsic value of 2 and time value of 2.50 B. Intrinsic value of 4.50 and time value of 0 C. Intrinsic value of 2 and time value of 4.50 D. Intrinsic value of 2.50 and time value of 2

A. Intrinsic value of 2 and time value of 2.50 With the market value of the stock at 42, the 40 call is in-the-money (has intrinsic value of) by 2 points. The remainder of the total premium of 4.50 is the 2.50 of time value. In other words, the 4.50 premium consists of the intrinsic value of 2 plus the time value of 2.50.

A major difference between futures contracts and forward contracts is: A. Investors may not offset forward contracts without permission B. Futures contracts may not be offset without permission C. An investor may not be short in a futures contract D. Forward contracts do not relate to commodities, but futures contracts do

A. Investors may not offset forward contracts without permission One of the major differences between futures contracts and forward contracts is the ability to offset each position. In a futures contract, the investor may offset the position at any time before the contract is assigned. However, in a forward contract, the agreement between the two parties may not be assigned without permission of the other party

A call option has all of the following characteristics, EXCEPT: A. It may only be created with stock as the underlying instrument B. It may be exchange-traded C. The holder of the option has the right to buy the underlying asset at a fixed price D. The writer of the option has the obligation to sell the underlying asset at a fixed price if exercised against by the holder of the option

A. It may only be created with stock as the underlying instrument Beyond equities, options may be written on many other assets. For example, options may be created on indexes, foreign currencies, futures, and interest rates.

The major distinction between a cash commodity contract and a commodity futures contract is: A. Liquidation of the contract by offset B. "To arrive" provisions C. Commodity grade D. Inspection procedures

A. Liquidation of the contract by offset The most significant difference between a futures contract and a cash contract is that the cash contract is directly negotiated between the buyer and the seller, and both parties are obligated to each other to perform on the terms of the contract. In a futures contract, the buyer and seller do not know the identity of each other, nor do they care. In the event that either party decides not to fulfill his obligation to make or take delivery of the actual commodity, he need simply offset his position. Since the clearing house of the exchange has become the buyer to each seller and the seller to each buyer once the initial trade is made, it does not matter how many parties replace the original parties to the trade. The long who decides to accept delivery on the futures contract is assured that the clearing house will obtain a short who will make delivery. The short who decides to make delivery is also assured that the clearing house will find a long to accept

In evaluating common stock, which of the following is the MOST important? A. Market value B. Stated value C. Discounted value D. Par value

A. Market value Par value is an accounting term and bears no relation to the market value of a company. For traders and investors, the market value is the current price as determined by the forces of supply and demand.

A notice is published stating that RMO 5% convertible preferred stock will be called at $60 per share. The preferred is convertible into 1/2 share of common and is selling in the market at $56 per share. RMO common stock is selling in the market at $110 per share. After the notice appears, the price of the preferred stock will most likely trade in the market at: A. Near $60 B. The same price as before the notice appeared C. Near $28 D. Near $55

A. Near $60 Converting the preferred stock has a value of $55 ($110 per common share x 1/2 conversion ratio). Since the call price of $60 is more beneficial to the preferred stockholder, the market price of the preferred stock will most likely rise to near $60 (the call price).

A customer owns shares of restricted stock and now intends to sell them. If the proper forms are filed with the SEC, the customer may sell these shares: A. Over a 90-day period B. Over a 180-day period C. Over a 35-day period D. At any time

A. Over a 90-day period Under Rule 144, an investor who intends to sell either restricted or control stock must notify the SEC by filing Form 144 at the time the sell order is placed. Once the filing is made, the customer may sell these shares within 90 days.

When liquidating a corporation's assets, in which order are claims satisfied? A. Secured bondholders, general creditors, preferred stockholders, common stockholders B. Secured bondholders, preferred stockholders, common stockholders, general creditors C. General creditors, secured bondholders, common stockholders, preferred stockholders D. Common stockholders, preferred stockholders, secured bondholders, general creditors

A. Secured bondholders, general creditors, preferred stockholders, common stockholders The order in which claims are satisfied when liquidating a corporation's assets is: Secured bondholders General creditors Preferred stockholders Common stockholders

If a client buys a futures contract and holds it to expiration, what is his obligation? A. The buyer is obligated to take delivery of the underlying commodity B. The buyer is obligated to deliver shares of stock C. The buyer is obligated to offset his position on the exchange D. The buyer of a futures contract has no obligations

A. The buyer is obligated to take delivery of the underlying commodity Futures contracts obligate an investor to either buy or sell a fixed amount of a commodity (e.g., wheat) at some point in the future. Although some investors choose to offset their obligation prior to the contract's expiration, an investor who does not offset his contract must either take or make delivery of the physical commodity. Buyers are obligated to take or accept delivery of the commodity, while sellers are obligated to make delivery.

An OTC market maker would justify the amount of its markup based on all of the following, EXCEPT: A. The market maker's cost B. Dollar value of the trade C. Current price D. Availability of the securities

A. The market maker's cost The amount of markup should be based on the current market price of the security, not the market maker's cost.

Which of the following transactions would NOT take place on an exchange? A. The purchase of a municipal bond B. The purchase of an exchange-traded fund C. The short selling of an equity security D. The sale of an options contract

A. The purchase of a municipal bond The SEC definition of an exchange is a marketplace that brings buyers and sellers together. An exchange may be a physical location such as the NYSE or a purely electronic system such as Nasdaq. Most exchanges trade equities (common and preferred stock, closed-end or exchange-traded funds), equity derivatives (options, rights, and warrants). Some exchanges will also trade corporate debt. Most corporate debt and other types of fixed-income or debt securities (i.e., municipal bonds) are not traded on an exchange, but traded directly between broker-dealers.

Preemptive rights provide which of the following benefits to their holders? A. Their proportionate ownership will not be diluted if additional shares are issued. B. That dividends will continue to be paid on their common stock. C. A guarantee that bonds can be purchased at a predetermined price from the issuer. D. The ability to vote when they cannot attend the shareholders' meeting.

A. Their proportionate ownership will not be diluted if additional shares are issued. If a company decides to issue additional shares, preemptive rights allow existing shareholders to maintain their proportionate interest in the company by exercising their rights.

Which of the following is TRUE for the buyers of put options? A. They have the right to sell 100 shares of stock. B. They have the obligation to sell 100 shares of stock. C. They have the right to buy 100 shares of stock. D. They have the obligation to buy 100 shares of stock.

A. They have the right to sell 100 shares of stock. Buyers of put options have the right to sell 100 shares of stock at the strike price.

Which of the following products is NOT a derivative? A. UITs B. CMOs C. Index options D. LEAPS

A. UITs A unit investment trust (UIT) is a type of investment company where investors' money is pooled and invested in securities. Investors in UITs have shares of beneficial interest in the portfolio. The shares are priced according to the performance of the portfolio of securities purchased. A UIT is not a derivative, since its value is not based on a specific security, but on the entire portfolio. Long-Term Equity Anticipation Securities (LEAPS) are long-term call or put options and are derivatives. An index option and a collateralized mortgage obligation (CMO) are both derivatives

An investor is long 1,000 bushels of wheat that she purchased for 50 cents per bushel. What's the investor's gain or loss if the price of wheat has dropped to 45 cents per bushel? A. loss of $50 B. A gain of $50 C. A loss of $5,000 D. A gain of $5,000

A. loss of $50 Since the investor went long and the price went down, she will be losing money. She bought the wheat for $0.50 per bushel (50 cents = $0.50) and the price is now $0.45; therefore, she has lost $0.05 per bushel. Since the position is 1,000 bushels, the total loss is $50 (1,000 bu. x $0.05 loss) which will be realized if the position is sold.

An investor has purchased a corn futures contract at $1.20 per bushel and the contract delivery size is 5,000 bushels. If the price of corn has fallen to $1.10 per bushel, what's the client's profit or loss? A. $0.10 unrealized loss B. $500 unrealized loss C. $500 unrealized profit D. There's no profit or loss since the client did not exercise the contract.

B. $500 unrealized loss Since the investor bought (i.e., went long) a futures contract, he wants the price to rise. There's no exercise of a futures contract; instead, at expiration, there's physical delivery of the commodity. At the expiration of the contract, if the price of corn has fallen by $0.10, the client will have an unrealized loss of $0.10 per bushel. For that reason, the customer's total unrealized loss is $500 ($0.10 per bushel x 5,000 bushels).

A customer buys 200 shares of Giant stock at $63 a share. The client writes 2 call options with a $75 strike price and receives a premium of $4. What is the customer's breakeven point? A. $71 B. $59 C. $67 D. $55

B. $59 A type of option position where an investor buys or holds stock and writes a call option is called a covered call. This strategy is typically used to generate income. The breakeven point is $59. It is determined by subtracting the premium from the cost basis of the stock ($63 - $4). The fact that 200 shares were purchased and that two calls were written is irrelevant, since the breakeven point is calculated on a per-share basis

What's a swap? A. A trust that's owned by a large number of small investors and contains a basket of equity securities B. A contract between two parties to exchange a sequence of cash flows, one of which has a fluctuating value for a predetermined period C. A bond that's issued by a financial services company with a rate of return that's linked to other securities D. The difference between Treasury bond yields and bonds of a different issuer with similar maturities

B. A contract between two parties to exchange a sequence of cash flows, one of which has a fluctuating value for a predetermined period A swap is a form of derivative whereby two parties agree to exchange two different cash flows. One of the cash flows is fixed and the other will vary based on interest rates, foreign currency prices, or even other securities (e.g., stocks or bonds). Similar to forward contracts, swaps are typically traded over-the-counter (not on an exchange).

A customer executing a short sale anticipates: A. No change in the market value of a security B. A decrease in the market value of a security C. Either a large increase or decrease in the market value of a security D. An increase in the market value of a security

B. A decrease in the market value of a security A customer executing a short sale is anticipating a decrease in the market value of a security. This is known as a bearish strategy, and the customer is hoping to buy back the security or cover the short sale at a lower price. For example, a customer executing a short sale at $20 a share, who then buys back the stock at $15 a share, has a gain or profit of $5.00 per share.

Of the following choices, which one is a derivative? A. A REIT B. A swap C. A hedge fund D. A UIT

B. A swap Of the given choices, only a swap is considered a derivative. A derivative is a security whose price is dependent on or derived from one or more underlying assets. There are many different types of swaps, including interest-rate swaps, currency swaps, and credit default swaps.

vA client sells an XYZ November 40 call and receives a premium of $300. What is the client's maximum loss? A. $300 B. An unlimited amount C. $4,000 D. $4,300

B. An unlimited amount When and investor sells call options and does not own the underlying stock, the call writer has an unlimited potential maximum loss. If the underlying stock's price increases, the call seller/writer may be exercised against and forced to buy the stock in the market at its current higher price and subsequently sell at the lower strike price. Theoretically, the stock's potential upside is unlimited.

A common shareholder is not entitled to: A. Vote for the board of directors B. Appoint officers of the corporation C. Receive dividends if voted for by the board of directors D. Give or sell shares to anyone she wishes

B. Appoint officers of the corporation Shareholders have the right to vote for the board of directors, but not to appoint officers of the corporation.

All of the following financial instruments are derivatives, EXCEPT: A. LEAPS B. Closed-end funds C. Futures contracts D. Options

B. Closed-end funds A derivative security is a financial product that is valued based on the worth of another (underlying) security. The value of an options contract is determined by the underlying stock (or other financial product). A LEAP is a type of options contract with an expiration date that is longer than nine months. The value of a futures contract is also based on the financial instrument or commodity that is referenced in the contract. In contrast, the value of a closed-end fund is the market price of its shares.

During a period of stable interest rates, which type of preferred stock tends to be the most volatile? A. Cumulative B. Convertible C. Non-cumulative D. Participating

B. Convertible Convertible preferred stock may be converted into a fixed number of common shares of the same issuer. For that reason, if the common stock into which the preferred stock may be converted has appreciated above the parity price, the value of the convertible preferred will also rise. During a period of stable interest rates, the other types of preferred stock tend to remain stable.

An issuer includes warrants with a bond offering that it's conducting. This is done to: A. Eliminate the dilution of its stock B. Decrease the coupon rate on the bonds C. Increase the yield on the bonds D. Increase the value of its stock

B. Decrease the coupon rate on the bonds Warrants are generally considered a "sweetener," which gives holders the ability to purchase stock at a predetermined price for a long period. When issued with bonds, the issuer can typically lower the coupon rate and reduce its interest cost

Which statement is FALSE regarding the use of futures contracts for hedging purposes? A. A long hedge would be used to protect against rising prices B. Hedging is only used by speculators C. A short hedge would be used to protect against falling prices D. Hedging is used by the producers or consumers of the underlying commodity

B. Hedging is only used by speculators Hedging strategies are typically used by those who produce or consume a particular commodity. Speculators have no underlying interest in the commodity price and simply take positions for potential profits. While speculators may hedge, this is a much more common practice for the producers and users of the commodity.

Which of the following is NOT TRUE regarding the characteristics of a real estate investment trust (REIT)? At least 90% of the income from a REIT must be derived from investing in real property At least 75% of the income from a REIT must be distributed to investors each year Any investment losses from a REIT are not passed through to investors If sold to the public, the shares of a REIT must be registered with the SEC A. III and IV only B. I and II only C. I only D. II and III only

B. I and II only REITs are required to generate at least 75% of their income from investing in real property—not 90%. Also, REITs are required to distribute at least 90% of their income to its shareholders each year—not 75%. For those REITs that are sold to the public, they must be registered with the SEC under the Securities Act of 1933. If a REIT incurs a loss, it is retained by the REIT and not passed through to the shareholders

Which TWO types of risks are NOT associated with options and derivatives contracts? Reinvestment risk Opportunity risk Purchasing-power risk Market risk A. I and IV B. I and III C. II and III D. II and IV

B. I and III Reinvestment risk and purchasing-power risk are not associated with options or derivatives contracts. Reinvestment risk is the possibility that a principal payment received from an investment will need to be reinvested at a lower rate due to a change in interest rates, or the investor might need to assume more risk to receive the same rate of return. Purchasing-power risk, the risk that the value of assets will be eroded by inflation, applies to long-term debt instruments. Market risk is the day-to-day potential for losses from fluctuations in securities prices. This type of risk cannot be avoided

What main characteristic qualifies an American-style equity option to be described as a derivative security? A. It may be exercised at the owner's discretion B. Its value is based on the valuation of another asset C. Its pricing is based solely on its time value D. As consistent with many other derivatives, it is risky

B. Its value is based on the valuation of another asset Derivative contracts (e.g., options) obtain their value from the price/value of an underlying asset. Derivatives are often priced based on both intrinsic and time value. Futures and swaps are types of derivatives whose owners have no exercise rights. Simply being risky does not qualify a security as a derivative. American-style options are able to be exercised by the owner at any time prior to its expiration. However, European-style options may only be exercised by the owner on the last trading day prior to expiration.

Market makers engage in all of the following activities, EXCEPT: A. Stand ready to buy and sell shares of stock B. Maintain an absolute inventory of shares C. Place large bid and asks in the market D. Stand at their post ready and willing to make trades

B. Maintain an absolute inventory of shares Market makers are broker-dealers that provide liquidity on stock exchanges. They do this by placing buy (i.e., bids) and sell (i.e., ask/offer) orders at their trading posts. Under exchange rules, market makers must always be ready to accept and execute orders to buy and sell stocks. Although market makers often maintain an inventory of stocks, they're not required to have a minimum or maximum absolute inventory.

All of the following are characteristics of ADRs, EXCEPT that they: A. Make it easier for American investors to diversify their holdings internationally B. Pay dividends in the currency of the country in which their issuer is domiciled C. Are traded on U.S. exchanges and OTC markets D. Represent foreign securities that are held in American banks for safekeeping

B. Pay dividends in the currency of the country in which their issuer is domiciled ADRs (American Depositary Receipts) represent foreign securities that have been deposited in U.S. banks. They facilitate American investment in foreign securities since they may be purchased on the U.S. exchanges and OTC markets, just like any other stock. They pay dividends in U.S. dollars.

A customer sells 500 shares of stock to a broker-dealer that makes a market in the stock. The broker-dealer acted in a(n): A. Agency capacity and charged the customer a markup B. Principal capacity and charged the customer a markdown C. Principal capacity and charged the customer a commission D. Agency capacity and charged the customer a commission

B. Principal capacity and charged the customer a markdown A broker-dealer that's always willing to buy and/or sell shares of stock is considered a market maker. A market maker will normally act in a principal capacity and charge a customer a markdown when buying the stock from the customer and a markup when selling the stock to the customer. When acting in an agency capacity, the broker-dealer will not take the other side of the trade and normally charges the customer a commission.

In a declining market, the type of order that would potentially contribute to the decline is a: A. Sell limit B. Sell stop C. Buy stop limit D. Sell stop limit

B. Sell stop Orders to sell at the market have the potential of worsening a market decline. This eliminates a buy order. Sell limit orders are placed above the current market price and would be executed only in a rising market. The sell stop limit is placed below the market and is activated when there is a trade at or below the stop price. However, the order will be executed only if the market subsequently moves up. The sell stop order will be triggered when the security trades at or below (through) the stop price and then becomes a market order to sell, potentially pushing the market further down.

A reverse stock split creates a: A. Forced sale by the investor B. Smaller number of shares C. Larger number of shares D. Tax liability

B. Smaller number of shares A reverse stock split creates a smaller number of shares. For example, if a company had 10,000,000 shares outstanding and declared a 1-for-10 reverse stock split, after the split the company would have 1,000,000 shares outstanding. Each stockholder would receive one share for every 10 shares previously owned. A company will do this because many investors shy away from low-priced stocks and a company may want to raise the price of its stock. Additionally, a company may need to raise the stock price to avoid delisting from an exchange. (63211)

Bryce Dunne is long 300 shares of YYZ, a company specializing in radio broadcasting. Bryce also is long 3 YYZ Aug calls. What is the purpose of this strategy? A. Generation of income B. Speculation C. Protection against a downside move D. Mitigation of risk

B. Speculation Bryce is making a very speculative trade with YYZ stock and YYZ call options. He is extremely bullish on the stock. This is demonstrated by the fact that he purchased both the stock and the call options. If the stock's price appreciates, he will make money on both trades. Conversely, if the stock's price goes down, he will lose money on the stock trade and the call options will expire worthless, which will mean a complete loss of the premiums paid when he purchased them

A customer believes a stock will have a wide fluctuation in price over a short period. If he wanted to engage in an option strategy that would be profitable from a sharp movement either on the upside or downside, he would buy a: A. Call B. Straddle C. Put D. Spread

B. Straddle The customer would buy a straddle, which is the simultaneous purchase of a put and a call with the same expiration dates and the same strike prices. If the market moved up sharply, the call could be exercised and if it moved down sharply, the put could be exercised, resulting in a profit

All of the following statements are TRUE of covered call option writing, EXCEPT: A. The writer can increase the overall yield on his portfolio B. The premium received guarantees the writer cannot have a loss on the underlying security C. It is considered a conservative option strategy D. The writer will have a short-term capital gain if the option expires unexercised

B. The premium received guarantees the writer cannot have a loss on the underlying security All of the choices listed are true except the statement that the premium received guarantees that the writer cannot have a loss on the underlying security. The security can decline in price below the breakeven point (price of the stock minus the premium), causing the writer to have a loss on the stock. If the option expires, the writer will always have a short-term capital gain from the premium received

Which of the following is a right that's provided to owners of preferred stock? A. The right to vote in corporate elections B. The right to receive a dividend if the payment is approved by the board of directors C. The ability to sell the preferred share at a predetermined price D. A guaranteed dividend payment

B. The right to receive a dividend if the payment is approved by the board of directors Unlike bond interest payments, dividend payments to preferred shareholders are not guaranteed. Dividend payments for both common and preferred stock are only made if they're approved by the corporation's board of directors.

The record date of a company's cash dividend is Thursday, October 7. To receive the dividend, before what date must a customer purchase this company's stock? A. Monday, October 4 B. Wednesday, October 6 C. Thursday, October 7 D. Friday, October 8

B. Wednesday, October 6 The ex-dividend date (the ex-date) is the first day on which a stock begins to trade without its dividend. The ex-date is typically one business day prior to the record date (in this question, Wednesday, October 6). For a buyer to receive the dividend, the transaction must settle on or before the record date of Thursday, October 7. Therefore, if a person purchases the stock on or after the ex-dividend date, he's not entitled to the dividend since stock transactions use regular-way settlement which takes two business days for settlement. In order to be entitled to the cash dividend, the purchaser must buy the stock prior to the ex-date of Wednesday, October 6. Please note that this question is not asking by what date an investor must purchase the stock to be entitled to the dividend; instead, it's asking before what date must the purchase be made.

A customer owns a warrant with a strike price of $50 and the price of the underlying security has increased from $25 to $40. The current intrinsic value of the warrant is: A. $25 B. Zero C. $10 D. $20

B. Zero The intrinsic value of any derivative (warrant, option, or right) is equal to the security's in-the-money amount. A warrant is in-the-money when the market value of the underlying security is above the strike price. In this question, since the market price of the underlying security is below the strike price, the warrant is out-of-the-money and has no intrinsic value

What is the spread in the following market? Bid: 9.85, 9.75, 9.80 Ask: 9.90, 9.89, 9.92 Mark For Review A. 12 cents B. 17 cents C. 4 cents D. 5 cents

C. 4 cents The spread is the difference between the highest bid and lowest ask price. In this question, the highest bid is 9.85 and the lowest ask if 9.89; therefore, the spread is $0.04 (4 cents). The numbers to the right represent the number of 100 share lots being bid or offered and don't impact the spread.

An investor owns a $100 convertible preferred stock which is convertible into two shares of common stock. The common is selling at $52 and the preferred is selling at $104. The preferred stock is called at $105. What should the investor do? A. Wait for a more favorable call B. Sell the preferred stock C. Allow the preferred to be called D. Convert to common and sell the common

C. Allow the preferred to be called The value of the preferred ($104) equals the value of converting to common (two shares at $52 per share). The investor would receive the greatest amount ($105) by allowing the preferred to be called. Waiting for a more favorable call is not a possibility.

Which of the following statements is TRUE regarding stock index options? A. The index is affected if a stock in the index should split B. All index options use the European style of exercise C. An exercise is settled by cash instead of the delivery of securities D. The shortest initial expiration is three months

C. An exercise is settled by cash instead of the delivery of securities The exercise of a stock index option is settled by cash instead of the delivery of securities. An index will not be affected if one of its components should split. Some index options are American style (may be exercised any day up to expiration), while others use the European style (may only be exercised on the last trading day prior to expiration). Stock index options have a monthly expiration cycle.

A customer believes that a stock's price will increase in the near future. Which option position would be most appropriate? A. Buy a put and a call B. Buy a put C. Buy a call D. Sell a call

C. Buy a call The customer would buy a call, which is a bullish position and would profit if the stock price rose. Buying a put and a call simultaneously is called a long straddle and it would not be appropriate for a bullish investor.

All of the following are characteristics of forward contracts, EXCEPT: A. The contracts cannot be offset B. The amount and type of the delivered commodity are negotiable C. Delivery and settlement of the contracts occurs immediately D. The contracts are negotiated off of an exchange

C. Delivery and settlement of the contracts occurs immediately A forward contract is an agreement to buy and sell commodities at a future time and place. Forwards are over-the-counter contracts that will be negotiated off of a futures exchange. All aspects of the contract are negotiated between the buyer and seller, including the price, type of commodity, and amount, as well as the time and place of delivery.

Which TWO of the following statements are TRUE of stop orders? I. A stop order may be described as a suspended market order II. A stop order may be executed only at the stop price or better III. A stop order, when triggered, guarantees an execution IV. A stop order, when triggered, becomes a limit order and needs its limit price to be satisfied for execution A. I and IV B. II and IV C. I and III D. II and III

C. I and III A stop order becomes a market order (in turn receiving immediate execution) when a round-lot trades at or through its stop price. A stop-limit order becomes a limit order when a round-lot trades at or through its stop price, and requires that its limit price be satisfied to receive an execution. A stop order is sometimes described as a suspended market order since execution depends on the stop price being triggered first

Which of the following choices would NOT be dilutive to existing shareholders? Stock dividend Corporation issues new stock for an employee stock option program Corporation issues warrants Corporation has a rights offering A. I and III B. II and IV C. I and IV D. II and III

C. I and IV Stock dividends and stock splits are nondilutive because they are proportionate. They will not change existing investors' ownership levels. When a corporation has a rights offering, it is offering additional shares to existing stockholders so that their ownership level will not be diluted. When a corporation issues more stock for any purpose, it is dilutive. It is not relevant that those shares are going to existing employees.

Which TWO of the following statements are TRUE regarding the buyer and writer of a straddle? The buyer of a straddle expects the market to fluctuate. The writer of a straddle expects the market to fluctuate. The buyer of a straddle expects the market to remain stable. The writer of a straddle expects the market to remain stable. A. I and II B. II and III C. I and IV D. II and IV

C. I and IV The writer (seller) of a straddle (call and put) believes the stock's price will remain stable. The buyer of a straddle expects that the market price of the underlying stock will be volatile.

All of the following are characteristics of futures contracts, EXCEPT: Most of the contract's terms are set by the buyer and the seller The amount of the commodity being traded is standardized Prices are negotiated between the buyer and the seller The buyer of a futures contract cannot be forced to take delivery A. II and III only B. I and II only C. I and IV only D. I only

C. I and IV only A futures contract is an agreement to buy or sell a specific amount of a commodity or financial instrument. Most of the contract's terms, such as the size of the contract, the point of delivery, the delivery month, and the grade of the underlying security or commodity are set by the exchange on which it trades. Although futures contracts may be offset, they differ from options because the buyer of futures contract may be forced to take delivery.

A cash forward contract is different than a futures contract because the cash forward contract is:A personal transaction between the buyer and the sellerNot for a standard amount of the commodity, but rather is for a specific amount and quality of the cash commodityNot negotiated by open outcry in the trading pits and is not subject to the rules of a futures exchange A. II and III only B. I and II only C. I, II, and III D. I only

C. I, II, and III A cash forward contract is a personal transaction for a specific amount and quality of the cash commodity and is not subject to the rules of a futures exchange.

An individual expects the market price of XYZ to go down. This investor might: Buy XYZ call options Write XYZ call options Buy XYZ put options Write XYZ put options A. II and IV only B. I and IV only C. II and III only D. I and III only

C. II and III only Since the individual is bearish, he should buy puts and/or write calls on the underlying stock. A bullish investor should buy calls or write puts.

To protect against a loss in a short sale, an investor could: Sell a call Enter a stop-loss order Buy a call Buy a put A. I, II, or IV only B. I or II only C. II or III only D. III or IV only

C. II or III only To protect (not guarantee) against a loss in a short sale, an investor could buy a call or enter a stop-loss order (buy-stop) to cover the short sale. If the stock increases in value, the call option may also appreciate in value offsetting a portion, or all of the loss, on the short stock position. The buy-stop order would limit the loss on the upside of the short sale. The short sale would be covered as the stop order would become an order to buy at the market when the stop price is reached

Which of the following statements is FALSE regarding a broker-dealer acting as a market maker in a stock? A. It trades for its own account when buying and selling securities B. It must be prepared to honor the prices it quotes unless it clearly qualifies them C. It makes money by charging commissions for executing transactions D. When making a market, it is acting as a principal

C. It makes money by charging commissions for executing transactions A market maker is a broker-dealer that stands ready to buy or sell a specific stock for its own inventory (its own account). The price it is willing to pay for the stock is its bid price, while its ask or offer price represents the price at which it is willing to sell stock (to other dealers). The difference between the bid and offer prices is the spread, a source of market-maker profits. As principals in transactions, market makers do not charge commissions. Commissions are charged when firms act as brokers (agents). However, in transactions with retail customers, market makers might charge a markup when selling (an increase in price above its offer price) and a markdown when buying from customers (a decrease below its bid price).

Which of the following is the BEST hedging strategy if a client is long 1,000 shares at $42? A. Short 45 puts B. Long 45 calls C. Long 40 puts D. Short 40 calls

C. Long 40 puts If the investor wants to hedge against downside moves in a stock, he should buy put options. Purchasing the out-of-the-money put options is cost-effective (lower premium) and therefore is an efficient hedging strategy. Buying calls on stock owned is considered a bullish strategy. Selling or shorting call options only provides downside protection to the extent of the premium received.

Investors often use financial futures to hedge portfolios against which of the following types of risk? A. Political risk B. Event risk C. Market risk D. Business risk

C. Market risk Financial futures can be bought and sold for stock indexes, foreign currencies, and bonds. Similar to how put options can hedge a stock position, stock index futures can hedge the market risk for a portfolio that tracks an index. Investors will sell futures contracts and profit when the market falls. The subsequent profit on futures will offset the portfolio's losses. Business risk is typically minimized through investing in an uncorrelated portfolio of stocks (i.e., through diversification). Political risk and event risk cannot be directly hedged, since there are no financial futures that address those risks.

An efficient market is one with: A. Computerized trading and reporting B. Uniform rules and procedures C. Narrow or small spreads between the bid and ask prices D. A trading floor

C. Narrow or small spreads between the bid and ask prices Liquid or efficient markets tend to have a large amount of trading activity and narrow spreads (bid and ask prices that are close to each other). While narrow spreads are a sign of an efficient market, wide spreads are a sign of an inefficient market.

If an index option is exercised, what does the buyer of the contract receive? A. One share of each component of the index B. 500 shares of the index C. The cash differential between the option strike price and the index value D. 100 shares of the index

C. The cash differential between the option strike price and the index value When index options are exercised, they utilize cash settlement. Since there is no delivery of the underlying shares, the seller delivers to the owner the cash difference between the option's strike price and the index value.

A buy limit order can be executed at: A. Only at the limit price B. The limit price or higher C. The limit price or lower D. The most immediately available price in the market

C. The limit price or lower Limit orders can be executed at the limit price or better. For buy limit orders, a better price is one that's lower. Ultimately, investors are certainly willing to buy a security at a lower price.

Which of the following statements is TRUE regarding the purchaser of a call option? A. The purchaser would exercise the option if the stock declined. B. The purchaser would have unlimited losses if the underlying stock declined. C. The purchaser would benefit if the underlying stock increased. D. The yield on the purchaser's portfolio would increase by purchasing the option.

C. The purchaser would benefit if the underlying stock increased. The maximum loss that a purchaser of an option (call or put) can sustain is the amount of the premium paid. The purchaser of a call option will profit if the underlying stock increases in value and would exercise the call only if the stock had increased. Increasing the yield on a portfolio is a benefit of writing, not purchasing, call options.

Which of the following statements is TRUE regarding warrants? A. Warrants are only issued by blue-chip corporations B. Warrants are guaranteed by the Options Clearing Corporation C. Warrants can be perpetual D. Warrants receive dividends when the common stock receives dividends

C. Warrants can be perpetual Warrants can be perpetual in their duration and are issued by the corporation that also issues the common stock. Warrants give the holder the ability to convert the warrant into the common stock of the corporation at a specified price and at the holder's choice.

Your client owns a portfolio of blue-chip equity securities and would like to increase the overall rate of return through the use of options. The most conservative strategy to achieve this objective is to: A. Write covered puts B. Buy calls C. Write covered calls D. Buy puts

C. Write covered calls The most conservative strategy for the investor to achieve his objective is to write covered calls. The call premium received will increase the yield on his portfolio of stocks because it will add to the income generated by the dividends received from the stock.

An investor writes an uncovered RST May 25 put for a premium of 4. What is the maximum profit that the investor could realize? A. $2,500 B. An unlimited amount C. $2,100 D. $400

D. $400 The writer received the $400 premium. If the option expired, he would have no obligation, recognizing the entire premium as a profit. The premium represents the most that the writer could profit.

An investor writes an uncovered RST May 25 put for a premium of 4. When RST is at 16, the put option is exercised. If the stock is immediately sold at the current market price, what is the investor's profit or loss? A. $900 loss B. $500 profit C. $900 profit D. $500 loss

D. $500 loss If the stock is put to the writer, he would be required to buy the stock for $2,500. His cost basis for tax purposes would be $2,100 ($2,500 strike price - $400 premium received). Since he then sold the stock for $1,600, he would have a net $500 loss ($2,100 - $1,600)

A customer enters a sell stop-limit order for 100 shares at 18.50. The last round-lot sale that took place before the order was entered was 18.88. Round-lot sales that took place after the order was entered occurred at 18.25, 18.38, 18.50, and 18.63. The trade was executed at: A. 18.38 B. 18.63 C. 18.25 D. 18.50

D. 18.50 After the order was activated by the round-lot sale of 18.25, the order became a limit order to sell 100 shares at 18.50 or better. 18.50 is the first price that meets this requirement and would be the execution price.

When a stock splits 5 for 4, by what percentage will the price of the stock be reduced? A. 80% B. 50% C. 25% D. 20%

D. 20% When a stock splits 5 for 4, the price will be 4/5 of its original price. This represents a decrease of 1/5 or 20%. The number of shares that an investor owns will increase by a ratio of 5/4, which represents an increase of 1/4 or 25%.

What is the market outlook for the buyers of put options? A. Neutral B. Bullish C. Volatility D. Bearish

D. Bearish Buyers of put options are bearish (i.e., they want the value of the underlying stock to fall).

A client is short 1,000 shares of XYZ. Which of the following actions may the adviser recommend to offset the risk of the short stock? A. Sell 10 XYZ puts B. Sell 10 XYZ calls C. Buy 10 XYZ puts D. Buy 10 XYZ calls

D. Buy 10 XYZ calls To reduce the risk of shorting the stock, the adviser may recommend buying calls on XYZ, as the investor has the right to buy the stock should its price rise, so as to be able to replace the shares that were borrowed.

An investor has heard conflicting reports about the success of a company's latest products. The investor is unsure of the direction in which the stock's price will move, but wants to take an option position. Which option strategy should be recommended? A. Buy a call and sell a call on the stock B. Buy a call on the stock C. Sell a put on the stock D. Buy a call and buy a put on the stock

D. Buy a call and buy a put on the stock

A client is invested in a large number of stocks in different industries. If the client is concerned that they may fall in value, an adviser may recommend a hedging strategy to the client, such as; A. Selling puts on a large-cap index B. Selling calls on the S&P 500 Index C. Buying calls on the Russell 2000 Index D. Buying puts on the S&P 500 Index

D. Buying puts on the S&P 500 Index In buying puts on the S&P 500 Index, the client has the right to exercise the option at its strike price and receive in cash the intrinsic value of the contract. Should the market decline, the puts would increase in value as they move into the money, thus offsetting losses on the stock portfolio.

A broker-dealer acting in an agency capacity will charge customers a: A. Markup B. Markdown C. Fee D. Commission

D. Commission When acting in an agency capacity, the broker-dealer will normally charge the customer a commission. A broker-dealer that is always willing to buy and/or sell a security is considered a market maker. A market maker will normally act in a principal capacity and charge the customer a markdown when buying stock from a customer and charge a markup when selling stock to a customer.

XYZ Corporation has just announced that its quarterly earnings will be a bit below market expectations. Which of the following securities issued by XYZ will be most affected by this news? A. Long-term debentures B. Preferred stock C. Commercial paper D. Common stock

D. Common stock The value of a company's common stock is generally most affected by news connected to the performance of the company's business.

An index option has been exercised. What is the writer of the option required to do to satisfy his obligation? A. Deposit cash equal to the strike price. B. Deliver all of the shares in the index. C. Buy all of the shares in the index. D. Deposit cash equal to the difference in the strike price and the value of the index.

D. Deposit cash equal to the difference in the strike price and the value of the index. Index options are cash settled, which means that they never require delivery of securities at exercise. If an index option is exercised, the amount of money by which the option is in-the-money must be delivered by the writer. Index call options are in-the-money (have intrinsic value) when the index value is above the strike price. Index put options are in-the-money when the index value is below the strike price.

Which of the following statements is TRUE regarding American style versus European style exercise for option contracts? A. European style options may be exercised by the seller only on the business day before expiration. B. American style options may only be exercised by the buyer on the business day of expiration. C. American style options may be exercised by the seller at any time before expiration. D. European style options may only be exercised by the buyer on the business day of expiration.

D. European style options may only be exercised by the buyer on the business day of expiration. European style options may only be exercised by the buyer on the business day of expiration. However, American style options may be exercised by the buyer on any day up to, and including, the day of expiration. Only the buyer of the contract has the ability to exercise the option. In contrast, sellers are exercised against.

One of the main differences between futures contracts and forward contracts is that: A. Forward contracts do not involve commodities B. Futures contracts are always used to speculate C. An investor may not be short a futures contract D. Forward contracts may not be offset without permission

D. Forward contracts may not be offset without permission One of the main differences between futures contracts and forward contracts is that future contracts may be offset (bought or sold). Indeed, most buyers and sellers of future contracts never actually take delivery of the underlying commodity or financial instrument. In a forward contract, however, both parties involved in the contract must agree before the contract may be bought or sold.

Which of the following measures the volatility of an option's premium? A. Alpha and beta B. Duration and convexity C. Expected return and standard deviation D. Gamma and theta

D. Gamma and theta Gamma and theta are both measures of the volatility of an option's premium. Gamma is used to measure the option's delta sensitivity to changes in the underlying stock price, while an option's delta measures the amount by which an option's premium will change when the underlying stock price changes. Theta is a measure of how quickly an option's time value decreases. Duration and convexity are measures of a bond's volatility. Alpha and beta are measures of non-systematic and systematic risk and can be applied to any investment. Expected return and standard deviation are both used in the Modern Portfolio Theory.

Which TWO of the following financial products would be defined as derivatives? Collateralized mortgage obligations Commercial paper Call options Corporate high-yield bonds A. II and III B. II and IV C. I and IV D. I and III

D. I and III A derivative is a financial product that derives its value from movements in another financial product. If the price of the underlying security changes in value, the price of the derivative will fluctuate. For example, a CMO is a security backed by other mortgage-backed securities. If changes occur to the prices of these securities due to fluctuating interest rates and other factors, the price of the CMO will change. The price of an option contract is based on changes in the underlying security. A call option provides the holder the right to buy a security at a specified price. If the underlying security increases in value, the value of the call option will rise.

Which TWO of the following statements are TRUE? A customer will sell at the ask. A customer will sell at the bid. A customer will buy at the bid. A customer will buy at the ask. A. II and III B. I and III C. I and II D. II and IV

D. II and IV When trading securities in the secondary market, investors sell at the bid price and buy at the ask (offering) price.

All of the following are TRUE regarding option positions, EXCEPT: A. Investors buy options to hedge stock positions B. Long calls will hedge short stock positions C. Investors sell covered options to generate income D. Long puts will hedge short stock positions

D. Long puts will hedge short stock positions Options may be used in many different ways to augment a stock portfolio. When seeking to add income, investors will sell covered options. For example, a client who owns 100 shares of XYZ at $34 may sell an XYZ Oct 40 call for a premium of 3. If the stock remains stable, the investor will be able to keep the stock and have a $300 gain for the premium. If the stock rises and the call is exercised, the investor will simply sell the shares he currently owns. The investor's profit is based on the difference between his purchase price ($34) and the option strike price ($40), plus the option premium ($3). Investors interested in hedging stock positions must buy options. Long calls are a hedge for short positions, while long puts are a hedge for long stock positions.

The current market value of a stock is below the strike price of a call option. This situation is referred to as: A. In-the-money B. At-the-money C. Behind-the-money D. Out-of-the-money

D. Out-of-the-money Call options are in-the-money when the current market value of the underlying stock is above the option's strike price. However, if the stock's market price is below the strike price of a call, the option is out-of-the-money. Out-of-the-money and at-the-money options have no intrinsic value.

Which of the following is suitable for an investor who wants an investment that's marketable, highly liquid, and provides income? A. Certificate of deposit (CD) B. Auction-rate security C. Index ETF D. Preferred stock

D. Preferred stock Preferred stocks provided income in the form of dividends and, since the shares will trade on the same exchange as the issuer's common stock, they are very liquid. Although ETFs are liquid, ETFs that are based on an index won't provide much income. Auction-rate securities are illiquid investments. Since the certificate of deposit is not a negotiable CD, it's not a liquid investment. CDs cannot be bought and/or sold in the market; instead, they can be redeemed prior to maturity with a penalty assessed. Negotiable or marketable CDs (which was not a choice) are liquid investments, but the minimum denomination is $100,000 and they often trade in $1 million denominations.

In comparison to forward contracts, futures contracts are: A. Individually negotiated instruments B. Considered alternative investments C. Largely unregulated D. Readily transferable

D. Readily transferable Unlike forward contracts, futures contracts are standardized agreements that are traded on exchanges and readily transferred. Forward contracts are not readily transferable since both parties to the original contract must agree before one of them may sell the contract to a third party

A stop order would NOT be used to: A. Limit a loss if the market price of a short position increases B. Protect a gain when a long stock position appreciates C. Limit a loss if the market price of a long stock position decreases D. Receive a specific price when buying or selling

D. Receive a specific price when buying or selling A knowledgeable investor would use a sell-stop order to protect a profit or limit a loss on a long position and a buy-stop order to protect a profit or limit a loss on a short position. A sell-stop order is entered below the current market and becomes a market order when the stop price is reached or penetrated on the downside. A buy-stop order is entered above the current market and becomes a market order when the stop price is reached or penetrated on the upside. Since it becomes a market order when the stop price is hit or penetrated, there is no guarantee as to execution price.

It is most beneficial to the holder of a call if the price of the underlying security is: A. Fluctuating B. Falling C. Remaining the same D. Rising

D. Rising The holder (purchaser) of a call expects the market price of the underlying security to rise and, therefore, will profit from a rise in the security.

The third market is concerned with: A. OTC equity securities trading on an exchange B. Listed securities trading on an exchange C. Securities listed on an exchange that are traded directly between institutional investors D. Securities listed on an exchange, but traded in the OTC market

D. Securities listed on an exchange, but traded in the OTC market The third market is concerned with securities that are listed on an exchange (e.g., the NYSE or Nasdaq) that are traded in the OTC market. The fourth market refers to direct institution-to-institution trading and does not involve the public markets or exchanges.

An investor has written 3 XYZ May 40 calls. Which of the following is correct? A. She must deliver 40 shares of XYZ stock if exercised against. B. She must deliver 120 shares of XYZ stock if exercised against. C. She may purchase 100 shares. D. She must deliver 300 shares if exercised against.

D. She must deliver 300 shares if exercised against. If exercised against, a call writer is obligated to deliver 100 shares per contract. In this case, the investor wrote (sold) three contracts and is obligated to deliver 300 shares of XYZ stock at the strike price.

Stock legends on restricted stocks typically require the owner to hold the shares for a minimum of: A. 30 days B. 90 days C. One year D. Six months

D. Six months Stock legends placed on restricted securities of a reporting company require that they be fully paid, owned for a minimum of six months, and can be sold under Rule 144. A 144 notice, which is good for 90 days, must be filed with the Securities and Exchange Commission (SEC) no later than the date of the sale.

Quotes for non-Nasdaq, over-the-counter (OTC) traded equities can be obtained from the: A. Third market B. The National Securities Clearing Corporation (NSCC) C. The Consolidated Quotation System (CQS) D. The OTC Bulletin Board (OTCBB)

D. The OTC Bulletin Board (OTCBB) Quotes for non-Nasdaq, over-the-counter traded equities can be found in the Pink Sheets (also known as the OTC Pink Market) and the OTC Bulletin Board (OTCBB). The third market refers to exchange-listed securities trading over-the-counter (for example, a stock listed on the NYSE trading OTC). Quotes for securities in the third market may be found on the Consolidated Quotation System.

In anticipation of volatility in the price of ABC common stock, an investor purchased one ABC March 40 call at $1.35 and one ABC March 40 put at $1.15. Just before the options' expiration, the price of ABC stock is $42.05 and the investor closes out both positions at their intrinsic value. Which of the following statements is TRUE? A. The investor has a profit of $235. B. The respective breakeven points were 41.35 and 38.85. C. The investor has a loss of $235. D. The investor has a loss of $45.

D. The investor has a loss of $45. When an investors buys both (or sells both) a call and put on the same stock with the same expiration date, the position is referred to as a straddle. The first step in working with straddles is to combine the premiums, which results in $2.50 ($1.35 call premium + $1.15 put premium). The breakeven points for a straddle can be found by taking the combined premium and then adding to the strike price (for the call) and subtracting from the strike price (for the put). In this case, the higher breakeven is $42.50 ($40 strike + $2.50 combined premium) and the lower breakeven is $37.50 ($40 strike - $2.50 combined premium). Therefore, if the market price of ABC is $42.05, the investor will lose the $0.45 difference between the higher breakeven of $42.50 and the market value of $42.05. Since an option has 100 shares, the total loss is $45 (100 shares x $0.45 loss). Put another way, if ABC is at $42.05 and both options are sold for their intrinsic value ($205 for the call and $0 for the put since it's out-of-the-money), the investor has a loss of $45 ($250 paid out, but only $205 received).

Which of the following statements is TRUE in relation to the buyer of a call option? A. The investor has a limited potential profit B. The investor is entitled to all dividends paid on the underlying stock C. The investor must exercise the option if the underlying stock goes up D. The investor has limited risk

D. The investor has limited risk A purchaser of a call option would have limited risk with the potential for unlimited profit. The risk is the possibility of losing the entire premium (cost of the option). The owner of the call option is not an equity owner of the stock unless and until the option is exercised.

A broker-dealer owns 100 shares of ABCO stock which it purchased at 28. If the stock is sold to a customer, the broker-dealer will base the markup on: A. The inventory cost of 28 B. The highest bid on the Nasdaq system C. A price that is fair and reasonable D. The lowest offer on the Nasdaq system

D. The lowest offer on the Nasdaq system When selling stock to a customer, a markup should be based on the lowest offer on the Nasdaq system, not the price the dealer paid to purchase the stock (dealer's inventory cost).

Which of the following is TRUE for the writers (sellers) of put options? A. They have the right to buy 100 shares of stock. B. They have the right to sell 100 shares of stock. C. They have the obligation to sell 100 shares of stock. D. They have the obligation to buy 100 shares of stock.

D. They have the obligation to buy 100 shares of stock. Writers (sellers) of put options have the obligation to purchase 100 shares of stock at the strike price if exercised against.

Which of the following options positions has the MOST risk? A. Buying a call B. Writing a covered call C. Buying a put D. Writing an uncovered call

D. Writing an uncovered call If an investor writes an uncovered (naked) call, she has sold call against stock that she does not own. If the underlying stock rises and the call writer is exercised against, she will be obligated to deliver the stock at the strike price. Since the call is uncovered, she must first purchase the stock in the open market. Theoretically, there is no limit as to how high the stock's price could rise; therefore, the investor is exposed to unlimited risk.