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39 Cards in this Set
- Front
- Back
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Orders on the Specialist/DMM's book are filled on a: A. Last In, First Out basis
B. First In, First Out basis C. First In, Last Out basis D. Random Selection basis |
The best answer is B. Orders on the book are handled on a FIFO basis - first in-first out. If an order is canceled and resubmitted as a different order (i.e., change the order from "Buy 100 shares at $50" to "Buy 200 shares at $50"), the new order goes to "last place" on the book.
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Under FINRA rules, a written power of attorney is NOT required for a registered representative to choose which of the following order related items?
I Security to be traded II Size of the order III Price of execution IV Time of execution A. I and II B. III and IV C. I, II, III D. I, II, III, IV |
The best answer is B. A registered representative can always pick the time and price of execution of an order - this is the same as a "Not Held" order. If any more than price or time is selected, the trade is "discretionary" and requires a written power of attorney from the customer.
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The Firm Element component of the "Continuing Education" requirement:
I is administered by the compliance department II must be completed by all registered persons III must be completed annually IV must communicate information that is understood by the participants A. I only B. I and II only C. III and IV only D. I, II, III, IV |
The best answer is D. The Firm Element of the Continuing Education requirement obligates member firms to deliver annual training to all registered representatives on product, regulation, and compliance issues. The firm must maintain a record that shows that the participant understood the information presented.
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All of the following are contrarian market theories EXCEPT:
A. short interest theory B. put/call ratio theory C. odd lot theory D. efficient market theory |
The best answer is D.
Efficient market theory states that markets are "efficient" at pricing stocks and one cannot beat the market over the long term. It is the argument for investing in index funds and ETFs. The short interest theory, put/call ratio theory and odd lot theory are all contrarian theories. The short interest theory states that a very large short interest indicates an "oversold" market - so prices have been pushed too low and the market is ready for a rebound - so this is a bullish indicator.The put/call ratio is the same "idea" as the short interest theory, using the ratio of put contracts issued to call contracts issued. A very high ratio indicates that many more bearish contracts (puts) are being issued than bullish contracts (calls), so this also indicates an oversold market that is ready for a rebound - so it is bullish.The odd lot theory is quite amusing. It states that small investors trade odd lots and small investors are wrong! If there is a lot of odd lot buying, you would sell; and vice versa! |
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Which of the following statements are TRUE about the NYSE Super Display Book system?
I Commissions charged to retail customers for Super Display Book executions are lower than for manual executions II Orders placed in the system are not subject to size limitations III Orders are routed directly to the DMM's Display Book for execution IV Reports of executed orders are routed directly back to the originating broker-dealer A. I and II only B. III and IV only C. I, II, III D. II, III, IV |
The best answer is B.
The NYSE Super Display Book system trades are less expensive for member firms to execute than manual trades handled by floor brokers (who earn a commission on each trade). However, this cost differential is not reflected in commission rates charged to customers. The customer pays the same commission no matter how the trade is handled by the firm. Super Display Book cannot handle any size trade. Orders are subject to size limitations. Larger trades must still be handled manually on the floor by a floor broker. Super Display Book accepts orders electronically from member firms to be executed immediately, or to be placed on the Display Book electronically. Execution reports are routed electronically to the firm that placed the order. |
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Which statements are TRUE regarding hedge funds?
I Hedge funds are subject to little regulatory oversight II Hedge funds must register as management companies under the Investment Company Act of 1940 III Hedge fund managers are compensated based on a percentage of capital appreciation in the fund IV Hedge fund managers can only be compensated based on a percentage of assets under management A. I and III B. I and IV C. II and III D. II and IV |
The best answer is A. Hedge funds are set up as private placements, open only to accredited investors. They are not regulated as investment companies and are subject to minimal regulatory oversight. Unlike regulated mutual funds, which can only compensate the adviser based on a percentage of assets under management, hedge fund managers typically take both a percentage of assets under management (say 2%) plus a percentage of capital gains in the fund (say 20%). Needless to say, this can result in very rich compensation for successful hedge fund managers.
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Which statements are TRUE regarding the effect of interest rate movements on bond price volatility?
I Bonds with the lowest price volatility will be ones with the lowest coupon rates II Bonds with the lowest price volatility will be ones with the highest coupon rates III Bonds with the highest price volatility will be ones with the lowest coupon rates IV Bonds with the highest price volatility will be ones with the highest coupon rates A. I and III B. I and IV C. II and III D. II and IV |
The best answer is C. The bond with the lowest price volatility will be the one with the highest coupon rate. Bonds with low coupon rates exhibit greater price volatility. Thus, to minimize price volatility due to interest rate movements ("interest rate risk"), high coupon bonds are more appropriate than low coupon bonds.
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Which of the following securities are exempt from registration under the Securities Act of 1933?
I Insurance company issues II Bank issues III Savings and loan issues IV Common carrier issues A. I and II only B. III and IV only C. I, II, III D. I, II, III, IV |
The best answer is D. When the Securities Act of 1933 was written, issuers that were already regulated under other laws were generally exempted from the provisions of the Act. Insurance companies were already regulated under State insurance laws; banks and savings and loans were regulated by both State and Federal banking laws; common carriers were regulated by the Interstate Commerce Commission (now part of the Department of Transportation).
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A customer buys 5M of 3 1/2% Treasury Bonds at 101-16. How much will the customer receive at each interest payment?
A. $17.50 B. $35.00 C. $87.50 D. $175.00 |
The best answer is C.
"5M" means that 5-$1,000 bonds are being purchased (M is Latin for $1,000). Annual interest on the bonds is 3.5% of $5,000 face amount equals $175.00. Since interest is paid semi-annually, each payment will be for $87.50. Notice that the fact that the bond is trading at a premium is irrelevant - the interest payment is based on the stated interest rate times par value. |
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A customer sells 1 ABC Jul 55 Call @ $6 and 1 ABC Jul 65 Put @ $6 on the same day. Just prior to expiration, the stock is trading at $63 and the customer closes the positions at intrinsic value. The customer has a net profit of:
A. $200 B. $400 C. $800 D. $1,200 |
The best answer is A. The customer has sold a short combination, receiving combined premiums of $1,200. When the stock is at $63, the short 65 put is 2 points "in the money," resulting in a 2 point loss to the writer, while the short 55 call is 8 points "in the money," resulting in an 8 point loss to the writer. $1,200 received in premiums net of $1,000 loss = $200 profit
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If a member firm acts as the managing underwriter in an initial public offering of an issuer's securities, then the member is prohibited from issuing a research report on that company for:
A. 10 days following the effective date B. 20 days following the effective date C. 30 days following the effective date D. 40 days following the effective date |
The best answer is D. If a member firm acts as the underwriting manager or co-manager in an initial public offering for an issuer, the member cannot issue a research report on that company for 40 days following the effective date of the offering.
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CMOs are:
I available in $1,000 denominations II available in $25,000 denominations III quoted in 1/8ths IV quoted in 1/32nds A. I and III B. I and IV C. II and III D. II and IV |
The best answer is B. CMOs are available in $1,000 denominations unlike the underlying pass-through certificates which are available only in $25,000 denominations. CMOs are quoted in 32nds, similar to the underlying pass-through certificates. Often CMO tranches are quoted on a "yield spread" basis to equivalent maturing U.S. Government Agency issues.
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Declines in all of the following would likely result in the FOMC making net purchases of government securities in the open market EXCEPT a decline in (the):
A. unemployment levels B. Consumer Price Index C. Gross Domestic Product D. bond prices |
The best answer is A. Falling unemployment levels means that economic activity is picking up. If this is true, the Fed would not want to stimulate the economy by loosening credit (the purchase of government securities by the Fed injects cash into the banks and loosens credit). A falling gross domestic product could cause the Fed to loosen credit to stimulate activity, as can falling bond prices (if bond prices are falling, yields are rising, which slows activity). A falling consumer price index means that the inflation rate is falling. The Fed will be more likely to loosen credit if inflation is low than if inflation is rising. To counteract rising inflation, the Fed will tighten credit.
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Which statements are TRUE about Equity REITs?
I Equity REIT share prices and overall stock prices are positively correlated II Equity REIT share prices and overall stock prices are negatively correlated III Equity REIT dividends paid to shareholders are taxed at regular income tax rates IV Equity REIT dividends paid to shareholders are taxed at a preferential 15% or 20% maximum rate A. I and III B. I and IV C. II and III D. II and IV |
The best answer is C. Equity REIT share prices and overall stock market prices are negatively correlated. When stock prices are flat or falling, Equity REIT prices tend to rise (and vice-versa). REIT dividend distributions do not qualify for the lower 15% or 20% tax rate given to common stock cash dividends - a disadvantage when investing in REITs.
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Chicago Board
OptionStrikeExpCalls - LastPuts - Last Amdahl10Nov1.00.25 10.7510Feb1.85.70 10.7510May2.25r 10.7515Nov.104.15 10.7515Feb.504.25 10.7515May.90r All of the following contracts listed below are trading "out of the money" EXCEPT: B. Amdahl Feb 10 Put C. Amdahl Nov 10 Call D. Amdahl Feb 15 Call |
The best answer is C. Put contracts go "out the money" when the market price exceeds the strike price. Since the market price is $10.75, put contracts with a 10 strike are .75 point "out the money." A call contract goes "out the money" when the market price is below the strike price. A call with a 15 strike, when the market is $10.75, is 4.25 points "out the money." A call with a 10 strike when the market is $10.75 is .75 point "in the money."
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Which of the following are risks that should be disclosed to customers when recommending the purchase of a CD sold through a brokerage firm?
I There is a substantial penalty for early withdrawal of funds II If interest rates have risen after issuance and the CD is sold prior to maturity, the investor may experience a loss of principal III The secondary market is limited, so that sale prior to maturity can incur higher than normal transaction costs IV Brokered CDs do not qualify for FDIC insurance coverage if the issuing bank should fail A. I and III B. I and IV C. II and III D. II and IV |
The best answer is C. There is no penalty for early withdrawal of funds on brokered CDs - however the amount of interest earned will be pro-rated over the shorter life of the deposit. If interest rates rise after issuance, the value of the CD in the secondary market will fall (though not by much, since this is a short maturity). Most of these instruments are held to maturity, so the secondary market is very limited. Finally, brokered CDs qualify for FDIC insurance as long as the CD is titled in the customer's name
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An assessment of a new client's financial status shows the following:
Name:Jim/Jane Smith Ages:42 and 38 Marital Status:Married - No Children Income:$82,000 per year - both work Retirement Plan:No Life Insurance:No Risk Tolerance:Low Client Balance Sheet:Assets Cash on Hand:$8,000 Marketable Securities:$61,000 ($22,000 in Money Market Fund; $39,000 in Treasury Bonds) Auto:$39,000 Home Ownership:$200,000 Liabilities Credit Cards Payable: $5,000College Loan:$22,000 Auto Loan:$25,000 Mortgage:$160,000 Net Worth: $96,000 The wife informs you that she is pregnant, and that she will stop working to take care of the child. The couple wishes to begin to set aside money for the child's higher education expenses and wishes to minimize current taxes. Which recommendation would be most appropriate for this couple? The $39,000 Treasury Bond investment should be: B. reallocated to a 50/50 mix of STRIPS and Treasury Bonds held in the same account C. reallocated in full to aggressive growth stock investments in a Custodian Account opened for the child to provide for future college education expenses D. partially used to buy a $200,000 life insurance policy on the husband at an annual premium of $1,000 and to open an IRA account investing in growth stocks by making the maximum annual contribution |
The best answer is D. This couple is looking to fund the child's college expenses (which will start in 18 years) and are looking to minimize taxes. The best option is to place the $39,000 proceeds from the sale of the Treasury bonds into a tax deferred vehicle, such as an IRA account. Custodian accounts do not grow tax deferred, so this is not the best choice. Furthermore, since the husband is currently 42 years old, when the monies are withdrawn 18 years from now to start paying for college, he will be age 60 and no penalty tax will be due (only regular taxes are due for withdrawals after age 59 1/2). Investing in stocks in a cash account or changing the bonds owned in the existing account does not give any tax benefit. Also, these customers currently have no insurance, but they have a big mortgage and other long-term liabilities such as a college loan and a car loan. If one should die, the other would have to work and care for the child, and there might not be enough income to make the monthly payments on these debts. Thus, buying enough life insurance to cover these liabilities is a prudent measure.
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When comparing fixed annuities to variable annuities, which statements are TRUE? II A variable annuity account grows at a guaranteed rate III A fixed annuity is suitable for a customer seeking preservation of capital IV A variable annuity is suitable for a customer seeking preservation of capital A. I and III B. I and IV C. II and III D. II and IV |
The best answer is A.
Fixed annuity premiums are invested in an insurance company's general account and grow at a guaranteed rate (which is usually fairly low). There is no investment risk. At retirement, the customer received a fixed periodic payment for life. Variable annuity premiums are invested in an insurance company "separate account" which buys shares of a designated mutual fund. The account grows based on the performance of the underlying mutual fund, so the investor is subject to investment risk. A fixed annuity insures a fixed guaranteed growth rate, while the growth rate of a variable annuity can go higher, or lower, or negative. So for preservation of capital, a fixed annuity is best. |
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A customer wishes to buy 100 shares of PDQ "when issued" stock at $25 as the initial transaction in a cash account. The customer must deposit:
A. $1,250 B. $1,500 C. $2,000 D. $2,500 |
The best answer is C. The purchase of when issued stock is treated the same as if the security were already issued and trading. However, the customer is not required to put up 100% to purchase when issued securities in a cash account. Instead, the customer must maintain equity as if the position were in a margin account. (Once the security is issued, it must be paid in full). Thus, the minimum is the greater of 50% or $2,000 of equity in the account. Since this is the initial transaction, the customer buying $2,500 of "when issued" stock must deposit $2,000 to meet the minimum equity requirement.
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An elderly client has a $400,000 portfolio that is conservatively invested in blue chip stocks and government bonds. He calls his representative and tells him that he wants to liquidate the entire portfolio and buy growth stocks. His son also has an account serviced by the same representative, so the representative calls the son to ask him about how his father is doing, to which the son responds: "Dad has not been himself lately." What step should the representative take?
A. The representative should follow the customer's instructions, liquidate the portfolio, and buy growth stocks B. The representative should refuse to follow the customer's instructions C. The representative should contact the client and explain the risks inherent in the customer's strategy D. The representative should contact compliance and ask them to file a SAR |
The best answer is C. This one is kinda cute! The basic rule for elderly clients that appear to be "out of it" is to escalate the matter to compliance and let them deal with it. However, a SAR is a Suspicious Activities Report, which is filed with the Federal Government if the firm is suspicious that a client is money laundering or supporting terrorism. So Choice D is incorrect! Looking at the other choices, representatives are supposed to follow client instructions, but they also have an obligation to steer customers away from doing something really stupid. The representative should neither do what the customer wants (which is stupid) or refuse to do what the customer wants. Sitting down with the customer and explaining why this is stupid appears to be the best choice. If the customer appears to be unable to understand when the registered representative is explaining why the customer's request is not a good idea, then escalate the matter to compliance and let them deal with it!
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A customer buys 1 ABC Jan 50 Call @ $4 when the market price of ABC is $51. The stock then moves to $58 and the customer exercises. The tax consequence upon exercise is a:
A. capital loss of $400 B. capital gain of $400 C. capital gain of $800 D. cost basis of $5,400 |
The best answer is D. If a customer exercises a call, he or she is buying the stock. The customer's cost basis is the purchase price of the stock ($50) plus the premium paid ($4) = $54. The premium paid is considered to be part of the acquisition cost of the stock. No taxable event occurs until the stock is sold.
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In a new margin account, a customer purchases 100 ABC shares at $12 per share as the initial transaction. Which of the following statements are TRUE?
I The margin call is for $1,200 II The margin call is for $2,000 III The maximum potential loss is $1,200 IV The maximum potential loss is $2,000 A. I and III B. I and IV C. II and III D. II and IV |
The best answer is A. Even though minimum equity to open a long margin account is $2,000, this does not apply if the securities in the account are fully paid. A customer cannot be asked to deposit more than 100% when buying since this is the maximum potential loss. The customer wants to buy $1,200 of stock, so 100% or $1,200 must be deposited. The equity in the account is $1,200 and the account is fully paid, so this is the maximum potential loss.
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Which of the following orders will be reduced on the Specialist's book (DMM's book) on ex date for a cash dividend?
I Buy 100 ABC @ 50 II Buy 100 ABC @ 60 Stop III Sell 100 ABC @ 50 Stop DNR IV Sell 100 ABC @ 60 A. I only B. I and II C. III and IV D. II and III |
The best answer is A. The orders that are reduced on the Specialist's (now renamed the DMM - Designated Market Maker's) book on ex date are those placed below the market - Open Buy Limit and Open Sell Stop orders. However, an order with DNR on it (Do Not Reduce) will not be adjusted downwards on ex date.
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A municipal dealer buys a 25 year 5% bond at par. All of the following prices by the municipal dealer for the 5% bond are fair EXCEPT:
A. 4.80 basis B. 101 C. 103 D. 4.00 basis |
The best answer is D. The dealer purchases 5% bonds at par. Any mark-up that he earns upon reselling the bonds must be fair and reasonable. A price of 101 equals a mark-up of 1% above par. A price of 103 represents a 3% mark-up from par. Both of these appear to be "fair."
To get an "approximate" price for a long-term bond offered on a yield basis, divide the coupon by the basis (this only works for long term bonds). Thus, a 5.00% bond offered on a 4.80% basis would have an approximate price of 5.00/4.80 = 1.04166 x $1,000 par = $1,041.66. This is about a 4% mark-up over par. A 5.00% bond offered on a 4.00% basis would have a price of 5.00/4.00 = 1.25 x $1,000 par = $1,250. This is a 25% mark-up over par and is excessive |
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Under MSRB rules, which of the following records must be kept for specified time periods?
I Trade comparisons II Official Statements III Customer account statements IV Customer complaints A. III and IV only B. I and II only C. I, III and IV D. I, II, III, IV |
The best answer is C. There is no requirement to keep Official Statements filed at the firm. The underwriter for the issuer files a copy of the Official Statement with the MSRB, which puts it up on its EMMA website for public access.
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A customer has a cash account holding $160,000 of securities and $340,000 of cash. If the broker-dealer were to fail, which statement is TRUE regarding the status of the account in an SIPC liquidation?
A. SIPC will provide coverage for the $160,000 of securities only B. SIPC will provide coverage for the total of $500,000 of securities and cash C. SIPC will provide coverage for only $250,000 of cash D. The customer will become a general creditor in the amount of $90,000 |
The best answer is D. SIPC covers customer claims against a failed broker-dealer for a total of $500,000, inclusive of maximum cash coverage of $250,000. For any claims above these limits, the customer becomes a general creditor of the failed broker-dealer. This customer has $160,000 of securities (covered in full) and $340,000 of cash (covered only for $250,000), for total coverage of $410,000. For the remaining $90,000 of cash not covered, the customer becomes a general creditor
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All of the following are defined as options "advertising" EXCEPT:
A. options website B. magazine inserts on options investments C. television commercials on options investments D. lectures to the public on options investments |
The best answer is D. Options advertising is defined as any sales material that reaches a public audience through a mass medium, including: websites, newspapers, periodicals, magazines, radio, television, telephone recordings, motion pictures, billboards, etc. A lecture about options is given to a "specific audience" and is defined as "sales literature."
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If a customer buys a fully-paid security that is part of the DTC DRS program, the customer will receive:
I physical stock certificates II uncertificated book-entry registration III payments of dividends or interest from the broker-dealer IV payments of dividends or interest from the issuer or transfer agent A. I and III B. I and IV C. II and III D. II and IV |
The best answer is D. DTC (Depository Trust Corporation) safekeeps almost all physical securities certificates for member firms. It is based in New York and has an underground, airtight bunker that goes 8 stories into the ground for this purpose. Computer systems keep track of the "transfer" of these certificates from one owner to another - they are no longer physically moved, unless the customer actually wants delivery of the physical certificate (for which DTC now imposes a substantial charge). Once DTC could track change of ownership by computer, the next step was to create a "book entry" registration system for stocks, where there are no more physical certificates (saves time and money). This is called "DRS" - the Direct Registration System. Because the owner's name is electronically recorded on the books of the transfer agent, payments of dividends and interest are made directly from the transfer agent to the customer/owner. Note, in contrast, that "street name" securities held in margin accounts do not record the owner's name with the transfer agent. In this case, the broker-dealer is the owner of record, and payments of dividends and interest are made by the transfer agent to the broker-dealer. The broker-dealer, in turn, credits each customer that is the beneficial owner of the "street-name" shares.
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The Major Market Index Option contract is traded on the:
A. New York Stock Exchange B. American Stock Exchange C. Chicago Board Options Exchange D. Chicago Mercantile Exchange |
The best answer is B. The Major Market Index Option contract (XMI) is traded on the American Stock Exchange.
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Which of the following statements are TRUE about an order to: Buy 100 ABC @ 50 Stop 53 Limit?
I The order is elected at $50 or lower II The order is elected at $50 or higher III The order is executed at $53 or lower IV The order is executed at $53 or higher A. I and III B. I and IV C. II and III D. II and IV |
The best answer is C. This is a Buy Stop Limit order. Buy Stop orders are placed higher than the current market, and are filled as the market rises. The guidelines of the stop price must be adhered to first. A buy stop is elected as the market rises to the stop price ($50) or higher. As soon as the market hits $50 or higher, the order is elected, and turns into a limit order to buy at the limit price of $53. An order to buy at $53 means to buy at $53 or lower. Thus, the order is elected at $50 or higher; and executed at $53 or lower.
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An "extraordinary item" would be found on the:
A. Income Statement B. Balance Sheet C. Retained Earnings Statement D. All of the above |
The best answer is A. An "extraordinary" item is found on the Income Statement. Extraordinary items are gains or losses that occur outside the company's normal scope of operations and are one time events. For example, a gain from selling part of a business is an Extraordinary Item. These are disclosed separately on the income statement.
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A detailed suitability determination must be completed by the registered representative and signed by the customer before confirmation of sale of a(n):
A. NASDAQ security B. NYSE listed security C. Pink sheet security under $5 D. CBOE listed option |
The best answer is C. The "penny stock rule" (Rules 15g-1 through 15g-6) requires that new customers who receive a recommendation and purchase non-exchange listed securities (meaning OTCBB or Pink Sheet issues) priced under $5 per share sign and return a suitability statement before sale can be confirmed. This rule is intended to stop "boiler room" high pressure phone sales of speculative penny stocks.
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The reserve maintenance fund consists of:
A. monies to pay for extraordinary maintenance or replacement costs B. monies to pay for regularly scheduled major repairs and replacement costs C. monies to meet debt service requirements D. all gross revenues from the facility |
The best answer is A. Under the flow of funds (which states the priority of collecting and disbursing pledged revenues), the reserve maintenance fund would contain monies to pay for extraordinary maintenance or replacement costs.
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Which of the following statements are TRUE regarding a joint account with tenancy in common?
I A specific percentage ownership is assigned to each party II Each party owns an undivided interest in the account III If one party dies, that person's interest goes to his beneficiary or estate IV If one party dies, the other party wholly owns the account A. I and III B. I and IV C. II and III D. II and IV |
The best answer is A. In a joint account with tenancy in common, each owner has a divided interest in the account. A specific percentage ownership is assigned to each participant. If one party should die, that person's percentage interest goes to his beneficiary or estate.
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Accrued interest is computed on a 30 day month / 360 day year basis for all of the following EXCEPT:
A. Corporate Debentures B. Revenue Bonds C. General Obligation Bonds D. U.S. Government Bonds |
The best answer is D. Accrued interest on U.S. Government bonds is computed on an actual day month / actual day year basis. Accrued interest for corporate and municipal bonds is computed on a 30 day month / 360 day year basis.
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A member firm receives a large block order to buy 100,000 shares of XYZ stock, which is not actively traded. Which customer(s) of the firm can buy XYZ stock prior to the filling of the block trade? A. The registered representative who received the orderB. Other customers of the firm who place buy orders, if the firm has information barriers in place C. Any customer of the firm who places an unsolicited order D. No customer can buy the stock until the block order to buy is filled |
The best answer is B. In its "front running" rule, FINRA gives an exception to the prohibition on a member firm placing orders to trade a stock prior to the filling of a large block order if the firm has information barriers in place. If this is the case, the front running prohibition only falls on the people at the firm who know about the existence of the large block order. Persons placing orders to buy XYZ stock at the firm who have no knowledge of the impending block purchase are exempted from the "front running" rule because, with effective information barriers in place, they could not have known about the large trade that is about to be placed.
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During periods of falling unemployment claims, rising consumer spending, and increased business spending, the Federal Reserve's actions would attempt to minimize the chances of:
A. inflation B. deflation C. recession D. expansion |
The best answer is A. The conditions stated, of falling unemployment claims, rising consumer spending and increased business spending, all point to a rapidly expanding Gross Domestic Product. In these conditions, the Federal Reserve is concerned with inflation, and would attempt to dampen activity somewhat to lessen the chances of inflation.
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A customer buys 100 shares of XYZ at $52 and buys 1 XYZ Jan 50 Put @ $9. Just prior to expiration, the stock is trading at $46. The customer closes the option position at a premium of $7. One week later, the stock moves to $56 and the customer sells the stock position in the market. The net gain or loss on all transactions is:
A. $100 loss B. $100 gain C. $200 gain D. $600 loss |
The best answer is C. The put contract was purchased at $9 and closed (sold) at $7 for a net loss of $2. The stock was purchased at $52 and sold at $56 for a net gain of $4. The net of all transactions is a 2 point or $200 gain.
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A customer buys 1 ABC Feb 40 Call @ $2 when the market price of ABC is $39.50. The customer's maximum potential loss is:
A. $200 B. $3,950 C. $4,200 D. unlimited |
The best answer is A. In a falling market, a long call position will expire "out the money" and the holder loses the premium paid. This is the maximum potential loss.
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