Top off Final Missed Flashcards
Pass the 7
Which of the following securities do NOT trade on NASDAQ? I Global Market stocks II Options on Global Market stocks III Capital Market stocks IV Options on Capital Market stocks
A. I and III
B. I and IV
C. II and III
D. II and IV
The best answer is D. NASDAQ is divided into 2 tiers of stock listings. The larger NASDAQ listings such as Microsoft or Intel are included in the “Global Market.” The lower tier of smaller stocks is called the NASDAQ Capital Market. NASDAQ does not trade any options.
Under MSRB rules, a registered representative that has been given discretionary authority by a customer, needs specific customer authorization to purchase:
A. non-investment grade municipal bonds
B. bonds where a control relationship exists between the municipal broker-dealer and the issuer whose bonds are purchased
C. municipal bond unit investment trusts
D. municipal bond option contracts
The best answer is B.
Discretionary authority given by a customer allows the registered representative to buy or sell any securities that the representative considers to be suitable for that customer. It makes no difference if the securities selected are not investment grade; nor if the securities are “packaged products” like mutual funds and unit trusts; or “derivatives” like options.
However, the MSRB does require that if a control relationship exists between a broker-dealer and the issuer whose bonds are to be purchased, this can only be done in a discretionary account with specific customer authorization. For example, if the Mayor of a municipality is an Officer of the municipal broker-dealer, a control relationship exists. To buy the municipality’s bonds into discretionary accounts, specific customer authorization is required.
An individual earning $60,000 in 2019 makes an annual contribution of $4,000 to a Traditional IRA. Which statement is TRUE?
A. This person can contribute a maximum of $2,000 to a Roth IRA
B. This person can contribute a maximum of $4,000 to a Roth IRA
C. This person can contribute a maximum of $6,000 to a Roth IRA
D. This person is prohibited from contributing to a Traditional Individual Retirement Account in that year
The best answer is A. The maximum permitted contribution to a Traditional IRA or Roth IRA for an individual is $6,000 total in 2019. This can be divided between the 2 types of accounts. In this case, since $4,000 was contributed to the Traditional IRA, another $2,000 can be contributed to a Roth IRA for that tax year. Also note that this individual’s income is too low for the Roth IRA phase-out (which occurs between $122,000 and $137,000 for individuals in 2019).
A. Exchange of one variable annuity contract for another variable annuity contract
B. Exchange of a life insurance contract for a variable annuity contract
C. Exchange of a variable annuity contract for a life insurance contract
D. Exchange of a life insurance contract for another life insurance contract
The best answer is C.
Section 1035 “tax-free” exchanges permit “like-for-like” exchanges without tax due. Thus, Choices A and D are tax free. It also permits a life insurance policy to be exchanged for a variable annuity without tax due, making Choice B tax-free. This is allowed because an individual might no longer need the death benefit and has a policy with built up cash value. This can be converted into a fixed or variable annuity, with payments to continue for life, without tax due upon conversion. Of course, the IRS is happy about this because the taxable annuity payments will start earlier than the payment of the taxable death benefit.
If a variable annuity is exchanged for any insurance policy, this is NOT a like-kind exchange, and tax will be due on any appreciation in the separate account. The stance of the IRS is that the individual is only doing this to delay receipt of payments that are taxable (because the variable annuity payments would have been received earlier than the taxable death benefit.)
A customer who buys 1 ABC Jan 30 Call and 1 ABC Jan 30 Put would want the market to:
I rise
II fall
III remain flat
A. I only
B. II only
C. Either I or II
D. III only
The best answer is C. A long straddle is the purchase of a call and the purchase of a put, on the same stock at the same strike price and expiration. If the market goes up, the long call goes “in the money” and the long put expires “out the money.” There is potentially unlimited profit on the long call. Conversely, if the market falls, the long put goes “in the money” and the long call expires “out the money”. The profit on the long put keeps increasing as the market falls, all the way to “0.” Thus, the position is profitable if the market either rises or falls. If the market stays the same and does not move, then both positions expire “at the money” and the premium paid is lost.
ABC Corporation has declared a cash dividend to stockholders of record on Thursday, October 24th. The last day to buy ABC shares BEFORE they go ex dividend is?
A. Friday, October 18th
B. Monday, October 21st
C. Tuesday, October 22nd
D. Wednesday, October 23rd
The best answer is C. The regular way ex date is 1 business day prior to the record date. The record date is Thursday, October 24th, therefore the ex date is Wednesday, October 23rd. To buy the shares before they go ex dividend, the shares must be purchased before Wednesday, October 23rd, meaning they must be purchased on Tuesday, October 22nd.
Which statement is TRUE about 529 Plans?
A. Assets may only be used to pay tuition to schools located in the state that established the 529 Plan
B. Contributions into the plan can only be made by the parents of the beneficiary
C. Assets held in the plan can only be used to pay for qualified educational expenses at the college level or higher
D. Withdrawals from the plan used to pay for nonqualified educational expenses may be subject to a penalty tax
The best answer is D.
529 Plan assets can be used to pay for “qualified” higher education expenses without having a federal tax bill and, starting in 2018, can be used to pay for up to $10,000 of below-college level qualified education expenses annually. Qualified education expenses include items such as tuition, books, and room and board. An example of a nonqualified education expense is the purchase of a car used for commuting to school.
Distributions used to pay for nonqualified education expenses are subject to ordinary income tax plus a 10% penalty tax (on the portion of that distribution attributable to the earnings in the account – which represent dollars that have not been taxed). Students may attend schools both in-state and out-of-state. Finally, 529 Plan contributions can be made by anyone.
The FINRA 5% Policy applies to which of the following?
I Mark-ups charged on purchases effected as a principal in over-the-counter securities transactions
II Mark-downs charged on sales effected as a principal in over-the-counter securities transactions
III Commissions charged on purchases effected as agent in over-the-counter securities transactions
IV Commissions charged on sales effected as agent in over-the-counter securities transactions
A. I only
B. I and II only
C. III and IV only
D. I, II, III, IV
The best answer is D. The FINRA 5% Policy applies to both mark-ups and mark-downs earned in principal transactions effected in the secondary market as a dealer, as well as to commissions earned in agency transactions effected in the secondary market. A firm earns a “mark-up” when it sells a security out of its inventory to a customer, while it earns a “mark-down” when it buys a security into its inventory from a customer. In these cases, firm acts as a dealer in the transaction. A firm earns a commission when it matches a customer who wishes to buy with someone other than that firm who wishes to sell (and vice-versa). In this case the firm acts as a broker.
The Policy states that such commissions and mark-ups (and mark-downs) must be “fair and reasonable,” with 5% as a guideline - not a rule. In determining a fair and reasonable charge, a number of factors are considered, including the size of the trade; the dollar amount involved; the difficulty of the trade; and the level of service provided by the firm.
A "saucer" formation is: I bullish II bearish III a reverse upward trend IV a reverse downward trend
A. I and III
B. I and IV
C. II and III
D. II and IV
The best answer is B. A saucer formation is bullish since the market has bottomed out and is now moving back upwards. It is a downtrend that has reversed itself.
All of the following callable municipal bonds are trading at an 8% basis. Which is MOST likely to be called?
A. 6 3/4% coupon rate callable at 103 in 2019
B. 7 1/2% coupon rate callable at 103 in 2019
C. 8 3/4% coupon rate callable at 100 in 2019
D. 8 3/4% coupon rate callable at 105 in 2019
The best answer is C. An issuer is most likely to call bonds which have high interest rates (high financing cost to the issuer) and low call premiums (the least expensive for the issuer to call in these bonds).
Which ratio is the least stringent test of liquidity?
A. Cash assets ratio
B. Quick ratio
C. Acid test ratio
D. Current ratio
The best answer is D. The cash assets ratio is the ratio of cash to current liabilities; this is the most stringent test of liquidity. The quick ratio (or “acid test”) is the ratio of current assets - inventories and prepaid expenses to current liabilities. This is a less stringent test than the cash assets ratio. The current ratio is the ratio of all current assets to current liabilities. This is the least stringent test of liquidity.
The Specialist (DMM) can stop stock for: I proprietary orders II public orders III brief time periods IV that trading day
A. I and III
B. I and IV
C. II and III
D. II and IV
The best answer is C. The Specialist (now renamed the DMM - Designated Market Maker) can only stop stock - guaranteeing a price for a brief time period to a floor broker - for public orders. This is a Specialist/DMM courtesy function that allows floor brokers to “shop around” for the best price, knowing that they have a guaranteed price from the Specialist/DMM in hand if they cannot locate a better deal.
Timing is the important factor in which portfolio management strategy?
A. Strategic allocation
B. Tactical allocation
C. Rebalancing
D. Indexing
The best answer is B. Strategic portfolio management is the determination of the percentage allocation to be given to each asset class - for example a portfolio might be strategically allocated as follows:
Money Market Instruments 10% Corporate Bonds 30% Large Cap Equities 50% Small Cap Equities 10% Tactical asset management is the permitted variance within each allocation percentage. For example, Large Cap equities are allocated 50%, but the manager may be tactically allowed to lower this percentage to, say, 40% or raise it to 60%. Thus, if the manager believes that Large Cap equities will underperform the market, he or she can lower the allocation to 40%; and if the manager believes that they will outperform the market, he or she can raise the allocation to 60%. This gives the manager some ability to "time the market" when conditions are overbought or oversold.
All of the following options orders to sell calls are permitted EXCEPT a(n):
A. individual selling naked calls in a discretionary account
B. investment company selling calls against securities in its portfolio
C. corporation selling calls against its underlying stock
D. custodian selling calls against securities in a custodian account
The best answer is C. Issuers are prohibited from selling call options against their underlying stock. If they were exercised, they could simply issue more shares to deliver on the exercise notice, diluting existing stockholders’ equity. Furthermore, the issuance of the new shares would require a registration with the SEC. Thus, issuers are prohibited from selling calls against their own stock.
There is no prohibition on investment companies selling calls against stocks held in their portfolios - this is a very popular strategy for enhancing income. Custodians can also sell covered calls against securities held in the custodian account to increase income. In a discretionary account, all orders are permitted as long as a written power of attorney is received from the customer and the trades are suitable for the account.
Portfolio margining is:
I risk based
II strategy based
III calculated using Regulation T rules
IV calculated using probability-based loss percentages
A. I and III
B. I and IV
C. II and III
D. II and IV
The best answer is B. Portfolio margin is a “risk” based margin method that gives substantially lower margin requirements for lower risk positions. It recognizes that if positions are hedged, such as a stock position hedged by the purchase of a put, then the loss potential of the combined position is much lower. Portfolio margin produces a much lower margin requirement for such a hedged position (the margin is basically equal to the maximum loss) than the separately calculated margins for each position that Regulation T would require. Regulation T is a so-called “strategy based” margin method, that applies a fixed margin percentage to each strategy separately. It does not account for the fact that one position may offset the risk of another position, which is what portfolio margin recognizes. Also note that portfolio margin can only be used by institutional or wealthy sophisticated individual customers.
If a corporation decides to split its stock, which of the following will occur after the split?
I The Price / Earnings Ratio changes
II The Price / Earnings Ratio remains the same
III The Earnings Per Share changes
IV The Earnings Per Share remains the same
A. I and III
B. I and IV
C. II and III
D. II and IV
The best answer is C. A stock split or dividend will have no effect on the Price / Earnings ratio of an issuer. The market price is adjusted on “ex date” for the split; and the earnings per share are restated downward to reflect the increased number of shares that will be issued. Since both decrease proportionately, the ratio stays the same.
A customer with an existing margin account believes that the market is headed for a long period of decline and wishes to speculate on this with PDQ stock and options. Because of the prevailing bearish sentiment, put premiums have reached new heights and call premiums are at new lows. PDQ stock is currently trading at $40 per share. PDQ Jun 40 Calls are trading at $4 and PDQ Jun 40 Puts are trading at $12. If the customer wishes to speculate on a market decline with the smallest capital commitment, the customer should:
A. Buy 1 PDQ Jun 40 Put in a margin account
B. Buy 1 PDQ Jun 40 Call in a margin account
C. Buy 100 shares of PDQ at $40 in a margin account and sell 1 PDQ Jun 40 Call
D. Sell short 100 shares of PDQ at $40 in a margin account and sell 1 PDQ Jun 40 Put
The best answer is D. This customer wants to speculate on a market decline with the smallest capital commitment. If the customer buys a PDQ Jun 40 Put (a bear strategy), the customer must pay a premium of $12 = $1,200. If the customer shorts the stock at $40, a $2,000 margin deposit is required. By selling 1 PDQ Jun 40 Put, the customer collects $1,200 in premiums. This is a “covered” put writer and the premium received can be used to offset the $2,000 margin requirement for a net deposit of $800. This is a smaller capital commitment than buying the put.
In a falling market, the short put goes “in the money” and is exercised, forcing the customer to buy the stock at $40. Since the customer already sold the stock at $40, there is no gain or loss on the stock position. However, the $1,200 received in premiums is retained and is the gain. On the other hand, if the market rises, the customer can lose an unlimited amount on the short stock position (the short put expires “out the money”). The customer would not buy a call, since this is a bullish strategy. The customer would not buy the stock and sell a call (a neutral strategy), since in a down market, the customer would lose the value of the stock (net of the collected premium).
A customer owns 1,000 shares of XYZZ stock, purchased at $40 per share. The stock is now at $45, and the customer has become neutral on the stock, but believes that the stock still has good long term growth potential. The client asks her representative for a “conservative recommendation” that will give her a positive portfolio return. The client should be told to:
A. sell 10 XYZZ 45 Call Contracts
B. sell 10 XYZZ 45 Put Contracts
C. sell 1,000 shares of XYZZ and sell 10 XYZZ 45 Call Contracts
D. sell 1,000 shares of XYZZ and sell 10 XYZZ 45 Put Contracts
The best answer is A. The customer purchased the stock at $40 and it is now trading at $45. The customer is now neutral on the stock, but thinks it is a good long term investment. So the stock should not be sold (eliminating Choices C and D). If the customer sells calls against the stock position (covered call writer), the customer will generate extra premium income in the portfolio. This is a conservative income strategy. The risk here is that if the stock rises immediately, the stock will be called away and the customer will not enjoy the upside gain. If the stock falls, the customer loses on the stock (same as before), reduced by the collected premiums.
The sale of puts will also produce premium income. If the stock rises, the puts expire and the customer still owns the stock, but if the stock drops, the short puts will be exercised, obligating the customer to buy the stock (in addition to the shares already owned). Thus, in a falling market, the customer will lose twice as fast! This is not a “conservative” strategy.
A customer owns 200 shares of ABC, purchased 2 years ago at $50 per share. The current market value of ABC stock is $60 per share. If the customer gifts the stock to a charity, the result is:
I A tax deduction to the donor of $50 per share
II A tax deduction to the donor of $60 per share
III A cost basis to the gift recipient of $50 per share
IV A cost basis to the gift recipient of $60 per share
A. I and III
B. I and IV
C. II and III
D. II and IV
The best answer is D. If a gift of securities is made to a charity, the donor gets to deduct the fair market value of the securities from his or her taxes (as long as the securities have been held at least 1 year). The cost basis to the recipient is the market value at the time of the gift.
A general obligation bond is purchased in the secondary market at a discount and is held to maturity. The holder elects not to accrete the bond discount for tax purposes. Which statements are TRUE?
I The interest income is subject to Federal income tax
II The interest income is not subject to Federal income tax
III The discount is taxed as interest income
IV The discount is not taxed
A. I and III
B. I and IV
C. II and III
D. II and IV
The best answer is C. The interest income received from investments in “public purpose” municipal bonds is exempt from Federal income tax. However, the market discount on such bonds is taxable as interest income received. This is nothing more than a “tax grab” by the Federal government - the idea being that wealthy people buy municipal bonds, so if there is a way that they can be taxed without jeopardizing their basic Federal income tax-free status, why not? The holder can either accrete the discount annually as taxable interest income earned and adjust the cost basis of the bond upwards by this amount; or can wait until the bond is sold or matures to report the accumulated “earned” discount as taxable interest income at that point (this is the better choice from a tax standpoint).
A customer is long 400 shares of fully paid XYZ stock, valued at $150 per share. The customer sells “short against the box” another 400 shares of XYZ. XYZ is listed on the New York Stock Exchange. The minimum maintenance margin requirement is:
A. 0
B. $3,000
C. $57,000
D. $60,000
The best answer is B. The margin in an arbitrage account is 5% minimum maintenance on the long side under FINRA rules. There is no Regulation T requirement, since the customer has no risk - his net position = “0.” Since the market value of the securities is $60,000, the minimum margin is 5% = $3,000. The customer can borrow the remaining $57,000.
The Vice-President of ACME Corporation, an NYSE listed firm, places an order to buy 10,000 shares of ACME common at the market. 3 months later, ACME stock’s price has increased by 20% and the officer places an order to sell. Which statements are TRUE?
I The sale of the stock is subject to Rule 144
II The stock cannot be sold unless it has been held, fully paid, for 6 months
III The sale is prohibited until a “waiver of liability” has been obtained from the issuer
IV The officer must forfeit the profit on the sale
A. I and II only
B. I and IV only
C. II and III only
D. I, II, III, IV
The best answer is B. Since the seller is an officer of that company, he is a control person under Rule 144, and any sales must conform with the Rule. Rule 144 requires that restricted shares be held for 6 months, fully paid, before being sold. Since these shares are registered, they are not “restricted” and the 6-month holding period requirement does not apply. There is no requirement for a “waiver of liability” from the issuer. Since the officer did not hold the appreciated securities for at least 6 months, he or she has a “short swing” profit that must be paid back to the issuer under the Securities Exchange Act of 1934 “Insider” rules.
A customer has an existing margin account that is restricted by $400. The customer receives a $1,000 dividend on securities held in the account. The customer can immediately withdraw:
A. 0
B. $100
C. $600
D. $1,000
The best answer is D. Cash dividends received from stock held in a margin account (whether the account is restricted or not) are applied against the debit and are 100% credited to SMA for 30 days. During this period, the customer can take out the dividend in full, restoring the debit to its original higher amount. After 30 days, if the customer does not take the dividend, the credit resulting from the dividend is automatically cleared from SMA and permanently reduces the debit.
Under the flow of funds in a revenue bond trust indenture, the first use of NET revenues is to pay:
A. operation and maintenance
B. debt service
C. debt service reserve
D. reserve maintenance fund
The best answer is B. This is tricky! Net revenues are defined as gross revenues less operation and maintenance costs. Once operation and maintenance are covered, the net revenues that remain are first used to pay debt service.
A Japanese company has entered into a contract to deliver goods to New York, payable in U.S. dollars upon delivery. To hedge the position using the PHLX World Currency Options market, the Japanese company should:
A. buy Japanese Yen calls
B. buy Japanese Yen puts
C. sell Japanese Yen calls
D. sell Japanese Yen puts
The best answer is A. The Japanese exporter is being paid in U.S. dollars. If the dollar weakens against the Japanese Yen, then the exporter will receive fewer Japanese Yen when he or she converts the U.S. Dollars received into Yen. To protect against an adverse move, the exporter should buy U.S. Dollar Puts - however this is not a choice, since no U.S. Dollar options are traded on the PHLX!
The risk here is that the Dollar will fall against the Yen; this is the same as the Yen strengthening against the Dollar. Thus, an equivalent hedge would be to buy Japanese Yen Calls. If the Yen appreciates against the Dollar, the gain on the Yen Calls would offset any loss on the Dollars received in payment.
A currency index call or put would not move at the same rate as a single currency, making this less useful as a hedge. Furthermore, there are no PHLX traded currency index options.
Instead of buying Yen calls, the exporter could sell Yen puts; and if the Yen appreciates, the puts would expire and the premium received could be used to offset any loss on the Dollars received in payment. However, this only hedges the importer to the extent of the premium collected; therefore, buying Japanese Yen calls is the better choice.
Which of the following statements are TRUE regarding corporate bonds purchased in the secondary market at a discount?
I The discount must be accreted
II The discount may be accreted
III The discount may be taxed as a long term capital gain if held for over 1 year
IV The discount will be taxed as ordinary income
A. I and III
B. I and IV
C. II and III
D. II and IV
The best answer is D. Corporate bonds bought in the secondary market at a discount are termed “market discount bonds.” There is an option of accreting the discount and paying tax annually on the accretion amount at full tax rates; or of waiting until the bond is redeemed or sold to pay the tax on the earned market discount at full tax rates. If the holder accretes the bond and holds it until maturity, there is no capital gain or loss, since the entire discount has been accreted and taxed over the bond’s life. If the holder opts not to accrete the bond, the bond will be redeemed at par and the entire market discount is taxed as interest income received at maturity (not as capital gains).
An issuer making a tender offer for its non-convertible bonds and later increases the price being offered by 10%. Which statement is TRUE?
A. The increase in the tender price has no effect on the life of the offer
B. The increase in the tender price increases the life of the offer by another 5 business days
C. The increase in the tender price increases the life of the offer by another 10 business days
D. The increase in the tender price increases the life of the offer by another 20 business days
The best answer is B. An issuer would consider tendering for its outstanding bonds when it has debt outstanding that is not callable, but it has excess funds that it believes would be best used to reduce the amount of debt outstanding.
A tender offer is made to the bondholders, who have the choice of tendering or not. Unlike stock tender offers, where the initial offer must be held out for 20 business days, here the initial life of the offer is only 5 business days. (The life is shorter because this tender offer is being made by the issuer, not an outsider.) Unlike stock tender offers, where there is typically a contingency that a minimum number of shares be tendered, these are “any and all offers” - so if a bondholder tenders, he or she will receive the tender price for the bonds.
If the issuer does not get enough bonds tendered, the issuer can “sweeten” the offer. This extends the offer by another 5 business days, and the sweetened price is given to all bonds tendered. (While the initial offer specifies a price to be paid, or a price based on a spread to a benchmark debt security, the actual price paid on the tendered bonds is not set until that last business day of the offer).
Growth investors:
A. seek to find investments that are undervalued by the market
B. determine the value of a security through fundamental analysis
C. invest in securities included in growth funds
D. make their investment decision based upon the market performance of the security
The best answer is D. Growth investors select investments based simply on growth in earnings or growth in market price; on the assumption that these will always be the best performing investments.
A municipal dealer quotes a 4 year, 4% term revenue bond at 98. The yield to maturity is:
A. 4.25%
B. 4.55%
C. 4.75%
D. 5.00%
The best answer is B. The formula for yield to maturity is:
Annual Income + Capital Gain (discount bond) / Average Bond Value = Yield to Maturity
This bond has a coupon rate of 4% = 4% of $1,000 par = $40 of annual income. The bond is purchased at 98% of $1,000 par = $980; and will mature at $1,000 in 4 years, Thus, the $20 capital gain is earned over 4 years for an annual gain of $20 / 4 = $5 per year.
The bond is purchased at $980 and matures at $1,000, for an average value of $980 + $1,000 / 2 = $990.
The YTM is: $40 + $5
$990 = 4.545% = 4.55%
A customer sells 1 ABC Jan 50 Call @ $3 and sells 1 ABC Jan 50 Put @ $6 when the market price of ABC is $48. At which market prices is the position profitable? I $44 II $42 III $40 IV $38
A. I and II only
B. II and III only
C. I and IV only
D. III and IV only
The best answer is A. A short straddle is the sale of a call and the sale of a put on the same stock at the same strike price and expiration. If the market moves up, the call will be exercised. If the market moves down, the put will be exercised. If the market stays at the strike price, then both contracts expire “at the money,” and the premiums collected represent the maximum gain. Since $9 in premiums was collected, the market must move down by more than 9 points to lose on the put; or must move up by more than 9 points to lose on the call. Thus, the position is unprofitable if the market moves below $50 - $9 = $41 per share; or moves above $50 +$9 = $59 per share. The position would be profitable between $42 and $58 per share. To summarize, the breakeven formulas for a short straddle are:
Upside Breakeven = Call Strike + Combined Premium
Downside Breakeven = Put Strike - Combined Premium
The maximum amount that can be invested by a client in a single issue under Regulation Crowdfunding is:
A. $100,000
B. $500,000
C. $1,000,000
D. $5,000,000
The best answer is A. The maximum amount that can be invested in a single offering under Regulation Crowdfunding is $100,000. The maximum size of single offering under the rule is $1,000,000.
(Test Note: The maximum investment amount and the maximum amount that can be raised are subject to an inflation adjustment every 5 years. In April 2017, the maximum investment amount was increased to $107,000 and the maximum amount that can be raised was adjusted to $1,070,000. For the exam, know the base amounts and the fact that they are indexed for inflation periodically.)
A floor broker on the Chicago Board Options Exchange:
I can hold an inventory of securities
II cannot hold an inventory of securities
III can accept all orders
IV can accept only day and GTC orders
A. I and III
B. I and IV
C. II and III
D. II and IV
The best answer is C. The floor broker is used to execute transactions on CBOE for retail member firms. The floor broker can execute a trade with another floor broker, a Market Maker or an Order Book Official, earning a fee for each transaction. Floor brokers do not hold an inventory - this is the function of a market maker. They can accept all orders, and are obligated to find the best available market.
Changes in which of the following would affect a corporation’s “alpha” coefficient?
A. Standard and Poor’s 100 Index volatility
B. Advance / Decline Ratio
C. Corporate Management
D. Short Interest
The best answer is C. The “alpha” coefficient is a measure of so-called stock specific risk, that is the relative risk of that stock’s price moving positively or negatively, independent of general market movements. (The “beta” coefficient is a measure of a stock’s price volatility relative to the market as a whole). Thus, the events that would affect “alpha” are those that relate solely to that company or industry, such as a change of corporate management. The other measures given are technical indicators of the market as a whole, and would have no impact on “alpha.”
Trading in the Interbank market will affect all of the following directly EXCEPT:
A. foreign currency prices in terms of U.S. dollars
B. American Depositary Receipt prices in terms of U.S. dollars
C. future economic growth
D. future trade deficit or surplus figures
The best answer is B.
Foreign currencies trade in the “Interbank” market. If the dollar declines against foreign currencies, U.S. goods become cheaper to foreigners. This will stimulate exports and domestic economic growth. If the dollar rises against foreign currencies, foreign goods become cheaper in the U.S. This will stimulate imports, and shift production out of the U.S. to other countries.
American Depositary Receipts are vehicles for foreign securities to be traded in the United States. ADRs are only traded in the United States, and are denominated in U.S. dollars, so there is no direct effect of foreign currency price movements on ADR prices (though an argument can be made that the foreign stock held in trust pays dividends in the foreign currency; and that these dividends are converted to U.S. dollars to be paid to ADR holders; that currency price movements have some impact on ADR values).
All of the following statements are true about listed securities EXCEPT:
A. listed securities trade in the Second Market
B. under Regulation T, all listed securities are marginable
C. listed securities are subject to Regulation SHO
D. listed companies must be registered with, and report their results to, the SEC
The best answer is A. Listed securities (those listed on an exchange) are marginable under Regulation T. Under the Exchange Act of 1934, Regulation SHO requires that before any equity security (either listed or unlisted) can be sold short, the member firm must affirmatively determine that the security can be borrowed and delivered on settlement. This is called the “locate” requirement. Listed securities trade in the first (exchanges), third (OTC trading of exchange listed securities) and fourth (direct trades between institutions via ECNs) markets. The second market is trading of unlisted securities over-the-counter. These are OTCBB and Pink Sheet issues. Listed companies must register with, and report their results to, the SEC.
Which statement is TRUE about a Certificate of Participation (COP)?
A. COPs are subject to statutory debt limits
B. COPs are backed by a pledge of lease revenues
C. COPs have a higher credit rating than G.O. bonds of the same issuer
D. COPs are full faith and credit obligations of the issuer
The best answer is B. As municipalities reached their debt limits with G.O. bond issuance, they found it harder and harder to get voter approval to raise limits to sell additional G.O. bonds (think of Proposition 13 in California that capped property taxes to almost no increase unless the property was sold). To get around this, the COP - Certificate of Participation - was invented and COP issuance is now greater than G.O. bond issuance in many states.
A COP is issued by a state entity where lease revenues are pledged to back the issue. The lease payments are received from a project such as a university dormitory, prison, municipal office building, municipal transit system, etc. The “difference” is that the lease payment is made based on the governing body making an annual appropriation from tax collections, and it is not “legally” obligated to do so, hence it is not really a bond. Rather, it is a security that gives the holder a share of “revenue” if the appropriation is made (which it will be, otherwise that issuer’s credit rating would be trashed).
COP issuance has increased greatly over the years because they are easier to issue than G.O. debt (no pesky debt limits or voter approval to deal with) - but they are sold at a slightly higher yield, because they have more credit risk.
Generally, which of the following statements are TRUE regarding the taxation of a municipal security?
I Capital gains from selling municipal bonds are taxable only on the State and Local levels
II Capital gains from selling municipal bonds are fully taxable
III Interest income received from municipal bonds is taxable only on the State and Local levels
IV Interest income received from municipal bonds is fully taxable
A. I and III
B. I and IV
C. II and III
D. II and IV
The best answer is C. Capital gains on municipal securities are taxable at the Federal, State and Local levels. Only the interest income from municipal securities is exempt from Federal income tax; it is still subject to State and Local tax unless the bond is purchased by a resident of that State.
Which of the following terms describe rights? I Exercisable II Negotiable III Redeemable IV Giftable
A. I and IV only
B. II and III only
C. I, II, IV
D. I, II, III, IV
The best answer is C. Rights are exercisable, negotiable (as they can be sold), and giftable (as they can be given to someone as a gift). Rights are not redeemable with the issuer.
A mutual fund manager of a “high technology” fund wishes to hedge the portfolio against a market decline. The best strategy is to buy:
A. broad-based calls
B. broad-based puts
C. narrow-based calls
D. narrow-based puts
The best answer is D. A “high-technology” fund could be hedged against loss by the purchase of index put contracts. A narrow-based index of high technology stocks would have a beta that more closely matches the fund’s characteristics than a broad-based index (such as the OEX or XMI, which are principally composed of blue-chip stocks).
A customer buys 1,000 shares of ABCD $25 par 8% cumulative preferred stock. This preferred issue pays quarterly dividends. This year, it missed the first 3 quarterly dividends. In the 4th quarter, it paid a common dividend of $.25 per share. In order to do this, it must have paid this preferred shareholder:
A. $400
B. $500
C. $1,600
D. $2,000
The best answer is D. This customer owns 1,000 shares of $25 par cumulative preferred, for a face value of $25,000. In order to have paid the common dividend,the company must have paid the preferred shareholder the 3 missed quarterly dividends in addition to the current quarterly dividend. Therefore, it must pay the annual dividend amount of 8% of $25,000 = $2,000 to this preferred shareholder.
Municipalities would issue tax exempt commercial paper for all of the following reasons EXCEPT to:
A. meet a temporary cash shortage due to unforeseen extraordinary expenses
B. refund an outstanding bond issue
C. provide construction period financing that will be permanently financed by a future bond sale
D. smooth out collections of funds that are normally subject to seasonal fluctuations
The best answer is B. Most municipalities finance short term needs through BANs (Bond Anticipation Notes), TANs (Tax Anticipation Notes), RANs (Revenue Anticipation Notes) and TRANs (Tax and Revenue Anticipation Notes). However, commercial paper could be used by a municipality to finance short term cash shortages caused by slow tax collections or unforeseen extraordinary expenses (these could also be financed by tax anticipation notes). Also, commercial paper could be used for an interim construction loan, because when a building is under construction, the long term financing may not yet be in place (of course, the municipality could also finance the construction through a bond anticipation note). Commercial paper cannot be used for long term financing such as a bond refunding.
Which of the following statements are TRUE about initial and minimum maintenance margins for stock positions in a short margin account?
I FINRA sets the 50% initial margin requirement
II The FRB sets the 50% initial margin requirement
III FINRA sets 30% minimum maintenance requirement
IV The FRB sets the 30% minimum maintenance requirement
A. I and III
B. I and IV
C. II and III
D. II and IV
The best answer is C. Initial margin for a short margin account is set by the Federal Reserve (FRB is the Federal Reserve Board) under Regulation T at 50%. Maintenance margin is set by FINRA at 30%.
A customer sells 1 ABC Jan 40 Call @ 8 and buys 1 ABC Jan 55 Call @ 2 when the market price of ABC is 43. The customer will profit or breakeven at all of the following prices EXCEPT:
A. 40
B. 44
C. 46
D. 50
The best answer is D. When the market price is at 40, both contracts will expire and the customer will receive a net credit of 6 points. When the market is at 44, the 40 call will be exercised, forcing the customer to buy stock at the market (44) and to deliver at 40 for a loss on the stock position of 4, but he still has a net credit from the option contracts of 6. So the customer still has a gain of: 6 - 4 = 2 point gain. When the market is at 46, the customer must deliver at 40 (once again, the 40 call is exercised). He or she has to go to the market to get the stock at 46. This is breakeven since he loses 6 points on the stock position, but he had a net credit from the premiums of 6. The customer starts to lose at any dollar price above $46. To summarize, the breakeven formula for a short call spread is:
Short Call Pread Breakeven = Short Strike Price + Credit
A customer has purchased 1,000 shares of ABC stock at $58 per share, paying a commission of $2 per share for the transaction. ABC stock declares a 20% stock dividend. When the dividend is paid, the tax status of the investment is:
A. 1,000 shares held at a cost basis of $58 per share
B. 1,000 shares held at a cost basis of $60 per share
C. 1,200 shares held at a cost basis of $58 per share
D. 1,200 shares held at a cost basis of $50 per share
The best answer is D. There is no tax due when a stock dividend is paid; instead the investor gets more shares; with each share worth proportionately less. The payment of a stock dividend increases the number of shares held by the investor and the cost basis must be reduced accordingly, since each share is theoretically worth less after the stock dividend is paid. The customer will have 1,000 shares x 1.20 = 1,200 shares after the stock dividend is paid. Each share originally had a cost basis of $60 ($58 price plus $2 commission). After the stock dividend is paid, the cost basis is adjusted to $60/1.20 = $50 per share.
A customer sells short 200 shares of ABC stock in a margin account. ABC declares a 5% stock dividend. How many shares must be purchased to close out the short position?
A. 190
B. 200
C. 210
D. 250
The best answer is C. Because the shares that were sold have been “borrowed,” they must be replaced. The former owner (lender) of the shares has no idea that they are gone. The lender has received dividends on the stock because the short seller has paid them to him. The lender will also receive the stock dividend he deserves because the short seller pays this to him as well. The short seller must deliver a total of 200 x 1.05 = 210 shares to cover when he or she buys in the position.
All of the following statements are true regarding the effect of the purchase of Treasury Stock EXCEPT:
A. the number of outstanding shares is reduced
B. the earnings per share is increased
C. the market price of the stock will increase
D. the number of authorized shares will be reduced
The best answer is D. Treasury stock is deducted from outstanding shares and since outstanding shares are reduced, earnings per share increases. As earnings per share rises, this makes the stock more attractive to investors, who will bid up the stock’s price in the market. The purchase of Treasury Stock has no effect on authorized shares.
Which securities will trade with accrued interest?
A. Negotiable Certificates of Deposit
B. Treasury Bills
C. Banker’s Acceptances
D. Treasury Receipts
The best answer is A. Negotiable CDs that mature in 1 year or less are issued at par and mature with accrued interest. Those issued for longer periods pay interest semi-annually and trade with accrued interest. The other choices are all original issue discount obligations, which trade flat.
On the same day, a customer buys 100 shares of XYZ stock at $60 and sells 1 XYZ Nov 60 Call @ $6 and sells 1 XYZ Nov 60 Put @ $2. This strategy is known as a:
A. covered spread
B. covered straddle
C. covered call writer
D. covered combination
The best answer is B. The customer has created a long stock/short straddle position. This is termed a “covered straddle,” however this name is not really accurate. The short call is covered by the long stock position, however the short put is naked. This is a neutral to slightly bullish market strategy.
If the market stays the same, both the short call and the short put expire, leaving the customer with a gain of $800 in total collected premiums.
If the market rises, the short call is exercised and the customer delivers the stock bought at $60 for the same $60 price. The short put expires “out the money” and the customer keeps the $800 in collected premiums.
If the market drops, the customer loses on both the long stock position and the short naked put (since the short put will be exercised, forcing the customer to buy another 100 shares of stock). The customer can lose the full value of the 200 shares owned if the market falls to “0,” net of the premium collection.
Which of the following are functions of a corporation’s Board of Directors?
I Mailing dividend payments to shareholders
II Canceling old shares and issuing new shares
III Preparing and mailing proxies
IV Setting the Declaration Date
A. IV only
B. I, III, IV
C. I, II, III
D. I, II, III, IV
The best answer is A. The declaration date is set by the Board of Directors of the company, not by the transfer agent. The transfer agent mails voting materials (proxies), annual reports, dividend payments to the shareholders, and cancels old shares and issues new shares.
Which of the following statements are TRUE about variable annuities?
I To sell variable annuities, salespersons must be registered with FINRA
II To sell variable annuities, salespersons do not have to be registered with FINRA
III To sell variable annuities, salespersons must be registered with the State Insurance Commission
IV To sell variable annuities, salespersons do not have to be registered with the State Insurance Commission
A. I and III
B. I and IV
C. II and III
D. II and IV
The best answer is A. To sell a variable annuity, salespersons must be registered with FINRA with either a Series 6 (mutual funds and variable annuities only) license or Series 7 (general securities) license. In addition, the salesperson must be registered with the State Insurance Commission (since these products are sold by insurance companies; and insurance companies are regulated only at the state level).
Which statements are TRUE when comparing a full power of attorney given in a brokerage account to a limited power of attorney?
I The individual given a full power of attorney can draw checks only
II The individual given a full power of attorney can enter orders and draw checks
III The individual given a limited power of attorney can draw checks only
IV The individual given a limited power of attorney can enter orders only
A. I and III
B. I and IV
C. II and III
D. II and IV
The best answer is D. A person holding a limited power of attorney in a brokerage account can enter orders but cannot draw checks. A person holding a full power of attorney can do both - but any checks must be drawn to account name - not to the name of the third party.
Which of the following is NOT defined as an Outside Business Activity by FINRA?
A. A registered representative who helps out in his or her family’s restaurant at night, only earning tips
B. A registered representative who is elected to the Board of Directors of her cooperative apartment house
C. A registered representative who volunteers to make solicitations of contributions to her church
D. A registered representative who teaches a course on financial literacy at a local community college
The best answer is C. FINRA requires that associated persons give written notice to their employer and receive written approval from their employer, to serve as an officer, director, partner or employee of another business organization. In addition, such an OBA (Outside Business Activity) must be reported on that individual’s U-4 Form. This information then flows into that registered representative’s BrokerCheck report and shows as an OBA on the report.
The intent of the OBA disclosure in BrokerCheck is that a potential customer can assess how much time a representative is devoting to his or her business as a representative, as opposed to how much time the representative is devoting to Outside Business Activities.
Being compensated is not the sole determinant of whether an activity is an OBA. If the activity can reasonably be expected to lead to additional business for that representative, it is an OBA. Teaching a course in night school at a college could be a way to get new client leads, and hence is an OBA. Being on the Board of Directors of a cooperative apartment house, while not compensated, puts the representative in a position to “steer” the Board when it makes a decision as to investing the coop’s reserve and operating funds, so it is an OBA. Working in the family restaurant for tips is clearly an OBA.
Note that volunteer charitable work, where there is no “quid pro quo” arrangement, is not an OBA. Rather, it is simply doing a good thing!
Which statements are TRUE about variable annuities?
I Contributions to the separate account are tax deductible
II Contributions to the separate account are not tax deductible
III Earnings in the separate account build tax-deferred
IV Earnings in the separate account are taxable each year
A. I and III
B. I and IV
C. II and III
D. II and IV
The best answer is C. There is no tax deduction for contributions made to a variable annuity contract. The major advantage is the tax-deferred build-up of earnings in the separate account.
A bond that was originally sold at par is now trading in the market at a premium. The bond is called at par. This action will be a detriment to the:
A. issuer
B. bondholder
C. underwriter
D. broker
The best answer is B. If the bond could be trading at a premium, this means that yields have dropped. The issuer can call in the bonds at par and refund the issue at lower current market interest rates, and since the call is at par, the issuer has no cost in calling the bonds.
The bondholder, on the other hand, is receiving par value for the bonds and now must reinvest those funds in new bonds to keep receiving income. The only problem is that yields have dropped, so the bondholder will now get less income. Furthermore, the bondholder gets no compensation for this because the bonds are called at par (there is no call premium).
When comparing a long put to a long put spread:
A. both have unlimited gain potential in a rising market
B. both have ever increasing gain potential in a falling market
C. the long put spread has a lower gain potential in a falling market
D. the long put spread has a higher gain potential in a falling market
The best answer is C. A purchase of a “put spread” is similar to simply buying a put. Both strategies are profitable in a falling market. The difference is that a long put gives ever increasing downside gain potential - all the way to “0.” A long put spread gives limited downside gain potential (for a lower premium paid).
Which statements are TRUE regarding reverse repurchase agreements?
I The bank dealer is the buyer of the underlying securities
II The bank dealer is the seller of the underlying securities
III The Federal Reserve is the buyer of the underlying securities
IV The Federal Reserve is the seller of the underlying securities
A. I and IV
B. II and III
C. I and II
D. III and IV
The best answer is A. In a reverse repurchase agreement, the Federal Reserve drains reserves from dealer banks, tightening credit. It does this by selling eligible securities to the banks, who buy them for cash. Thus the banks are drained of excess cash and credit levels are reduced.
Which orders guarantee execution but not price? I Buy Limits II Buy Stops III Sell Limits IV Sell Stops
A. I and II
B. III and IV
C. I and III
D. II and IV
The best answer is D. If a “Stop” order is elected, it becomes a market order to be filled at the first opportunity. Thus, the actual price at which the order is executed is not known. On the other hand, a “Limit” order specifies that the execution must comply with the limit price specified or better. Thus, limit orders are filled at that price or better.
A technical analyst has identified a resistance level for ABC stock at $81 and a support level at $75. The stock is currently trading at $77 and the analyst expects the stock to break the support level. Which order is appropriate to profit if the support level is broken?
A. Sell (short) 100 ABC @ $74 Stop
B. Sell (short) 100 ABC @ $76
C. Sell (short) 100 ABC @ Market
D. Sell (short) 100 ABC @ $76 Stop
The best answer is A. A stock breaks a “support” level as the market falls. If the stock breaks this level ($75), the investor feels that the price will plummet. To profit, he wants to sell short if the market breaks $75 on the downside, so the order is to sell (short) @ $74 Stop. The order must be a sell stop because it is placed lower than the current market. If the market falls to $74, the order is triggered and becomes a market order to sell short. The order can then be executed on the next trade. Once the short stock position is established, the customer believes that the price will plummet, and that the stock can be purchased later to cover the short sale at a much lower price for a profit.
A customer who purchases a “call spread” believes that the market will:
A. rise
B. fall
C. remain neutral
D. be volatile
The best answer is A. A purchase of a “call spread” is similar to simply buying a call. The difference is that a long call gives unlimited upside gain potential; a long call spread gives limited upside gain potential (for a lower premium paid).
The Securities Exchange Act of 1934 established “self regulatory organizations” (SROs) and empowered these organizations to do all of the following EXCEPT:
A. set guidelines for fair dealing with the public
B. establish commission rates to be charged to the public
C. take administrative action against broker-dealers that violate industry regulations
D. establish arbitration procedures to settle intra-industry disputes
The best answer is B. Originally, the exchanges, such as the NYSE and NASD (National Association of Securities Dealers) were both marketplaces and regulators of their member firms. This changed when FINRA was created in 2006. Each exchange now only regulates its trading operation; and FINRA regulates the broker-dealer member firms and is its own SRO (Self Regulatory Organization). FINRA sets guidelines for fair dealing with the public with its Conduct Rules; it handles complaints against broker-dealers for securities law violations under the Code of Procedure; it can take administrative action against broker-dealers that violate industry regulations; and it establishes arbitration procedures to settle intra-industry disputes.
Fixed commission rates are prohibited under the Securities Exchange Act of 1934 - these are set by the member firms.
A customer owns a 5 ABC convertible bonds, convertible into common stock at a 20:1 ratio. The common stock is currently trading at $29. The customer believes that the stock will rise during the next 6 months, but does not think that it will rise above $45 per share. The customer wishes to use options to profit from his belief, but wishes to minimize any additional capital outlay. Which strategy is the best recommendation to the customer?
A. Buy 1 ABC Jan 45 Call
B. Sell 1 ABC Jan 45 Call
C. Buy 1 ABC Jan 45 Put
D. Sell 1 ABC Jan 45 Put
The best answer is B.
This customer believes that the stock will rise from its current price of $29, but will not rise above $45 per share. As the holder of a convertible bond, convertible at $50 per share, it would not make sense to convert, even if the price rose to $45. However, the customer can use the convertible bond to “cover” the sale of call contracts against the stock. Since each bond is convertible at 20:1, 5 bonds is the equivalent of 100 shares of stock. By selling an ABC Jan 45 Call, the customer collects the premium income, and has no capital outlay since the short call is covered.
If the stock does rise above $45 and the call is exercised, the customer simply converts the bonds and delivers the converted shares.
Any option buying strategy does not meet the customer’s specifications, since it requires a money outlay.
The sale of a put does not make sense, even though it would be profitable if the market rises. If the market falls, the put would be exercised, requiring the customer to buy the stock again! There is no “cover” if this occurs and a margin deposit is required. This customer wishes to minimize any additional capital outlay, so this strategy in not appropriate.
A Municipal Finance Professional (MFP) can give what dollar amount to an elected official’s campaign in which he or she is NOT entitled to vote without this action resulting in a 2 year ban?
A. 0
B. $100
C. $250
D. $500
The best answer is A. Under MSRB Rule G-37, a Municipal Finance Professional can give up to $250 to an elected official’s campaign in which the MFP is entitled to vote without any problems.
If the amount given is more than $250, or if ANY dollar amount is given to an elected official’s campaign in which the MFP is not entitled to vote (as in this case), then the municipal broker-dealer is banned from doing negotiated underwritings and municipal financial advisory work for that municipality for 2 years.
Therefore, an MFP can give nothing to an elected official’s campaign in which he or she is not entitled to vote, otherwise a ban will result. The idea here is simple - why would an MFP give any campaign contribution where he or she is not entitled to vote, other than to curry favor with that issuer official?
A “sinking fund call” is a(n):
A. mandatory call
B. extraordinary mandatory call
C. optional call
D. extraordinary optional call
The best answer is A. A sinking fund call obligates an issuer to place monies periodically into a sinking fund; and at dates established in the bond resolution, to retire a portion of the outstanding bonds by either calling some of the issue by random choice; or by purchasing bonds in the open market (if it is cheaper to do so). These calls are mandatory, since the specifics of how the monies are to be deposited to the sinking fund; and at what dates, and in what amounts, bonds are to be retired, are all spelled out in the bond resolution.
ABC Corporation declares a 1:5 stock split. As a result of this action all of the following will occur EXCEPT the:
A. market price of ABC common stock will increase
B. number of common shares of ABC outstanding will decrease
C. Earnings per Share of ABC common stock will increase
D. Price / Earnings ratio of ABC common stock will increase
The best answer is D. In a reverse stock split, the number of common shares outstanding is decreased and the market price per share is increased proportionately on the “ex” date. Because the corporations’ earnings will be spread over fewer shares, earnings per share will increase. However, the company’s Price / Earnings ratio will remain constant because both the stock market price and the earnings per share will increase in the same proportion keeping the Price / Earnings ratio unchanged.
Which of the following must be disclosed, or be disclosed upon customer request, in competitive bid municipal underwritings?
I Spread
II Initial offering price of each maturity
III Participation amount of each underwriter
IV Order priority provisions
A. I and III
B. II and IV
C. I, II and IV
D. I, II, III, IV
The best answer is B. In competitive bid municipal underwritings, the offering price of each maturity must be disclosed, but there is not requirement to disclose the spread, which is typically very thin. There is no requirement to disclose the participation amounts of the underwriters (since this in no way affects the customer). However, the order priority provisions must be disclosed (the usual priority is Pre-Sale; Group Net; Designated; Member Takedown).
The bid price of a mutual fund is $14.30 and the ask price is $15.50. The fund has the following breakpoint schedule:
Purchase Amount Sales Charge
$0 -$10,000 7.75%
$10,001 - $25,000 7.25%
$25,001 - Over 6.50%
The fund charges a redemption fee of 1/2%. A customer who redeems 200 shares this day will receive:
A. $2,846
B. $2,846 less a commission
C. $2,860
D. $2,860 less a commission
The best answer is A. Mutual funds are redeemed at NAV less a redemption fee (if any). No commissions are charged on purchases or redemptions. The redemption fee of 1/2% must be deducted to get the net proceeds.
$14.30 NAV x .995 x 200 shares = $2,846
The “right of rejection” in a municipal bond sale refers to the:
A. refusal by a municipal dealer to accept a delivery of bonds tendered to that firm by another municipal securities dealer
B. return of municipal securities that have been previously accepted on a delivery
C. procedure where a municipal dealer that bought securities, but has not yet received them, can close-out the transaction
D. settlement method where payment is made on delivery, or, if the dealer does not have the monies, the delivery may be rejected
The best answer is A. When securities are delivered on settlement date, the buyer inspects the delivery to ensure that the proper securities are being delivered in “good form.” If the buyer finds that the wrong securities are being delivered, or that there is a problem, such as the securities’ not having a proper assignment; or a coupon bond missing coupons; then the buyer may reject the delivery. This is the right of rejection.
If the buyer has failed to detect an irregularity upon settlement, and accepts a delivery that later proves to have a problem, the buyer may use the “right of reclamation” to correct the problem. The buyer completes a “reclamation form” detailing the error; attaches it to the securities with the problem; and returns both to the seller. Upon receipt of the securities with the reclamation form, the seller must correct the problem within stated time periods.
Upon exercise of a Japanese Yen World Currency call option, the holder will:
A. receive U.S. Dollars
B. deliver U.S. Dollars
C. receive Japanese Yen
D. deliver Japanese Yen
The best answer is A. If there is an exercise of a foreign currency option, settlement is the same as for exercise of index options. If a PHLX World Currency option is exercised, the writer must pay the holder the “in the money” amount the next business day. There is no delivery of the foreign currency upon exercise.
