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Free Series 4 Sample Exam Questions Results

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Exam: Free Series 4 Sample Exam Questions
Time Spent: 00 hours 0 minutes 42 seconds
Max. Marks: 10
Marks Obtained: 3
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Q. No Question Correct Answer Your Answer Explanation
1. I and III II and IV

A bullish investor would establish a credit (short) put spread or a debit (long) call spread. Straddles are a bet on volatility not on a direction of the stock and therefore straddles are neither bullish nor bearish.

2. A customer owns an Eastman October 50 listed call option. Eastman has declared a special $1.00 cash dividend. When Eastman sells ex-dividend, which of the following will reflect the strike price and the number of shares of the Eastman October 50 option? Strike Price $50; Number of Shares 100 Strike Price $50; Number of Shares 100

Listed options are not adjusted for regular cash dividends. Even though the $1 dividend was termed a special dividend the amount is not significant enough to require the option contract to be adjusted

3. A firm’s ROP may have a sales function if the number of agents conducting option business is less than: 10 5

A firm’s ROP may have a sales function if the number of agents conducting option business is less than 10. If the firm has more than 10 agents conducting option business the ROP may not have any sales function.

4. A large investor has a high beta portfolio with a value of $5,000,000. The OEX index is at 500. The investor wants to protect his account from a market decline. Which of the following is true? The investor could effectively hedge his portfolio buy purchasing more than 10 OEX 500 puts The investor could effectively hedge his portfolio buy purchasing 10 OEX 500 puts

The key to this question is the fact that the investor’s portfolio has a high beta. The investor’s portfolio would fall more than the overall market during a decline. As such in order to effectively hedge his portfolio he would have to purchase more puts to account for the higher beta of the portfolio.

5. An investor has held 1000 shares of UYT for 8 months. The investor paid $56.78 for the shares. The stock has increased in value to $59.76. The investor buys 10 UYT May 55 puts at $2.05. Which of the following are true? I only I only

The investor has purchased puts to protect a stock position held less than 12 months therefore any gain or loss will be short term. All of the other choices are false.

6. An investor holding an S&P 500 Index 1,440 call decides to exercise when the index is at 1,440.12. The index closes at 1,441.35. What will the customer receive? $135.00 $123.00

The investor will receive the in the money amount based on the closing value for the S & P 500 not based on the value of the index at the time of exercise. The contract was in the money by1.35 at the close. The investor’s account will be credited 1.35 X 100 = $135

7. III and IV III and IV

An investor who is short a spread will profit if the difference in the premiums narrows and will realize the maximum profit if both options expire unexercised. If both options expire the seller will keep the entire premium received for selling the spread.

8. Capped index options automatically exercise if they go how far in the money ? 30 points 100 points

A capped index option trades like a spread and will automatically be exercised if the option goes in the money by 30 points. Because the profit potential is capped at 30 points the premium on the option is less than the premium for non-capped options.

9. Closing transaction for options writers are taxed as: Short-term capital gains or losses. None of the choices listed.

Closing transactions for option writers are treated as short term capital gains or losses.

10. If a customer sells an IBM October 100 call, which he bought for $12, for $20 and the IBM October 120 call, which he initially sold for $4, expires unexercised, the customer will realize a profit or loss of: $1,200 profit. $1,200 loss.

The customer will realize a profit of $1,200. They made $800 on the long call and made $400 because the short call expired worthless.

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