SIE Module 6 Test Bank

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1. Which of the following statements is correct regarding stock option terminology?

A. A stock option is written by the issuer of the underlying stock.

B. A call option allows the owner to sell a certain number of shares at a certain price for a limited period of time.

C. Writing either a put or call option is referred to as “going long.”

D. The exercise price is written into the contract and cannot be changed after the option is created.

2. Which of the following statements is correct regarding stock options?

A. A call option with an exercise price of $50 per share when the underlying stock price is $60 per share is out of the money.

B. A put option with an exercise price of $50 per share when the underlying stock price is $45 per share is at the money.

C. A put option with an exercise price of $40 per share when the underlying stock price is $48 per share is out of the money.

D. A call option with an exercise price of $70 per share when the underlying stock price is $70 per share is out of the money.

3. A call option with a strike price of $100 is selling for $2.50 when the market price of the underlying stock is $95. The intrinsic value of the call option per share is:

A. -$5.00

B. $0.00

C. $2.50

D. $5.00

4. Tommy paid a premium of $3 per share to purchase a put option to sell 100 shares of stock at a strike price of $50 per share. Assume the stock is currently trading for $43 per share, what would be the amount of Tommy’s profit or loss if he were to exercise the option?

A. $300 net loss.

B. $400 net profit.

C. $700 net profit.

D. $1,000 net loss.

5. A call option with a strike price of $50 is selling for $3.50 when the market price of the underlying stock is $52. Which of the following statements is correct regarding this stock option?

A. The option is out of the money.

B. The intrinsic value of the option is $3.50.

C. The speculative value of the option is $1.50.

D. The option will most likely expire unexercised.

6. A put option with a strike price of $50 is selling for $3.50 when the market price of the underlying stock is $52. Which of the following statements is correct regarding this stock option?

A. The option is out of the money.

B. The intrinsic value of the option is $2.

C. The speculative value of the option is $1.50.

D. The option will most likely be exercised if market conditions remain unchanged.

7. Rebecca owns 100 shares of Zippy Drone stock. She just sold a Zippo Drone call option. Which one of the following actions would be the most risky for Rebecca?

A. Selling the Zippy Drone stock before the option expires.

B. Selling a Zippy Drone put option with an identical strike price as the call option.

C. Purchasing an additional 100 shares of Zippy Drone stock.

D. Buying back the Zippy Drone call option.

8. Brittney purchased 100 shares of Crow Corporation stock for $20 per share. She wrote a covered call option on Crow Corporation that expires in three months. The option sold for a $2 premium, and had a strike price of $27 per share. Brittney sold the stock at its fair market value of $24 per share three months later. Her total profit on the stock and call combined is:

A. $100.

B. $200.

C. $400.

D. $600.

9. What is the risk associated with a covered call option strategy?

A. Unlimited, regardless of whether or not the underlying stock is sold.

B. Limited, regardless of whether or not the underlying stock is sold.

C. Limited, but only if the stock is not sold.

D. Risk free, but only if the stock is not sold.

10. A client purchases a call with a strike price of $52. The call will expire in six months. What is the intrinsic value of the call if the fair market value of the stock is $50?

A. $0.

B. $2.

C. $4.

D. $6.

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11. Ron purchased stock at $65. He then sells a call option with a strike price of $70, receiving a premium of $2. If the stock is trading at $75 at expiration, how much gain does Ron recognize?

A. $0.

B. $2.

C. $5.

D. $7.

12. The following information relates to a put option:
• Current stock price – $63
• Strike price of the option – $58
• Premium paid – $2
What is the intrinsic value of the option?

A. $0.

B. $2.

C. $3.

D. $5.

13. Stephen obtains a $200,000 loan from Supreme Bank at 3% annually. He deposits the $200,000 into a savings account at Awesome Bank that pays 6% annually. This is an example of:

A. Speculating.

B. Market manipulation.

C. Arbitrage.

D. Hedging.

14. The stock of Simple Company is trading at $10 per share on the New York Stock Exchange (NYSE) while at the same time, it is trading for $11 on the London Stock Exchange (LSE). Gordon buys the stock on the NYSE and immediately sells the shares on the LSE, earning a profit of $1 per share. This is an example of:

A. Speculating.

B. Market manipulation.

C. Arbitrage.

D. Hedging.

15. Which one of the following statements is correct regarding hedge funds?

A. They are highly liquid investments.

B. They typically use borrowed money to amplify their returns.

C. They charge an expense ratio in lieu of charging a performance fee.

D. They trade actively on the secondary market.

16. Which one of the following statements is correct regarding hedge funds?

A. Most hedge fund managers are compensated only if the hedge fund is profitable during the year.

B. Since hedge funds are private investments, they are prohibited from advertising.

C. Liquidity risk is a major concern when assessing the risk exposures associated with hedge funds.

D. Hedge funds are typically structured as S corporations due to tax and liability advantages.

17. A call option with a strike price of $100 is selling for $3 when the market price of the underlying stock is $101. The speculative (time) value of the call option is:

A. $0.

B. $1.

C. $2.

D. $3.

18. What is the risk associated with a covered call option strategy?

A. Unlimited, regardless of whether or not the underlying stock is sold.

B. Limited, regardless of whether or not the underlying stock is sold.

C. Limited, but only if the stock is not sold.

D. Risk free, but only if the stock is not sold.

19. Rhonda purchased the following options on XYZ Company stock:
• Put option – strike price of $32, premium of $2.
• Call option – strike price of $38, premium of $3.
Both options will expire in two months. She would break even if XYZ Company stock was trading for either:

A. $26 and $40.

B. $30 and $41.

C. $27 and $43.

D. $34 and $44.

20. Rahul owns 1,000 shares of BlueCo common stock. Recently, he purchased an out-of-the-money put option on BlueCo stock while simultaneously writing an out-of-the-money call option on BlueCo stock. Which one of the following represents an accurate description of this hedging strategy?

A. Harvest.

B. Straddle.

C. Collar.

D. Spread.

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21. Joanna purchased a call option on ABC Company stock. With respect to this option:

A. Her maximum gain is the option’s strike price, and her maximum loss is the current value of the stock.

B. Her maximum gain is unlimited, and her maximum loss is unlimited.

C. Her maximum gain is the premium paid, and her maximum loss is unlimited.

D. Her maximum gain is unlimited, and her maximum loss is the premium paid.

22. Currently, a put option on ABC Company stock is selling for a premium of $4. The put option has a strike price of $60. If ABC Company stock is trading at $61 per share, what is the intrinsic value and the speculative value of the put option, respectively?

D. $4 and $0.

A. -$1 and $5.

B. $1 and $3.

C. $0 and $4.

23. Which of the following option strategies seeks profit when the price of a stock increases?

I. Selling a call.
II. Selling a put.
III. Buying a call.
IV. Buying a put.

A. I and IV.

B. II and III.

C. I and II.

D. III and IV.

24. Assuming the investor does not own the underlying stock, which one of the following option strategies would expose the investor to the greatest amount of risk?

A. Buying a put.

B. Selling a call.

C. Buying a call.

D. Selling a put.

25. Currently, a call option on ABC Company stock is selling for a premium of $3. The call option has a strike price of $40. If ABC Company stock is trading at $42 per share, what is the intrinsic value and the speculative value of the call option, respectively?

A. -$2 and $5.

B. $2 and $1.

C. $0 and $3.

D. $3 and $0.

26. Genevieve, an unmarried individual, ran into an old college friend, Nikki, at the gym. Nikki is employed as a hedge fund manager. Genevieve is interested in investing in the hedge fund that Nikki manages. In order to invest in this fund, Nikki should inform Genevieve that she must have:

A. Equity investments of $750,000 or more.

B. Trust assets of $500,000 or more.

C. Annual income of $100,000 or more.

D. Net worth of $1,000,000 or more.

27. An advantage of an exchange-traded fund over an index mutual fund is that an exchange-traded fund:

A. Is usually a no-load fund, while an index mutual fund requires a commission upon purchase.

B. Trades at net asset value, while an index mutual fund may trade at a premium to net asset value.

C. Results in lower costs for an investor making frequent trades than the costs associated with an index mutual fund.

D. Can be purchased on margin and sold short, while an index mutual fund can only be purchased after the market has closed.

28. Which one of the following statements is correct regarding exchange-traded notes?

A. They are managed by a board of directors who are tasked with looking out for investors.

B. They represent secured debt instruments.

C. They pay periodic coupon interest payments.

D. They have a market value that is influenced by the creditworthiness of the debtor company.

29. Which one of the following would be properly classified as an alternative investment?

A. Leveraged offshore separately managed account.

B. Private equity fund.

C. Publicly traded shares of a penny stock.

D. Tax-exempt private activity bonds.

30. Which one of the following would be the most appropriate strategy for an investor anticipating an upcoming bull market?

A. Purchase an inverse S&P 500 exchange traded fund.

B. Sell a put option on a stock already owned by the investor.

C. Sell a call option on a stock that is not already owned by the investor.

D. Initiate a short sale on a blue-chip stock.

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31. Which one of the following statements is correct regarding venture capital?

A. It is a type of private equity financing.

B. Interests are usually sold to investors in the form of shares of C corporation stock.

C. It is a form of financing that is provided to mature companies that have taken on a large amount of debt.

D. It is used to lend money to state governments and tax-exempt organizations.

32. Which one of the following statements is correct regarding American options?

A. American options are only available in the form of call options.

B. American options are only available for broad-based equity indices.

C. American index options cease trading on the third Friday of the expiration month.

D. Owners of American options may exercise only at expiration.

33. Which one of the following represents a type of option that can only be exercised on its expiration date?

A. European option.

B. Nonqualified stock option.

C. American option.

D. Bermudan option.

34. Which one of the following statements is correct regarding the comparison of a private equity fund to a merger arbitrage hedge fund?

A. The private equity fund is more liquid than the merger arbitrage hedge fund.

B. The private equity fund is expected to produce higher returns than the merger arbitrage hedge fund.

C. The private equity fund is less volatile than the merger arbitrage hedge fund.

D. The private equity fund will usually have less correlation to the stock market than the merger arbitrage hedge fund.

35. Which of the following represents an aspect of a performance fee that is intended to motivate a hedge fund manager?

A. 12b-1 fee.

B. Contingent deferred sales charge.

C. Hurdle rate.

D. High water mark.

36. A typical hedge fund manager fee is:

A. 1% of assets under management, charged quarterly, plus a performance fee of 25% of the profits.

B. 2% of assets under management, charged quarterly, plus a performance fee of 20% of the profits.

C. 5% of assets under management, charged quarterly, plus a performance fee of 15% of the profits.

D. 6% of assets under management, charged quarterly, plus a performance fee of 10% of the profits.

37. Which one of the following statements is correct regarding variable annuities?

A. Variable annuities were designed to protect purchasing power and provide benefits that adjust with changing investment performance.

B. Most variable annuities are issued on an immediate basis.

C. Unrealized gains and losses have no effect on the value of deferred variable annuity contracts’ accumulation units.

D. Critics of variable annuities suggest inflation will continue, and higher internal expenses of these contracts will defeat any original hedge benefits.

38. Which of the following statements is correct regarding annuities?

A. Fixed annuities provide better inflation protection than variable annuities.

B. A life annuity certain pays the annuitant a life annuity with a guarantee of total payments equal to the premiums paid.

C. An installment refund annuity pays the annuitant a life annuity with a guaranteed number of payments.

D. The amount of variable annuity units owned remains constant during the liquidation period.

39. Which one of the following types of life insurance policies offers design flexibility of both premium and death benefits and permits the policyholder to invest the cash value?

A. Variable universal life insurance.

B. Term life insurance.

C. Ordinary life insurance.

D. Variable life insurance.

40. Janice received an inheritance from her recently deceased father. She would like to purchase an annuity with the inheritance. Her objectives are as follows:
• Leave a lump sum inheritance to her children at her death.
• Prevent the insurance company from receiving a sizeable profit in the event she dies in the near future.
• Avoid investment risk.
The most appropriate type of annuity for her to purchase is:

A. Variable annuity.

B. Single life annuity.

C. Refund annuity.

D. Joint annuity.

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41. Stuart and Joanna, both aged 33, are considering appropriate funding vehicles for their three-year-old daughter Carla’s college education expenses. They would like to purchase life insurance that could be used to meet both their premature death loss exposure goals and their education expense funding goals. Stuart and Joanna have a long-term planning horizon and are risk tolerant. Which one of the following types of life insurance would be most appropriate based on their objectives?

A. Variable universal insurance.

B. Decreasing term insurance.

C. Whole life insurance.

D. Annual renewable term insurance.

42. Stacy, age 45, purchased a single premium nonqualified annuity several years ago, paying a non-deductible premium of $50,000. The annuity currently has a cash value of $75,000. Assuming Stacy takes a $9,000 loan from the cash value today, how much would be included in her gross income for federal income tax purposes?

A. $0.

B. $3,000.

C. $6,000.

D. $9,000.

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