S7 Assessment Exam Questions and Answers with Rationale

S7 Assessment Exam Questions and Answers with Rationale 1. Sales Proceeds per share as a result of exercise of a put:: the sales pro- ceeds upon exercise of a put option is found by subtracting the premium from the strike price of the put. **If you own the put contract you have the ability to sell at the strike if exercised, but you paid a certain amount to do that. (premium). So subtract the cost of what you paid (premium) from the money you made made selling the put at strike 2. Credit Spread: a credit spread involved the purchase and sale of two option contracts, both of the same class (put, put OR call, call). The contract which is sold has a higher premium than the contract purchased (gives you the credit). In this question, the Nov 60 put will have a higher premium than the Nov 50 Put, creating a credit spread. **A credit spread involves selling, or writing, a high-premium option and simulta- neously buying a lower premium option. The premium received from the written option is greater than the premium paid for the long option, resulting in a premium credited into the trader or investor's account when the position is opened. When traders or investors use a credit spread strategy, the maximum profit they receive is the net premium. 3. Debit spread: used to offset the maximum loss. Occurs when you buy option with higher premium and sell one with a lower premium and the loss is debited to trader's account **trader buys one May put option with a strike price of $20 for $5 and simultane- ously sells one May put option with a strike price of $10 for $1. Therefore, he paid $4, or $400 for the trade. If the trade is out of the money, his max loss is reduced to $400, as opposed to $500 if he only bought the put option. 4. A customer has placed a market order to purchase EMD with a broker-deal- er, and requests that the order be directed to a specific exchange which is not currently posting the