CHAPTER 5 — REGULATION T AND EXCHANGE MARGIN RULES
A customer opens a new margin account and purchases $18,000 of marginable common stock. The customer says she recently received a bonus and wants to know the minimum Regulation T deposit before settlement. The account contains no other securities, SMA, or cash.
Answer: What is $9,000?
A customer buys 1 SPX 5,000 call at 42. The customer says she wants exposure to a broad market advance but does not want to buy shares of an ETF. The customer asks how much must be deposited for the long index option.
A. $2,100
B. $5,000
C. $4,200
D. $0
Answer: What is C. $4,200?
A customer believes the British pound will strengthen against the U.S. dollar. The customer wants to speculate using listed world currency options and does not have an existing commercial exposure. The RR must identify the position that benefits from a rising pound.
A. Buy British pound puts
B. Sell British pound calls
C. Buy British pound calls
D. Sell U.S. dollar puts
Answer: What is C. Buy British pound calls?
A customer enters an order to buy 5 ABC July 60 calls at the best available price. The customer is more concerned with execution than price and does not place a limit on the order. The order is sent to the exchange floor for execution.
A. Limit order
B. Market order
C. Stop order
D. Stop-limit order
Answer: What is B. Market order?
A new customer is approved for options trading and receives the required options disclosure document. The RR later realizes the customer has not yet signed and returned the options agreement. The firm must determine the deadline for obtaining the signed agreement after account approval.
A. 5 days
B. 10 days
C. 15 days
D. 30 days
Answer: What is C. 15 days?
A customer buys $3,000 of marginable stock in a new margin account. The customer believes the deposit should be $1,500 because Regulation T is 50%, but the RR recalls a minimum equity rule for opening margin accounts. No other securities are held in the account. What is the minimum deposit?
A. $1,500
B. $750
C. $2,000
D. $3,000
Answer: What is C. $2,000?
A customer owns 1 broad-based index call with a strike price of 3,900. At expiration, the exercise settlement value is 3,936. The customer asks whether securities will be delivered into the account after exercise. What is the settlement amount?
A. Cash settlement of $3,600
B. Delivery of index securities worth $3,600
C. Cash settlement of $36
D. No settlement because index options cannot be exercised
Answer: What is A. Cash settlement of $3,600?
A customer believes the euro will decline against the U.S. dollar after a central bank announcement. The customer is not hedging an import or export transaction and wants a listed currency option position. The RR must identify the position that profits from a falling euro.
A. Buy euro calls
B. Buy euro puts
C. Sell euro puts
D. Buy U.S. dollar calls
Answer: What is B. Buy euro puts?
A customer enters an order to buy 10 XYZ August 50 puts at 4 or better. The customer states that the order should not be executed above the stated price, even if the market moves quickly. The RR is reviewing how the order should be marked.
A. Buy limit order
B. Buy stop order
C. Market order
D. Sell stop order
Answer: What is A. Buy limit order?
A customer gives a registered representative written discretionary authority over an options account. The RR wants to enter discretionary options orders, and the branch manager is reviewing the account before trading begins. The account must be accepted under the firm’s supervisory procedures before discretionary orders are entered.
A. Prior written approval by a Registered Options Principal
B. Oral approval by the customer only
C. Approval by the OCC
D. Approval by FINRA before each trade
Answer: What is A. Prior written approval by a Registered Options Principal?
A customer has a long margin account with securities valued at $64,000 and a debit balance of $38,000. The customer asks the RR for the account’s current equity after a volatile trading session. The account contains only marginable common stock. What is the equity?
A. $26,000
B. $38,000
C. $32,000
D. $64,000
Answer: What is A. $26,000?
A customer asks why an SPX option cannot normally be exercised before expiration even though it is in-the-money. The RR explains that the customer is not dealing with an equity option or ETF option. The customer is asking about exercise style rather than tax treatment. Which term applies?
A. American-style exercise
B. Physical settlement
C. Cashless exercise
D. European-style exercise
Answer: What is D. European-style exercise?
A U.S. importer must pay a supplier in euros in three months. The importer is concerned the euro may appreciate, increasing the dollar cost of the future payment. The customer wants a hedge rather than an income strategy. Which strategy is most appropriate?
A. Buy euro calls
B. Buy euro puts
C. Sell euro calls
D. Sell euro puts
Answer: What is A. Buy euro calls?
A customer owns 8 ABC October 45 calls purchased at 5. The customer wants to protect most of an unrealized profit if the option begins declining, and instructs the RR to sell if the option trades at or below 9. The customer understands execution could occur below the trigger price.
A. Sell limit order
B. Buy stop order
C. Sell stop order
D. Stop-limit order
Answer: What is C. Sell stop order?
A customer buys 1 ABC July 50 call at 4 and later lets the option expire worthless. The customer asks how the premium is treated for tax purposes. The customer never exercised or sold the option.
A. Ordinary income of $400
B. No tax consequence
C. Short-term capital gain of $400
D. Capital loss of $400
Answer: What is D. Capital loss of $400?
A customer has a long margin account with securities valued at $90,000 and a debit balance of $42,000. The customer wants to know whether there is excess equity under Regulation T. No SMA balance is separately provided, and the customer is not making a new purchase. What is the excess equity?
A. $48,000
B. $6,000
C. $0
D. $3,000
Answer: What is D. $3,000?
A customer buys 1 OEX 920 put at 18. At expiration, the OEX settlement value is 897, and the customer asks for the profit or loss on the option only. The customer owns unrelated blue-chip stocks, but they are not part of the calculation. What is the result?
A. $1,800 loss
B. $500 gain
C. $2,300 gain
D. $500 loss
Answer: What is B. $500 gain?
A U.S. exporter expects to receive Swiss francs in two months. The exporter is worried the Swiss franc may decline before the payment is converted into U.S. dollars. The customer wants protection from a falling foreign currency. Which strategy is most appropriate?
A. Sell Swiss franc puts
B. Buy Swiss franc calls
C. Sell Swiss franc calls
D. Buy Swiss franc puts
Answer: What is D. Buy Swiss franc puts?
A customer is short 6 DEF September 70 calls and wants to limit a loss if the option premium rises. The customer tells the RR to buy the contracts if they trade at or above 11. The customer is not placing a limit price.
A. Sell stop order
B. Buy stop order
C. Buy limit order
D. Market order
Answer: What is B. Buy stop order?
A customer sells 1 XYZ October 60 call at 5 and the option expires unexercised. The customer asks how the premium is treated for tax purposes. The customer does not own XYZ stock and no closing purchase was made.
A. Long-term capital gain of $500
B. Short-term capital gain of $500
C. Capital loss of $500
D. Addition to stock basis
Answer: What is B. Short-term capital gain of $500?
A customer has a long margin account with market value of $42,000 and a debit balance of $34,000. The firm uses the standard 25% long maintenance requirement. The customer asks whether a maintenance call exists after the market declined during the afternoon session. What is the maintenance call?
A. $2,500
B. $8,000
C. $10,500
D. No maintenance call
Answer: What is A. $2,500?
A customer owns a diversified portfolio valued at $2,400,000 and wants to hedge using broad-based index options. The index is trading at 800, the multiplier is $100, and the portfolio beta is 1.00. The customer asks how many contracts are needed for a full hedge.
A. 24 contracts
B. 80 contracts
C. 3 contracts
D. 30 contracts
Answer: What is D. 30 contracts?
A customer asks the RR how many units are covered by a standard listed Japanese yen option contract. The customer incorrectly assumes the contract size is the same as a euro or British pound option. The RR must apply the special contract specification.
A. 10,000 yen
B. 100,000 yen
C. 10,000,000 yen
D. 1,000,000 yen
Answer: What is D. 1,000,000 yen?
A customer enters an order to sell 20 ABC June 40 calls at 6.50, but only if all 20 contracts can be sold. The customer does not want a partial execution because the strategy requires the entire position to be closed at once.
A. Not-held order
B. Contingent order
C. All-or-none order
D. Market order
Answer: What is C. All-or-none order?
A customer buys 100 shares of ABC at 48 and buys 1 ABC 45 put two months later. The customer asks whether the put affects the holding period on the stock. The RR is reviewing the protective put tax rules rather than suitability.
A. The put has no effect on the stock’s holding period.
B. The holding period is automatically converted to long-term.
C. The holding period on the stock is terminated or suspended because the put is not a qualified married put.
D. The stock’s cost basis is reduced by the put premium.
Answer: What is C. The holding period on the stock is terminated or suspended because the put is not a qualified married put?
A customer has a short margin account with a credit balance of $96,000 and short market value of $72,000. The customer asks for the equity in the account before deciding whether to buy in part of the short position. The account contains no long securities and no options. What is the equity?
A. $168,000
B. $36,000
C. $24,000
D. $72,000
Answer: What is C. $24,000?
A portfolio manager owns a $5,000,000 portfolio with a beta of 1.20. The manager wants to hedge against a broad market decline using index puts. The index is trading at 1,000 and the multiplier is $100. How many contracts are needed?
A. 60 contracts
B. 50 contracts
C. 120 contracts
D. 600 contracts
Answer: What is A. 60 contracts?
A customer buys 1 Swiss franc 82 put at 2.75. At expiration, the Swiss franc is 77, and the option settles at intrinsic value. The customer asks for the net result on the put only.
A. $225 gain
B. $275 loss
C. $500 gain
D. $775 gain
Answer: What is A. $225 gain?
A customer instructs a floor broker to buy 10 MNO April 55 calls at 3.25 but gives the broker discretion as to time and price. The customer later complains when the broker does not immediately execute, but the order was handled according to its terms.
A. Limit order
B. All-or-none order
C. Stop order
D. Not-held order
Answer: What is D. Not-held order?
A customer buys stock and buys a put on the same day as part of a married put strategy. The customer asks how the cost of the put is treated for tax purposes if the put is a qualified hedge. The customer is not asking about margin treatment.
A. The put premium is added to the stock’s cost basis.
B. The put premium is immediately deductible.
C. The put premium is treated as ordinary income.
D. The put premium reduces the stock’s holding period to zero.
Answer: What is A. The put premium is added to the stock’s cost basis?
A customer has a short margin account with a credit balance of $88,000 and short market value of $80,000. The firm applies the standard 30% short maintenance requirement. The customer states that the account still has positive equity, but the RR is checking whether maintenance is satisfied. What is the maintenance call?
A. $8,000
B. $24,000
C. $0
D. $16,000
Answer: What is D. $16,000?
A customer buys 1 VIX 22 call at 4.50. The customer is not trying to hedge a specific stock position and is instead expecting volatility to rise following a series of economic announcements. The customer asks for the breakeven point.
A. 17.50
B. 26.50
C. 22.00
D. 450.00
Answer: What is B. 26.50?
A customer buys 1 XDB 165 call at 2.30. The British pound rises to 171, and the customer closes the option at intrinsic value. The customer asks for the profit or loss on the option contract only, ignoring commissions.
A. $600 gain
B. $230 loss
C. $370 gain
D. $830 gain
Answer: What is C. $370 gain?
A customer enters an order to sell 1 ABC July 50 call and buy 1 ABC October 50 call if the difference is 2 points or less. The order depends on the relationship between two option premiums, not merely one absolute price. The floor broker must execute both sides based on the stated differential.
A. Contingent order
B. Market order
C. All-or-none order
D. Opening-only order
Answer: What is A. Contingent order?
A registered representative wants to send retail customers an options worksheet projecting likely gains from a multi-leg strategy. The communication discusses options strategy and contains performance assumptions. The ROP is reviewing whether approval is required before use.
A. No approval is required if sent to fewer than 25 retail customers.
B. Prior ROP approval is required.
C. Only the customer must approve the worksheet.
D. Approval is required only after the communication is used.
Answer: What is B. Prior ROP approval is required?
A customer has a long margin account with market value of $100,000 and a debit balance of $58,000. The customer asks whether the account is restricted under Regulation T, and also whether it is below the 25% maintenance requirement. The customer is not asking about SMA withdrawal rules. Which statement is correct?
A. The account is restricted but not below maintenance.
B. The account is not restricted but is below maintenance.
C. The account is both restricted and below maintenance.
D. The account is neither restricted nor below maintenance.
Answer: What is A. The account is restricted but not below maintenance?
A customer owns SPY calls and SPX calls in the same account. The customer asks why one contract may result in stock delivery while the other settles in cash. The RR must distinguish ETF options from broad-based index options. Which statement is correct?
A. Both SPY and SPX options are cash-settled.
B. SPY options are cash-settled; SPX options are physically settled.
C. Both SPY and SPX options are physically settled.
D. SPY options are physically settled; SPX options are cash-settled.
Answer: What is D. SPY options are physically settled; SPX options are cash-settled?
A customer is reviewing a Japanese yen option with a quoted strike price of 104. The customer asks how to convert the quoted strike into U.S. dollar terms. The customer is not asking for profit or loss, only the decimal conversion.
A. $1.04
B. $0.0104
C. $0.104
D. $104.00
Answer: What is B. $0.0104?
A customer places an order to sell 15 XYZ May 80 puts at 7 stop, limit 6.75. The option trades at 7, but the best available bid immediately falls to 6.50. The customer asks why the order was not filled after the stop price was reached.
A. The order became a market order and should have been filled.
B. The order was canceled because stop orders cannot be used for options.
C. The order became a limit order and could not be executed below 6.75.
D. The order was required to execute at 6.50.
Answer: What is C. The order became a limit order and could not be executed
A firm discovers a clearly erroneous options transaction after execution. The customer is upset because the reported price was favorable, but the exchange rules provide a process for review and adjustment or nullification. The ROP is determining how such trades are handled.
A. The trade must always stand once reported.
B. The customer decides whether the trade is canceled.
C. FINRA automatically reverses all disputed trades.
D. The exchange may review and adjust or nullify clearly erroneous options transactions under its rules.
Answer: What is D. The exchange may review and adjust or nullify clearly erroneous options transactions under its rules?
A customer has securities with a market value of $75,000 and a debit balance of $25,000 in a long margin account. The customer wants to withdraw as much cash as possible without changing the market value of the securities. Regulation T is applied, and no separate SMA balance is given.
Answer: What is $12,500?
A customer sells 1 broad-based index call at 16 when the index is 780 and the strike is 800. The option is uncovered, and the firm applies the broad-based index option margin requirement. The customer asks for the required deposit using the greater of the applicable calculations.
Answer: What is $11,300?
A customer sells 1 euro 1.40 call for a total premium of $700 when the spot rate is 1.3650. The option is out-of-the-money, and the contract represents 10,000 euros. The firm calculates the uncovered short world currency option margin requirement using the greater of the basic and minimum calculations.
Answer: What is approximately $891?
A member firm receives a customer order in a listed option and believes a better price may be available off the exchange floor. The firm has not first attempted to execute the order on the floor, and the customer has not approved off-floor execution. The ROP reviews whether the order may be executed away from the floor.
Answer: What is the order generally may not be executed off the floor unless the firm first attempts floor execution and the customer approves the off-floor execution?
An associated person wants to borrow money from a customer who is not an immediate family member and has no permitted lending relationship under firm procedures. The customer is wealthy and says the loan would be private, documented, and unrelated to securities transactions. The branch manager reviews the request under SRO rules.
Answer: What is the borrowing arrangement is prohibited unless it fits a permitted category and firm procedures allow it?
A customer has a long margin account with market value of $120,000 and a debit balance of $72,000. The market value falls to $82,000 after several technology stocks decline sharply. The RR must determine whether the account is restricted, whether a maintenance call exists using 25%, and whether the market decline creates SMA.
Answer: What is restricted, a $10,500 maintenance call exists, and the decline creates no SMA?
A customer owns a $7,200,000 diversified equity portfolio with a beta of 1.30. The customer expects a temporary market decline and wants to hedge with broad-based index puts. The index is at 1,200, the multiplier is $100, and the RR must adjust the hedge for beta.
Answer: What is 78 contracts?
A customer sells 1 Swiss franc 78 put for a total premium of $900 when the spot rate is $0.7350. The option is in-the-money, and the contract represents 10,000 Swiss francs. The firm must calculate the uncovered short world currency option margin requirement.
Answer: What is $1,194?
A customer enters an order to buy 30 ABC calls at the opening only with a limit of 4. The opening market is 4.20, and the contracts later trade down to 3.90 during the same trading session. The customer asks whether the order should still be active because the limit was later reachable.
Answer: What is the order is canceled because it was opening-only and could not be executed at the opening price within the limit?
A customer opens an options account, receives the ODD, and is approved for uncovered options. Within the first week, the customer enters complex option orders and asks the RR to decide trade timing without written discretionary authority. The firm has not received a signed options agreement, and no ROP has approved discretionary authority.
Answer: What is the account may trade if approved, but the signed options agreement must be obtained within 15 days and the RR may not exercise discretion without proper written authorization and approval?