STC Series 7 Chapter 12 Test Exam
2025 With 100% Correct Answers
A U.S. importer needs to purchase British pounds to pay for a shipment of goods. The exchange
of U.S. dollars for British pounds would occur:
AOn the Philadelphia Stock Exchange
B. In the Interbank market
CIn the third market
DIn the over-the-counter market - CORRECT ANSWER✔✔B. In the Interbank market
Foreign exchange rates are established in the Interbank market. The Interbank market involves
the purchase and sale of foreign currencies between commercial banks. The Philadelphia Stock
Exchange is where foreign currency option transactions take place.
On December 16, a Mr. Smith purchased 2 listed XYZ May 70 calls and paid a $4 premium for
each call when the current market price of XYZ Corporation was $69 per share. If, in May, the
market price of XYZ Corporation is $67 and the calls expire, Mr. Smith loses:
A. $400
B. $700
C. $800
D. $1,400 - CORRECT ANSWER✔✔C. $800
Mr. Smith will not exercise the call options. At expiration, the market price of XYZ is $67, which
is less than the exercise price. Therefore, the options expire worthless. Mr. Smith loses $800
($400 per contract times 2), the entire amount of the premium paid.
In May, a customer sells an STC July 40 listed call for a $6 premium and buys an STC July 30
listed call for $10. The customer has created which of the following?
A. A debit spread executed for a cost of $400 which will be profitable if the price of STC
decreases
,B. A debit spread executed for a cost of $400 which will be profitable if the price of STC
increases
C. A credit spread in which the client received $400 and will be profitable if the price of STC
decreases
D. A credit spread in which the client received $400 and will be profitable if the price of STC
increases - CORRECT ANSWER✔✔B. A debit spread executed for a cost of $400 which will be
profitable if the price of STC increases
Since the investor paid more for the purchase than she received on the sale, this is a debit
spread which was executed for a cost of $400. Since the dominant leg is the long call, the
position will be profitable if the stock price increases. A call debit spread is considered a bullish
strategy.
Which TWO of the following option recommendations are suitable for a sophisticated investor
who expects the overall market to fall but is bullish on mining stocks?
I. Buying narrow-based index calls
II. Buying narrow-based index puts
III. Buying broad-based index calls
IV. Buying broad-based index puts
A. I and III
B. I and IV
C. II and III
D. II and IV - CORRECT ANSWER✔✔B. I and IV
Since the investor is bullish on mining stocks, buying narrow-based index calls on mining stocks
is appropriate. Since the investor expects the overall market to fall, buying broad-based index
puts is appropriate.
Logan has the following position in his account.
Long 1 DEF May 35 call.
, Logan anticipates a slight bullish move in DEF from which he wants to benefit, but he also wants
some income generated to reduce the cost of the position without adding additional risk. He
could accomplish this by adding which of the following positions to his account?
A. Short 1 DEF May 45 call
B. Short 1 DEF May 25 call
C. Short 1 DEF May 45 put
D. Short 1 DEF May 25 put - CORRECT ANSWER✔✔A. Short 1 DEF May 45 call
By selling (short) 1 DEF May 45 call, Logan will generate income through the premium received
and reduce the overall cost of the position. While the short call allows the owner to purchase
DEF from him at $45 per share until it expires in May, Logan is long a DEF call that allows him to
purchase the same stock at $35 per share until May. Logan has established a debit call spread.
Had Logan added 1 short DEF May 25 call, he may have been required to sell DEF at $25 per
share with the risk it would have cost him $35 per share to purchase DEF.
If he added either of the short puts, he may have been required to purchase DEF at $25 or $45
per share without a right to dispose of it.
An investor wrote a 115 index option call. The option was exercised and the index closed at 125.
The writer will:
A. Deliver the index
B. Receive the index
C. Deliver cash
D. Receive cash - CORRECT ANSWER✔✔C. Deliver cash
Settlement on an index option contract is made in cash. The writer must pay the contract's in-
the-money amount times $100.
An investor selling a combination will profit if the price of the underlying security is:
A. Rising
B. Falling
C. Volatile
2025 With 100% Correct Answers
A U.S. importer needs to purchase British pounds to pay for a shipment of goods. The exchange
of U.S. dollars for British pounds would occur:
AOn the Philadelphia Stock Exchange
B. In the Interbank market
CIn the third market
DIn the over-the-counter market - CORRECT ANSWER✔✔B. In the Interbank market
Foreign exchange rates are established in the Interbank market. The Interbank market involves
the purchase and sale of foreign currencies between commercial banks. The Philadelphia Stock
Exchange is where foreign currency option transactions take place.
On December 16, a Mr. Smith purchased 2 listed XYZ May 70 calls and paid a $4 premium for
each call when the current market price of XYZ Corporation was $69 per share. If, in May, the
market price of XYZ Corporation is $67 and the calls expire, Mr. Smith loses:
A. $400
B. $700
C. $800
D. $1,400 - CORRECT ANSWER✔✔C. $800
Mr. Smith will not exercise the call options. At expiration, the market price of XYZ is $67, which
is less than the exercise price. Therefore, the options expire worthless. Mr. Smith loses $800
($400 per contract times 2), the entire amount of the premium paid.
In May, a customer sells an STC July 40 listed call for a $6 premium and buys an STC July 30
listed call for $10. The customer has created which of the following?
A. A debit spread executed for a cost of $400 which will be profitable if the price of STC
decreases
,B. A debit spread executed for a cost of $400 which will be profitable if the price of STC
increases
C. A credit spread in which the client received $400 and will be profitable if the price of STC
decreases
D. A credit spread in which the client received $400 and will be profitable if the price of STC
increases - CORRECT ANSWER✔✔B. A debit spread executed for a cost of $400 which will be
profitable if the price of STC increases
Since the investor paid more for the purchase than she received on the sale, this is a debit
spread which was executed for a cost of $400. Since the dominant leg is the long call, the
position will be profitable if the stock price increases. A call debit spread is considered a bullish
strategy.
Which TWO of the following option recommendations are suitable for a sophisticated investor
who expects the overall market to fall but is bullish on mining stocks?
I. Buying narrow-based index calls
II. Buying narrow-based index puts
III. Buying broad-based index calls
IV. Buying broad-based index puts
A. I and III
B. I and IV
C. II and III
D. II and IV - CORRECT ANSWER✔✔B. I and IV
Since the investor is bullish on mining stocks, buying narrow-based index calls on mining stocks
is appropriate. Since the investor expects the overall market to fall, buying broad-based index
puts is appropriate.
Logan has the following position in his account.
Long 1 DEF May 35 call.
, Logan anticipates a slight bullish move in DEF from which he wants to benefit, but he also wants
some income generated to reduce the cost of the position without adding additional risk. He
could accomplish this by adding which of the following positions to his account?
A. Short 1 DEF May 45 call
B. Short 1 DEF May 25 call
C. Short 1 DEF May 45 put
D. Short 1 DEF May 25 put - CORRECT ANSWER✔✔A. Short 1 DEF May 45 call
By selling (short) 1 DEF May 45 call, Logan will generate income through the premium received
and reduce the overall cost of the position. While the short call allows the owner to purchase
DEF from him at $45 per share until it expires in May, Logan is long a DEF call that allows him to
purchase the same stock at $35 per share until May. Logan has established a debit call spread.
Had Logan added 1 short DEF May 25 call, he may have been required to sell DEF at $25 per
share with the risk it would have cost him $35 per share to purchase DEF.
If he added either of the short puts, he may have been required to purchase DEF at $25 or $45
per share without a right to dispose of it.
An investor wrote a 115 index option call. The option was exercised and the index closed at 125.
The writer will:
A. Deliver the index
B. Receive the index
C. Deliver cash
D. Receive cash - CORRECT ANSWER✔✔C. Deliver cash
Settlement on an index option contract is made in cash. The writer must pay the contract's in-
the-money amount times $100.
An investor selling a combination will profit if the price of the underlying security is:
A. Rising
B. Falling
C. Volatile
