Question 1

Which of the following defines the vesting period?

Accepted Answer

A)  The period during which employee stock options can be exercised 
B)  The period during which the options are issued 
C)  The period during which the strike price of the options equals the stock price 
D)  The period during which employee stock options cannot be exercised 
A)  The period during which employee stock options can be exercised 
B)  The period during which the options are issued 
C)  The period during which the strike price of the options equals the stock price 
D)  The period during which employee stock options cannot be exercised D

Question 2

Which of the following are true of employee stock options?

Accepted Answer

A)  They are commonly valued as though they are regular American options 
B)  They are commonly valued as though they are regular American options, but with a reduced life 
C)  They are commonly valued as though they are regular European option 
D)  They are commonly valued as though they are regular European options but with a reduced life 
A)  They are commonly valued as though they are regular American options 
B)  They are commonly valued as though they are regular American options, but with a reduced life 
C)  They are commonly valued as though they are regular European option 
D)  They are commonly valued as though they are regular European options but with a reduced life D

Question 3

Which of the following is true about the practice of backdating a stock options grant?

Accepted Answer

A)  It is illegal 
B)  It is illegal in the majority of states in the U.S., but not all states 
C)  It is illegal in roughly half the states in the U.S. 
D)  It is unethical, but not illegal 
A)  It is illegal 
B)  It is illegal in the majority of states in the U.S., but not all states 
C)  It is illegal in roughly half the states in the U.S. 
D)  It is unethical, but not illegal A

Question 4

A company surprises the market with an announcement that it has granted stock options to senior executives. The options are exercised four years later. When does dilution take place?

Accepted Answer

A)  Dilution takes place when the options are exercised 
B)  Dilution takes place on the announcement date 
C)  Dilution takes place gradually over the four years 
D)  There is no dilution 
A)  Dilution takes place when the options are exercised 
B)  Dilution takes place on the announcement date 
C)  Dilution takes place gradually over the four years 
D)  There is no dilution

Question 5

What term is used to describe losses shareholders experience because the interests of managers are not aligned with their own?

Accepted Answer

A)  Agency costs 
B)  Backdating scandals 
C)  Dilution 
D)  Income statement expense 
A)  Agency costs 
B)  Backdating scandals 
C)  Dilution 
D)  Income statement expense

Question 6

Which of the following is NOT true?

Accepted Answer

A)  Management has an incentive to issue executive stock options after bad news 
B)  Management has an incentive to issue executive stock options before good news 
C)  Executive stock options encourage management to pursue strategies that are best for the company in the long run 
D)  Management have an incentive to time the announcement of good news just before they plan to exercise their stock options 
A)  Management has an incentive to issue executive stock options after bad news 
B)  Management has an incentive to issue executive stock options before good news 
C)  Executive stock options encourage management to pursue strategies that are best for the company in the long run 
D)  Management have an incentive to time the announcement of good news just before they plan to exercise their stock options

Question 7

Which of the following was true about employee stock options between 1996 and 2004?

Accepted Answer

A)  The options never had any affect on a company's financial statements 
B)  The value of options which were at-the-money when issued had to be expensed on the income statement 
C)  The value of options which were at-the-money when issued had to be reported in the notes to the financial statements 
D)  Options which were at-the-money when issued did not affect a company's financial statements 
A)  The options never had any affect on a company's financial statements 
B)  The value of options which were at-the-money when issued had to be expensed on the income statement 
C)  The value of options which were at-the-money when issued had to be reported in the notes to the financial statements 
D)  Options which were at-the-money when issued did not affect a company's financial statements

Question 8

Which of the following strategies makes no sense?

Accepted Answer

A)  An employee exercises stock options early and sells the stock. No dividends are expected 
B)  An employee exercises stock options early and keeps the stock. No dividends are expected 
C)  An employee exercises stock options early and sells the stock. Dividends are expected 
D)  An employee exercises stock options early and keeps the stock. Dividends are expected 
A)  An employee exercises stock options early and sells the stock. No dividends are expected 
B)  An employee exercises stock options early and keeps the stock. No dividends are expected 
C)  An employee exercises stock options early and sells the stock. Dividends are expected 
D)  An employee exercises stock options early and keeps the stock. Dividends are expected

Question 9

Which of the following increases the expected life of employee stock options?

Accepted Answer

A)  An increase in the vesting period 
B)  An increase in employee turnover 
C)  A fast growth rate for the stock price 
D)  A tendency for employees to exercise earlier than in the past 
A)  An increase in the vesting period 
B)  An increase in employee turnover 
C)  A fast growth rate for the stock price 
D)  A tendency for employees to exercise earlier than in the past

Question 10

Which of the following was true about employee stock options prior to 1995?

Accepted Answer

A)  The options never had any affect on a company's financial statements 
B)  The value of options which were at-the-money when issued had to be expensed on the income statement 
C)  The value of options which were at-the-money when issued had to be reported in the notes to the financial statements 
D)  Options which were at-the-money when issued did not affect a company's financial statements 
A)  The options never had any affect on a company's financial statements 
B)  The value of options which were at-the-money when issued had to be expensed on the income statement 
C)  The value of options which were at-the-money when issued had to be reported in the notes to the financial statements 
D)  Options which were at-the-money when issued did not affect a company's financial statements

Question 11

Which of the following was true after 2005?

Accepted Answer

A)  The options never had any affect on a company's financial statements 
B)  The value of options which were at-the-money when issued had to be expensed on the income statement 
C)  The value of options which were at-the-money when issued had to be reported in the notes to the financial statements 
D)  Options which were at-the-money when issued did not affect a company's financial statements 
A)  The options never had any affect on a company's financial statements 
B)  The value of options which were at-the-money when issued had to be expensed on the income statement 
C)  The value of options which were at-the-money when issued had to be reported in the notes to the financial statements 
D)  Options which were at-the-money when issued did not affect a company's financial statements

Question 12

When a CEO has employee stock options, he or she is in theory motivated to do which of the following?

Accepted Answer

A)  Take more risk 
B)  Take less risk 
C)  Buy some of the company's stock 
D)  None of the above 
A)  Take more risk 
B)  Take less risk 
C)  Buy some of the company's stock 
D)  None of the above

Question 13

When an employee stock option is exercised, which of the following is usually true?

Accepted Answer

A)  The employee pays the market price for the shares and the company refunds the difference between the market price and the strike price 
B)  The company or the company's agent buys stock in the market for the employee 
C)  The company issues more shares and sells them to the employee for the strike price 
D)  The employee cannot immediately sell the shares 
A)  The employee pays the market price for the shares and the company refunds the difference between the market price and the strike price 
B)  The company or the company's agent buys stock in the market for the employee 
C)  The company issues more shares and sells them to the employee for the strike price 
D)  The employee cannot immediately sell the shares

Question 14

When an employee leaves the company which of the following is usually true?

Accepted Answer

A)  All outstanding employee stock options are forfeited 
B)  Out-of the money employee stock options are forfeited 
C)  All options which have vested are forfeited 
D)  All options are retained 
A)  All outstanding employee stock options are forfeited 
B)  Out-of the money employee stock options are forfeited 
C)  All options which have vested are forfeited 
D)  All options are retained

Question 15

Which of the following is true?

Accepted Answer

A)  An employee stock option is usually held to maturity 
B)  An employee stock option tends to be exercised earlier than an OTC option with the same terms 
C)  An employee stock options tends to be exercised later than an OTC option with the same terms 
D)  Employee stock options are usually exercised as early as possible 
A)  An employee stock option is usually held to maturity 
B)  An employee stock option tends to be exercised earlier than an OTC option with the same terms 
C)  An employee stock options tends to be exercised later than an OTC option with the same terms 
D)  Employee stock options are usually exercised as early as possible

Question 16

Which of the following ensures that managers are rewarded only when a company performs better than its competitors?

Accepted Answer

A)  A constant strike price for executive stock options 
B)  A strike price that increases with time 
C)  A strike price that changes in line with an index of stock prices 
D)  A strike price that is tied to reported profit 
A)  A constant strike price for executive stock options 
B)  A strike price that increases with time 
C)  A strike price that changes in line with an index of stock prices 
D)  A strike price that is tied to reported profit

Question 17

Which of the following is true about employee stock options after they have been issued?

Accepted Answer

A)  They have to be revalued every year 
B)  They have to be revalued every quarter 
C)  They have to be revalued every day like other derivatives 
D)  They never have to be revalued 
A)  They have to be revalued every year 
B)  They have to be revalued every quarter 
C)  They have to be revalued every day like other derivatives 
D)  They never have to be revalued

Question 18

Which of the following hypotheses is supported by empirical research?

Accepted Answer

A)  The grant date for executive stock options tends to be when the stock price is high 
B)  The grant date for executive stock options tends to be when the stock price is low 
C)  The grant date for executive stock options tends to be after a growth spurt in the stock price 
D)  The is no relationship between the timing of grants and the stock price 
A)  The grant date for executive stock options tends to be when the stock price is high 
B)  The grant date for executive stock options tends to be when the stock price is low 
C)  The grant date for executive stock options tends to be after a growth spurt in the stock price 
D)  The is no relationship between the timing of grants and the stock price

Question 19

Employee stock options are particularly popular with start ups because

Accepted Answer

A)  They encourage employees to work hard 
B)  The start up cannot afford to pay high salaries 
C)  The risk associated with the company's success is shared with employees 
D)  All of the above 
A)  They encourage employees to work hard 
B)  The start up cannot afford to pay high salaries 
C)  The risk associated with the company's success is shared with employees 
D)  All of the above

Question 20

Which of the following is NOT usually true about employee stock options?

Accepted Answer

A)  There is a vesting period 
B)  They can be sold to other employees 
C)  They are often at-the-money when issued 
D)  Their value is currently a charge to the income statement 
A)  There is a vesting period 
B)  They can be sold to other employees 
C)  They are often at-the-money when issued 
D)  Their value is currently a charge to the income statement

Exam 14: Employee Stock Options

Which of the following defines the vesting period?

Which of the following are true of employee stock options?

Which of the following is true about the practice of backdating a stock options grant?

A company surprises the market with an announcement that it has granted stock options to senior executives. The options are exercised four years later. When does dilution take place?

What term is used to describe losses shareholders experience because the interests of managers are not aligned with their own?

Which of the following is NOT true?

Which of the following was true about employee stock options between 1996 and 2004?

Which of the following strategies makes no sense?

Which of the following increases the expected life of employee stock options?

Which of the following was true about employee stock options prior to 1995?

Which of the following was true after 2005?

When a CEO has employee stock options, he or she is in theory motivated to do which of the following?

When an employee stock option is exercised, which of the following is usually true?

When an employee leaves the company which of the following is usually true?

Which of the following is true?

Which of the following ensures that managers are rewarded only when a company performs better than its competitors?

Which of the following is true about employee stock options after they have been issued?

Which of the following hypotheses is supported by empirical research?

Employee stock options are particularly popular with start ups because

Which of the following is NOT usually true about employee stock options?

Introduction

Mechanics of Futures Markets

Hedging Strategies Using Futures

Interest Rates

Determination of Forward and Futures Prices

Interest Rate Futures

Swaps

Securitization and the Credit Crisis of 2007

Mechanics of Options Markets

Properties of Stock Options

Trading Strategies Involving Options

Introduction to Binomial Trees

Valuing Stock Options: the Bsm Model

Options on Stock Indices and Currencies

Futures Options

The Greek Letters

Binomial Trees in Practice

Volatility Smiles

Value at Risk

Interest Rate Options

Exotic Options and Other Nonstandard Products

Credit Derivatives

Weather, Energy, and Insurance Derivatives

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