Upgrade to remove ads
Only $35.99/year

UNIT #3: REVIEW MARGIN ACCOUNTS TO CONFIRM PROPER HANDLING AND TIMELY ADHERENCE TO MARGIN REQUIREMENTS

Terms in this set (28)

A customer margin agreement consists of all of the following except
A)
a loan consent agreement.
B)
a credit agreement.
C)
a debit agreement.
D)
a hypothecation agreement.
Explanation
Before a customer is allowed to trade on margin, the customer must sign a margin agreement with three basic components: a credit agreement, a hypothecation agreement, and a loan consent agreement. A margin agreement provides credit to the customer.
C
Accounts approved for pattern day trading must maintain on any day during which day trading occurs minimum equity of
A)
$20,000.
B)
$10,000.
C)
$25,000.
D)
$15,000.
Explanation
Pattern day traders must have on deposit in the account equity at least $25,000 on any day on which day trading occurs.
C
A customer's margin account is best described as
A)
an APR loan on securities in a customer's account.
B)
an equity line of credit for securities.
C)
a rehypothecation loan on the value of the securities in the customer's account.
D)
a collateralized loan account for securities.
Explanation
A margin account is a collateralized loan account in which a customer increases his trading capital with money borrowed from a brokerage house in the hope of earning leveraged profits.
D
Regulation T requires that all stock purchases normally be paid for within how many business days?
A)
Seven days
B)
Three days
C)
Four days
D)
One day
Explanation
Under Regulation T, a customer must normally meet the initial margin requirement for a stock purchase within two business days of the settlement date. Regular way settlement for stock is T + 2. Two business days after settlement would be T + 4.
C
The current minimum maintenance margin requirement is best described as
A)
an equity balance that must be maintained in the margin account on an ongoing basis.
B)
the equity balance less the debit balance that must be maintained in the margin account on an ongoing basis.
C)
an equity balance equal to the initial margin requirement equity that must be maintained in the margin account on an ongoing basis regardless of the debit balance.
D)
an equity balance necessary to establish a position in a margin account and maintain the position on an ongoing basis.
Explanation
The maintenance margin must be maintained in the margin account on an ongoing basis.
A
Your customer established a new position by writing a covered call in a margin account. The requirement for the position is
A)
50% of the stock purchase price for both the long stock and the short call.
B)
20% of the market value of the underlying security, less any amount the option is out of the money plus an amount equal to the current market value of the option premium.
C)
10% of the market value of the underlying security plus an amount equal to the current market value of the option premium.
D)
an amount equal to the current market value of the option premium.
Explanation
If a short call is covered, there is no Regulation T margin requirement for the option. The customer must deposit 50% of the stock purchase price to meet the Regulation T requirement for both the long stock and the short call. The other items are for an uncovered call.
A
Both initial and minimum margin requirements apply to positions with options. An investor who writes an uncovered option is required to have at least all of the following items on deposit except
A)
50% of the market value of the underlying stock.
B)
20% of the market value of the underlying security less any amount the option is out of the money.
C)
10% of the market value of the underlying security.
D)
an amount equal to the current market value of the option premium.
Explanation
Initial and minimum margin require at least an amount equal to the current market value of the option premium, 20% of the market value of the underlying security less any amount the option is out of the money, or 10% of the market value of the underlying security. Fifty percent of the market value of the underlying stock would be above the minimum required.
A
The margin disclosure statement provides some basic information on using margin to pay for securities. Which statement would most likely be included?
A)
Your brokerage firm is required to provide you with advance notice when margin requirements are increased.
B)
You can lose more money than you have invested.
C)
You must file for an extension of time on a margin call if necessary.
D)
Your brokerage firm will consult with you before trading some or all of your securities to pay off your margin balance.
Explanation
The risks involved in trading securities on margin are important. There are several risks. You can lose more money than you have invested. Your brokerage firm may sell some or all of your securities without consulting you to pay off your margin loan. Your brokerage firm can increase its margin requirements at any time and is not required to provide you with advance notice. You are not entitled to an extension of time on a margin call.
B
Which of the following positions would cover a call option written in a cash account?
A)
Long call with a lower strike price
B)
Short position in 100 shares of the underlying stock
C)
Long position in 100 shares of the underlying stock
D)
Long call with a higher strike price
Explanation
A call option obliges the writer to sell stock at the strike price, and a long position in the underlying stock will cover the writer's risk. Owning a call with a lower strike price will cover a call with a higher strike price in a margin account only.
C
According to Regulation T, what percentage must be deposited when an option is purchased?
A)
25%
B)
0%
C)
100%
D)
55%
Explanation
Long options have no loan value and must be paid for in full.
C
The minimum equity required to be on deposit for pattern day traders on any day on which day trading occurs is
A)
$25,000.
B)
$15,000.
C)
$20,000.
D)
$10,000.
Explanation
Pattern day traders must have on deposit in the account equity of at least $25,000 on any day on which day trading occurs.
A
Initial and maintenance margin requirements are set by
A)
FINRA.
B)
the SEC.
C)
the Federal Reserve Board (FRB).
D)
the CBOE.
Explanation
The Federal Reserve Board (FRB) sets the initial and maintenance margin requirements for non-exempt securities, whether long or short.
C
In a new margin account, if a customer buys 300 shares of XYZ for 48 and simultaneously writes 3 XYZ Jan 50 calls at 1, the margin call will be for
A)
$6,900.
B)
$7,500.
C)
$7,350.
D)
$7,200.
Explanation
The Regulation T requirement is $7,200 (50% × $14,400). There is no Regulation T requirement for writing covered calls. The requirement to establish both positions is $7,200. However, the question asked for the margin call (a margin deposit). The requirement of $7,200 is reduced by the premium income received ($300). By depositing $6,900, the customer will have $7,200 in the account, the difference being the premium income credited to the account on settlement date.
A
A customer writes a put spread. Which of the following are true statements?
The margin requirement is the difference between the two strike prices.
The margin requirement is the net premium received (credit).
The margin deposit is equal to the maximum gain potential of the position.
The margin deposit is equal to the maximum loss potential of the position.
A)
I and III
B)
II and IV
C)
II and III
D)
I and IV
Explanation
The margin requirement on a credit spread is the difference between the two strike prices. The margin deposit that must be made is the margin requirement less the net premiums received. This deposit amount is equal to the maximum loss potential of the position.
D
The margin disclosure statement provides some basic information on using margin to pay for securities. Which statement would most likely be included?
A)
Your brokerage firm is required to provide you with advance notice when margin requirements are increased.
B)
You can lose more money than you have invested.
C)
Your brokerage firm will consult with you before trading some or all of your securities to pay off your margin balance.
D)
You must file for an extension of time on a margin call if necessary.
Explanation
The risks involved in trading securities on margin are important. There are several risks. You can lose more money than you have invested. Your brokerage firm may sell some or all of your securities without consulting you to pay off your margin loan. Your brokerage firm can increase its margin requirements at any time and is not required to provide you with advance notice. You are not entitled to an extension of time on a margin call.
B
In a customer margin account, the customer is required to
A)
pay for the securities in full or borrow part of the purchase price and settle within T+2 days.
B)
pay for the stock in full within T+2 days.
C)
pay a portion of the balance, but not the entire balance, within T+2 days.
D)
pay a portion of the balance or the entire balance within T+1 days.
Explanation
When a customer purchases securities in a margin account, the customer may pay for the securities in full or borrow part of the purchase price from the brokerage firm.
A
A writer of an XYZ 45 put is considered covered in which of the following positions?
A)
Long XYZ 50 put
B)
Long XYZ 40 put
C)
Long XYZ common stock
D)
Short XYZ 45 call
Explanation
Being long a put with the same or higher strike price—and with the same or later expiration—covers the risk of writing a put with a lower strike price.
A
A bank has tendered a bank guarantee letter that certifies that the bank holds on deposit funds for the writer of a put equal to the aggregate exercise price of the put. This bank must be approved by
A)
the SEC.
B)
the FDIC.
C)
the OCC.
D)
FINRA.
Explanation
Any bank that tenders a letter of guarantee or a bank agreement on behalf of a put writer must be approved by the OCC. The broker-dealer holding the account for the put writer must agree to accept the letter of guarantee.
C
The Regulation T requirement (also referred to as the Fed call) is 50% of the market value of the
A)
stock and options purchased.
B)
stock purchased or sold.
C)
options purchased or sold.
D)
uncovered options purchased or sold.
Explanation
The Regulation T requirement is 50% of the market value of the securities being purchased on margin or sold short. Margin requirements are different for uncovered option positions.
B
A customer sells short 100 shares of XYZ at 70 and writes an XYZ May 70 put for 3.50. The customer must deposit
A)
$3,150.
B)
$3,500.
C)
$6,650.
D)
$7,000.
Explanation
The requirement of the short stock position is 50% or $3,500. The requirement on covered puts is zero. To determine the margin deposit, the premiums collected ($350) are subtracted from the required margin ($3,500 − $350 = $3,150).
A
In an existing margin account, a customer buys 100 DCF at 78 and writes 1 DCF Aug 80 call at 2.50. The margin call (deposit) would be
A)
$3,900.
B)
$5,280.
C)
$5,480.
D)
$3,650.
Explanation
The required deposit is $3,650 ($3,900 - $250). While the margin requirement is $3,900, the investor receives $250 in premium for writing the option.
D
Which of the following is a marginable security?
A)
A listed stock
B)
An Over-the-Counter Bulletin Board
C)
An Initial Public Offering stock
D)
A penny stock
Explanation
A listed stock is marginable. The Federal Reserve Board regulates which stocks are eligible for margin. However, broker-dealers can elect not to margin a particular security. Usually, extremely high beta stocks are not eligible by broker-dealers.
A
Regarding pattern day traders, which of the following is true?
A)
Buying power for pattern day traders is the same as for nonpattern day traders: two times SMA.
B)
A pattern day trader is one who executes four or more day trades in a five-business-day period.
C)
A pattern day trader is one who executes six or more day trades in a 10-business-day period.
D)
Buying power for pattern day traders is three times the maintenance margin excess—that amount above the 25% minimum maintenance required.
Explanation
A pattern day trader is defined as one who executes four or more day trades in a five-business-day period. While minimum maintenance for pattern day traders is the same as nonpattern day traders (25%), buying power for pattern day traders is four times the maintenance margin excess—that amount above the 25% minimum maintenance required.
B
A customer who has no other positions in XYZ stock establishes the following positions in a margin account:
Bought 100 XYZ shares at 36
Short 1 XYZ July 40 call at 2
How much must the customer deposit into the account?
A)
$1,800
B)
$2,000
C)
$2,200
D)
$1,600
Explanation
The investor must deposit 50% of the long stock value (100 shares × $36 = $3,600) × 50% = $1,800, less the $200 premium received for the short call that is already in the account. Therefore, the required deposit is $1,600 ($1,800 - $200). However, FINRA requires you to deposit with your brokerage firm a minimum of $2,000 or 100% of the purchase price of the securities, whichever is less. This is known as the minimum margin requirement for any margin account. The $2,000 deposit must remain in your margin account. Most broker-dealers requires a much more substantial deposit for opening a margin account for options.
B
Which of the following involving an options customer is most accurate?
A)
The customer must be financially able to bear the risks of any recommended position.
B)
The customer must receive the Options Clearing Corporation (OCC) Disclosure Document within 15 days of the account opening.
C)
The customer must sign a Special Statement for Uncovered Options Writers.
D)
The customer must maintain a margin account.
Explanation
The customer must be financially able to bear the risks of any recommended position. Not all options transactions take place in a margin account. The OCC Disclosure Document must be delivered before the account is opened. A Special Statement for Uncovered Options Writers must be delivered before the initial uncovered contract sale.
A
Which of the following are marginable securities?
A)
LEAPS purchased with more than nine months to expiration
B)
Options purchased in a cash account
C)
Options purchased on initial public offerings
D)
Options purchased in a margin account
Explanation
There is an exception to the rule that option buyers must deposit 100% of the premium. If a customer buys a LEAPS option that has more than nine months until expiration, Regulation T requires that the customer only deposit 75% of the purchase price (total premiums). To this extent, the LEAPS have a loan value of 25%. Twenty-five percent would, therefore, be both an initial and minimum maintenance requirement. Option purchases require 100%.
A
All of the following are true regarding day traders except
A)
they have a $25,000 minimum equity deposit.
B)
they can utilize a guaranteed account.
C)
they have a 25% margin rate; regular customers are at a 50% margin rate.
D)
they execute four or more day trades in a five-business-day period.
Explanation
Margin rules also prohibit day trading accounts from using account guarantees, which are otherwise permitted. For example, a cross guarantee is one where another customer, in writing, agrees to the use of money or securities in his account to carry the guaranteed accounts. Generally, this type of guarantee would be done to assist in meeting any margin calls if need be. A day trading account would not be permitted to utilize such a guarantee.
B
Which of the following statements is not correct?
A)
The margin requirement is 50% of the option premium for listed equity options.
B)
No margin is required on any covered put or call.
C)
Day traders margin rates are 25% for margin eligible equity securities.
D)
Market makers and specialists have special margin rates for offsetting positions.
Explanation
For listed equity options, the margin requirement is 100% of the option premium plus a percentage of current market value, less any out-of-the-money amount.
A
Sets found in the same folder