General Securities Representative (Series 7) Practice Exam – Your All-in-One Guide to Exam Success!

Question: 1 / 400

In what scenario is a call option typically exercised?

When the market price of the underlying asset falls below the strike price

When the market price of the underlying asset rises above the strike price

A call option is typically exercised when the market price of the underlying asset rises above the strike price. This scenario is favorable for the holder of the call option because exercising it allows them to purchase the underlying asset at a predetermined price (the strike price), which is now lower than the current market price. This results in an immediate profit for the option holder, as they can buy low and potentially sell at the higher market price.

In contrast, exercising a call option when the market price is below the strike price would not make financial sense, as the holder would be paying more for the asset than its current market value. Situations like a company announcing bankruptcy or approaching expiration without certainty about the asset's value do not create typical scenarios for exercising call options, as they would lead to a loss or unfavorable conditions.

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When the underlying company announces bankruptcy

When the option nears expiration and the asset’s value is doubtful

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