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Hull: Options, Futures, and Other Derivatives, Ninth Edition Chapter 16: Employee Stock Options Multiple Choice Test Bank: Questions with Answers 1. Which of the following is true? 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
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  Hull: Options, Futures, and Other Derivatives, Ninth EditionChapter 16: Employee Stock Optionsultiple Choice !est ank: #uestions $ith %ns$ers 1.Which of the following is true?A.An employee stock option is usually held to maturityB.An employee stock option tends to be exercised earlier than an OT option with the same terms .An employee stock options tends to be exercised later than an OT option with the same terms !. mployee stock options are usually exercised as early as possible Answer# B mployee stock options tend to be exercised earlier than similar exchange$traded options. This is because they cannot be sold and exercising them is the only way to moneti%e gains. A& & and ! are not true. '.Which of the following is (OT usually true about employee stock options?A.There is a )esting periodB.They can be sold to other employees.They are often at$the$money when issued!.Their )alue is currently a charge to the income statement Answer# B mployee stock options cannot be sold. A& & and ! are true.*.What term is used to describe losses shareholders experience because theinterests of managers are not aligned with their own?A.Agency costsB.Backdating scandals .!ilution!.+ncome statement expense Answer# A ,Agency costs- refers to costs arising because the interests of managers and shareholders are not aligned..Which of the following are true of employee stock options?A.They are commonly )alued as though they are regular American optionsB.They are commonly )alued as though they are regular American options& but with a reduced life. .They are commonly )alued as though they are regular uropean option!.They are commonly )alued as though they are regular uropean options but with a reduced life. Answer# !   They are commonly )alued using Black$/choles$0erton i.e. as uropean options2 but with a reduced life to re3ect early exercise beha)ior4.Which of the following was true about employee stock options prior to 1554? A.The options ne)er had any a6ect on a company7s 8nancial statementsB.The )alue of options which were at$the$money when issued had to be expensed on the income statement.The )alue of options which were at$the$money when issued had to be reported in the notes to the 8nancial statements!.Options which were at$the$money when issued did not a6ect a company7s 8nancial statements Answer# ! Options which were at the money were assumed to ha)e no cost to a company prior to 1554.9.Which of the following was true about employee stock options between 1559 and '::? A.The options ne)er had any a6ect on a company7s 8nancial statementsB.The )alue of options which were at$the$money when issued had to be expensed on the income statement.The )alue of options which were at$the$money when issued had to be reported in the notes to the 8nancial statements!.Options which were at$the$money when issued did not a6ect a company7s 8nancial statements Answer#  The )alue of options had to be reported in the notes to the 8nancial statements between 1559 and '::. They did not ha)e to be expensed.;.Which of the following was true after '::4?A.The options ne)er had any a6ect on a company7s 8nancial statementsB.The )alue of options which were at$the$money when issued had to be expensed on the income statement.The )alue of options which were at$the$money when issued had to be reported in the notes to the 8nancial statements!.Options which were at$the$money when issued did not a6ect a company7s 8nancial statementsAnswer# BAfter '::4 options had to be expensed on the income statement.<.Which of the following is true about employee stock options after they ha)e been issued?A.They ha)e to be re)alued e)ery yearB.They ha)e to be re)alued e)ery =uarter  .They ha)e to be re)alued e)ery day like other deri)ati)es!.They ne)er ha)e to be re)alued Answer# ! Options are )alued when issued but do not ha)e to be )alued subse=uently.5.Which of the following is true about the practice of backdating a stock options grant?A.+t is illegalB.+t is illegal in the ma>ority of states in the ./.& but not all states.+t is illegal in roughly half the states in the ./.!.+t is unethical& but not illegal Answer# ABackdating is illegal1:.A company surprises the market with an announcement that it has granted stock options to senior executi)es. The options are exercised four years later. When does dilution take place? A.!ilution takes place when the options are exercisedB.!ilution takes place on the announcement date.!ilution takes place gradually o)er the four years!.There is no dilution Answer# B @cient markets should ensure that dilution takes place at the time of theannouncement. 11.When an employee lea)es the company which of the following is usually true?A.All outstanding employee stock options are forfeitedB.Out$of the money employee stock options are forfeited.All options which ha)e )ested are forfeited!.All options are retained Answer# Bsually out$of$the$money options are forfeited and in$the$money options ha)e to be exercised immediately. 1'.Which of the following de8nes the )esting period?A.The period during which employee stock options can be exercisedB.The period during which the options are issued.The period during which the strike price of the options e=uals the stockprice!.The period during which employee stock options cannot be exercised   Answer# ! The )esting period is the period during which options cannot be exercised.1*.Which of the following is (OT true?A.0anagement has an incenti)e to issue executi)e stock options after bad newsB.0anagement has an incenti)e to issue executi)e stock options before good news. xecuti)e stock options encourage management to pursue strategies that are best for the company in the long run!.0anagement ha)e an incenti)e to time the announcement of good news >ust before they plan to exercise their stock options Answer#  xecuti)e stock options tend to cause management to ha)e short$term hori%ons. A& B& and ! are not true. This is because management want to issue options when the price is low and exercise when the price is high. 1.Which of the following strategies makes no sense?A.An employee exercises stock options early and sells the stock. (o di)idends are expectedB.An employee exercises stock options early and keeps the stock. (o di)idends are expected.An employee exercises stock options early and sells the stock. !i)idends are expected!.An employee exercises stock options early and keeps the stock. !i)idends are expected. Answer# BAn exchange$traded call option on a non$di)idend$paying stock should ne)er be exercised early. The only reason for exercising an employee stock option is moneti%e it. The option cannot be sold2. But to moneti%e the option the shares of stock that are obtained must be sold.14.When a  O has employee stock options& he or she is in theory moti)ated to do which of the following?A.Take more riskB.Take less risk.Buy some of the company7s stock!.(one of the abo)e Answer# A+f the  O takes more risk& )olatility increases and the options become more )aluable.19.When an employee stock option is exercised& which of the following is usually
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