General Securities Representative (Series 7) Practice Exam

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Index options cannot be exercised before what time?

Start of trading day
End of the trading day
Start of the last hour of trading
First trade of the options

The correct answer is: End of the trading day

Index options can only be exercised at the end of the trading day, which is why the correct option is the end of the trading day. This is primarily because index options are cash-settled, meaning that when they are exercised, the settlement is based on the final index value rather than the underlying asset being transferred. Investors must wait until the market closes to determine the final settlement value, which is essential for calculating the payoff from exercising the option. Other options suggest different times, such as the start of trading or the start of the last hour. However, exercising an option before the market has closed would not allow for an accurate calculation of its final value since the index can fluctuate throughout the trading day. Therefore, the end of the trading day ensures that all relevant market data is available for the exercise, aligning with how index options function in the marketplace.