General Securities Representative (Series 7) Practice Exam

When do index and interest rate options that are exercised settle?

1. On the exercise date

2. The same day

3. One business day

4. Within 5 business days

The correct answer is: One business day

When index and interest rate options are exercised, they settle one business day after the exercise date. This is an important feature to understand, especially in the context of how these financial instruments operate. In the case of index options, settlement involves cash payment based on the difference between the exercise price and the value of the underlying index. Since index values are not tied to a physical asset that can be delivered, the cash settlement occurs the day after exercise, providing clarity and efficiency in the transaction. For interest rate options, a similar process applies. When exercised, the cash settlement also occurs one business day later. This timing allows for the accurate processing of payments and adjustments based on the latest market data. Understanding this settlement schedule is crucial for both traders and investors when planning their cash flows and the timing of their financial transactions.