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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
...
An employee stock option is usually held to maturity
B
...
An employee stock options tends to be exercised later than an OTC option with the same
terms
D
...

co
m

Employee stock options tend to be exercised earlier than similar exchange-traded options
...
A,
C, and D are not true
...
Which of the following is NOT usually true about employee stock options?
A
...
They can be sold to other employees
C
...
Their value is currently a charge to the income statement
Answer: B

Employee stock options cannot be sold
...


3
...
Agency costs
B
...
Dilution
D
...


sh

4
...
They are commonly valued as though they are regular American options
B
...

C
...
They are commonly valued as though they are regular European options but with a reduced
life
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Answer: D
They are commonly valued using Black-Scholes-Merton (i
...
as European options) but with
a reduced life to reflect early exercise behavior
5
...
The options never had any affect on a company’s financial statements
B
...
The value of options which were at-the-money when issued had to be reported in the
notes to the financial statements
D
...

co
m

Answer: D
Options which were at the money were assumed to have no cost to a company prior to
1995
...
Which of the following was true about employee stock options between 1996 and 2004?
A
...
The value of options which were at-the-money when issued had to be expensed on the
income statement
C
...
Options which were at-the-money when issued did not affect a company’s financial
statements
Answer: C

The value of options had to be reported in the notes to the financial statements between
1996 and 2004
...


sh

Th

7
...
The options never had any affect on a company’s financial statements
B
...
The value of options which were at-the-money when issued had to be reported in the
notes to the financial statements
D
...


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...
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Which of the following is true about employee stock options after they have been issued?
A
...
They have to be revalued every quarter
C
...
They never have to be revalued
Answer: D
Options are valued when issued but do not have to be valued subsequently
...

co
m

9
...
It is illegal
B
...
S
...
It is illegal in roughly half the states in the U
...

D
...
A company surprises the market with an announcement that it has granted stock options to
senior executives
...
When does dilution take place?
A
...
Dilution takes place on the announcement date
C
...
There is no dilution
Answer: B

Efficient markets should ensure that dilution takes place at the time of the announcement
...
When an employee leaves the company which of the following is usually true?
A
...
Out-of the money employee stock options are forfeited
C
...
All options are retained

Th

Answer: B

sh

Usually out-of-the-money options are forfeited and in-the-money options have to be
exercised immediately
...
Which of the following defines the vesting period?
A
...
The period during which the options are issued
C
...
The period during which employee stock options cannot be exercised

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...

13
...
Management has an incentive to issue executive stock options after bad news
B
...
Executive stock options encourage management to pursue strategies that are best for
the company in the long run
D
...

co
m

Executive stock options tend to cause management to have short-term horizons
...
This is because management want to issue options when the price is low and
exercise when the price is high
...
Which of the following strategies makes no sense?
A
...
No dividends are expected
B
...
No dividends are
expected
C
...
Dividends are expected
D
...
Dividends are expected
...
The only reason for exercising an employee stock option is monetize it
...
But to monetize the option the shares of stock that are obtained must be
sold
...
When a CEO has employee stock options, he or she is in theory motivated to do which of the
following?
A
...
Take less risk
C
...
None of the above

sh

Answer: A

If the CEO takes more risk, volatility increases and the options become more valuable
...
When an employee stock option is exercised, which of the following is usually true?
A
...
The company or the company’s agent buys stock in the market for the employee

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The company issues more shares and sells them to the employee for the strike price
D
...

17
...
An increase in the vesting period
B
...
A fast growth rate for the stock price
D
...

co
m

Answer: A
If the vesting period increases employees must wait longer before they are allowed to
exercise
...
Which of the following hypotheses was supported by empirical research covering the 1995 to
2002 period?
A
...
The grant date for executive stock options tended to be when the stock price is low
C
...
The was no relationship between the timing of grants and the stock price
Answer: B

Empirical research showed that the grant date was a low point for the stock price
...


Th

19
...
A constant strike price for executive stock options
B
...
A strike price that changes in line with an index of stock prices
D
...
Employee stock options are particularly popular with start ups because
A
...
The start up cannot afford to pay high salaries

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The risk associated with the company’s success is shared with employees
...
All of the above
Answer: D

sh

Th

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