🌐 Nonequity Options (Index, Interest Rate, Currency) – Series 7 Exam

Understanding nonequity options is essential for success on the Series 7 – General Securities Representative Exam. Unlike traditional equity options that involve individual stocks, nonequity options are based on indexes, interest rates, or currencies — and they behave differently in terms of exercise, settlement, and risk.

This guide covers everything you need to know about index options, interest rate options, and currency options for the Series 7 exam.

📈 Index Options

🔍 Overview:

• Options based on a market index (e.g., S&P 500, Russell 2000, Nasdaq-100)
• No delivery of securities — settled in cash
• Used to hedge or speculate on overall market movement

⚡ Key Points:

• European-style exercise: Can only be exercised at expiration (SPX, RUT)
• American-style exercise: Some sector indexes allow early exercise
• Settlement: T+1 (next business day after exercise) in cash
• Multiplier: $100 per index point

🧠 Tested Concepts:

• Hedging portfolios (portfolio insurance strategies)
• Anticipating market movement
• Beta hedging with index options

🏦 Interest Rate Options

🔍 Overview:

• Options based on changes in interest rates (yield of specific debt instruments)
• Settled in cash — no delivery of bonds or notes

⚡ Key Points:

• Underlying: Yields of T-bills, T-notes, T-bonds
• Multiplier: $100 per basis point movement
• Exercise Style: European (only at expiration)
• Settlement: Cash settlement

🧠 Tested Concepts:

• Hedging against rising/falling interest rates
• Speculating on future interest rate movements
• Inverse relationship between bond prices and yields

💱 Currency Options

🔍 Overview:

• Options based on exchange rates between two currencies (e.g., USD/EUR, USD/JPY)
• Help protect against or speculate on foreign exchange fluctuations

⚡ Key Points:

• Trading venue: Primarily on the Philadelphia Stock Exchange (PHLX)
• Exercise Style: European
• Settlement: U.S. dollars (cash settlement)
• Multiplier: $10,000 for most contracts (except for some cross-rate pairs)

🧠 Tested Concepts:

• Hedging foreign currency exposure for exporters/importers
• Speculating on strength or weakness of a currency
• Impact of interest rate differentials on currency strength

📋 Key Differences from Equity Options

📌 Series 7 Test Focus Areas

• Knowing which options are European vs. American style
• Understanding cash settlement procedures
• Identifying hedging strategies using index and currency options
• Recognizing portfolio protection versus speculation strategies

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