CEP Client Advisory Services 3

Question 1

An executive holds vested NQSOs and is concerned about a potential stock price decline. Which strategy directly hedges the downside risk of the option position before exercise?

Accepted Answer

Purchasing put options on the company's stock

Answer

Purchasing put options on the company's stock directly hedges downside risk by giving the holder the right to sell at a set price, protecting against a price decline.

Question 2

Under what circumstance would a participant's ISO exercise trigger 'disqualifying disposition' treatment?

Accepted Answer

The participant sells shares acquired via ISO exercise less than 2 years from grant date or less than 1 year from exercise date

Answer

A disqualifying disposition occurs when ISO shares are sold before meeting both holding periods: 2 years from grant date and 1 year from exercise date.

Question 3

A client wants to gift appreciated company stock to a donor-advised fund (DAF) to maximize tax efficiency. Which outcome correctly describes this strategy?

Accepted Answer

The client avoids capital gains tax on appreciation and receives a charitable deduction for the full fair market value at the time of the gift

Answer

Donating appreciated stock directly to a DAF allows the donor to avoid capital gains on the appreciation and claim a deduction for the full fair market value, subject to AGI limitations.

Question 4

Which of the following best describes a 'net exercise' (or net share settlement) for stock options?

Accepted Answer

The participant receives shares net of those withheld by the company to cover both exercise price and taxes

Answer

In a net exercise, the company withholds shares sufficient to cover both the exercise price and applicable taxes, and delivers only the net shares to the participant.

Question 5

A departing employee holds both vested NQSOs and vested ISOs. Their separation agreement provides a 90-day post-termination exercise window. After 90 days, what happens to any unexercised ISOs?

Accepted Answer

They expire and are forfeited with no value

Answer

Unexercised ISOs that are not exercised within 90 days of termination expire and are forfeited per the plan terms; they do not automatically convert to NQSOs.

(CEP) Certified Equity Professional Practice Test

(CEP) Certified Equity Professional Practice Test

CEP Client Advisory Services 3