General Securities Representative (Series 7) Practice Exam

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Which event can never result in an adjustment to options contracts?

Stock splits
Cash dividends
Mergers
Stock dividends

The correct answer is: Cash dividends

The event that can never result in an adjustment to options contracts is cash dividends. This is because cash dividends do not alter the underlying value of the stock in the same way that stock splits, stock dividends, or mergers can. When a company pays a cash dividend, the amount of cash distributed reduces the price of the stock accordingly, but it does not change the number of shares outstanding or the fundamental value of the existing shares. Options contracts are designed to reflect the value of the underlying asset, and while the stock price may decrease temporarily due to the cash dividend payout, the overall value represented by the contract remains unchanged. In contrast, stock splits and stock dividends do affect the number of shares and proportional ownership, necessitating adjustments to the contracts to maintain equity among all option holders. Mergers can result in changes to the stock structure itself, also requiring adjustments to reflect the new entity's share distribution.