Question

What is a lower bound for the price of a 4-month call option on a non-dividend-paying stock when the stock price is $28, the strike price is $25, and the risk-free interest rate is 8% per annum?

Answer 1

The lower bound for the price of a 4-month call option on a non-dividend-paying stock is 3.66

Step-by-step explanation:

Lower bound = Stock Price - Strike Price*exp[-rt]

= 28 - 25*exp[-8%*4/12]

= 3.66

Therefore, The lower bound for the price of a 4-month call option on a non-dividend-paying stock is 3.66