2011 Mock Morning Session - Derivatives question, somebody, regarding, 2011

sweetgirl

Question 93: regarding lower Bound for European call.

Can somebody help me out with this question

I cannot get 4.30. this is my reasoning

4/1.05^3/12 = 3.95.

I chose B because it was the closest one. What am I doing wrong here?

Thanks

dece2011

sorry do not have acesss to the question. However based on what you have written you may have omitted one part of the formula. What is S or the current value of the underlying? At this moment all you have calculated is the PV of X. You need to subtract this from S.

Lower bound for EC = MAx( 0, S- X/(1+r)^T)

Hope this helps

evolsteevol

S is 29 and X is 25

What is this answer?

btcapital

29 - 25/1,05^(3/12). Simple as that.

orang3eph

Perhaps reading the equation in this manner will help.

s - (x/(1+r)^t) - The bracketed term has to be discounted prior to the subtraction

Penny-wenny

thanks heaps mate

marsilni

No worries. GL!