An analyst is evaluating a European call option with a strike price of 25 and 219 days to expiration. The underlying stock is currently trading for $29, and the analyst thinks that by the option expiration date the stock will be valued at $35. If the risk-free rate is 4.0%. what is the lower bound on the value of this option?
A $0
B $4.00
C $4.58作者: JRossSter 时间: 2011-7-11 19:49
Is the answer C?作者: mnieman 时间: 2011-7-11 19:49
kurupt, options are always valued more than zero or otherwise they can't be sold. But the pay off's may be zero or negative all the time.
Unless the markets see intrinsic value or time value, options cannot be priced. If they are not readily in the money, they have atleast time value -- hope that the price of the underlying rises before the option expires.
hth作者: sgupta0827 时间: 2011-7-11 19:49
of course, minimum value of the option anytime (any spot, any rates, any vol) during the life can theoretically go to zero. the value of the option at given time, given spot, given rate has lower bound equal to ... you know...作者: btcapital 时间: 2011-7-11 19:49
I stand corrected.... I got confused between 'lower bound' and percieved value of an option.
Lower bound = Max(0, underlying-PV of strike rate@rfr)
In this case, it is in the money so the lower bound CANNOT be zero.作者: kamara5 时间: 2011-7-11 19:49
can somebody show me how to get 4.58 in terms of calculation?
Thanks作者: kasinkei 时间: 2011-7-11 19:49
I'm wondering the same thing. When I took $4 at the 4% over 219 days, I only got $4.10. Confused.作者: studyn 时间: 2011-7-11 19:49
Its a European option:
29 - (25/(1.04^(219/365) = 4.58
UGhhh
Shortcut: European lower bound must be = or > the American lower bound. If this were american, it would already be worth $4 plus the time value portion, so must be > $4. the european must at least equal the american, so the number >$4 is the only correct choice.
Edited 1 time(s). Last edit at Friday, June 5, 2009 at 02:44PM by june2009.作者: amqata 时间: 2011-7-11 19:49
Min European = max (0, S- (X/((1+rf)^.6)))
219/365=.6
X=Strike Price
S=Stock Price
This gets you 4.58作者: cyber21 时间: 2011-7-11 19:49
june, please excuse my ignorance. Would my calculation of $4.10 have been correct for an American option?作者: hariRaj 时间: 2011-7-11 19:49
here you go billy
Int the calc
i/y =4/365
n=219
fv=25
PV= you get 24.41
29-24.41= 4.59作者: JoeyDVivre 时间: 2011-7-11 19:49
i dont think so...schweser is saying the lower bound formulas are the same for ameican and european calls.
european lower limit must be = or > American.作者: Beatnik 时间: 2011-7-11 19:49
pistan669 Wrote:
-------------------------------------------------------
> here you go billy
>
>
> Int the calc
>
> i/y =4/365
>
> n=219
>
> fv=25
>
> PV= you get 24.41
>
> 29-24.41= 4.59
Ohhhhh i like this method. Will it always yield the correct lower limit? NICE!!
