LOS h: Calculate and interpret the lowest prices of European and American calls and puts based on the rules for minimum values and lower bounds.

Q1. Consider a call option expiring in 60 days on a non-dividend-paying stock trading at 53 when the risk-free rate is 5%. The lower bound for a call option with an exercise price of 50 is:

A)   $0.

B)   $3.40.

C)   $3.00.

Q2. Consider a put option expiring in 120 days on a non-dividend-paying stock trading at 47 when the risk-free rate is 5%. What are the lower bounds for an American put and a European put with exercise prices of 50?

          American Put     European Put

A)     $3.00                       $2.20

B)     $2.20                       $2.20

C)     $3.00                       $3.00

Q3. Consider a call option expiring in 110 days on a non-dividend-paying stock trading at 27 when the risk-free rate is 6%. The lower bound for a call option with an exercise price of 25 is:

A)   $2.44.

B)   $2.00.

C)   $1.97.

LOS h: Calculate and interpret the lowest prices of European and American calls and puts based on the rules for minimum values and lower bounds. fficeffice" />

Q1. Consider a call option expiring in 60 days on a non-dividend-paying stock trading at 53 when the risk-free rate is 5%. The lower bound for a call option with an exercise price of 50 is:

A)   $0.

B)   $3.40.

C)   $3.00.

Correct answer is B)

53 ? 50/(1.05)^60/365 = 3.40.

Q2. Consider a put option expiring in 120 days on a non-dividend-paying stock trading at 47 when the risk-free rate is 5%. What are the lower bounds for an American put and a European put with exercise prices of 50?

          American Put     European Put

A)     $3.00                       $2.20

B)     $2.20                       $2.20

C)     $3.00                       $3.00

Correct answer is A)

An American put can be exercised immediately for a $3 gain, the European put cannot be exercised until expiration so its minimum value is 50 / (1.05)^120/365 ? 47 = $2.20.

Q3. Consider a call option expiring in 110 days on a non-dividend-paying stock trading at 27 when the risk-free rate is 6%. The lower bound for a call option with an exercise price of 25 is:

A)   $2.44.

B)   $2.00.

C)   $1.97.

Correct answer is A)

27 - 25/(1.06)^110/365 = 2.435.

thanks

thansk

j

thanks