Option question currently, question, option, thinks, price

ShooterMcCFA

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

JoeyDVivre

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.

Beatnik

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!!

amqata

Min European = max (0, S- (X/((1+rf)^.6)))

219/365=.6

X=Strike Price
S=Stock Price

This gets you 4.58

cyber21

june, please excuse my ignorance. Would my calculation of $4.10 have been correct for an American option?

hariRaj

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

kasinkei

I'm wondering the same thing. When I took $4 at the 4% over 219 days, I only got $4.10. Confused.

studyn

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.

btcapital

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.

kamara5

can somebody show me how to get 4.58 in terms of calculation?

Thanks