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12 March, 12:48

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?

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  1. 12 March, 13:51
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    The lower bound for the price of a 4-month call option on a non-dividend-paying stock is 3.66

    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
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