Question

(a) What is a lower bound for the price of a 6-month European call option on a nondividend-paying stock when the stock price is $50, the strike price is $48, and the risk-free interest rate is 5% per annum? (b) What is a lower bound for the price of a 2-month European put option on a nondividend-paying stock when the stock price is $70, the strike price is $73, and the risk-free interest rate is 8% per annum?

Answer #1

**(a)**

Stock Price (S) = $50

Strike Price (X) = $48

Risk free rate(r) = 5% p.a

Maturity (t) = 6 months = 0.5

**Lower bound of European Call
option:**

**(b)**

Stock Price (S) = $70

Strike Price (X) = $73

Risk free rate(r) = 8% p.a

Maturity (t) = 2 months = 2/12 = 0.16667

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