Question

Which of the following option is false? Select the most suitable answer. Select one:

a. The European put price plus the stock price must equal the European call price plus the present value of the strike price.

b. For American options, put-call parity provides an upper and a lower bound for the difference between call and put prices.

c. For American options without dividend payment, the difference between call and put prices should be higher than or equal to the difference between stock price and strike price.

d. The intrinsic value of an option is always lower than the option premium. e. Call option writer has limited profit.

Answer 1

C) For american options without dividend payment, the call and put prices should be higher than or equal to the difference between stock price and strike price.

Explanation: Apart from the above Option, rest all are true.

Option 5 is true, Maximum profit which can be earned by any option writer is limited to the option premium.

Option 2 is true, Put call parity provides an upper and lower bound for difference between put and call prices.

Option 4 is true, Intrinsic value is always less than option premium. This is because, if the intrinsic value is more than Option premium, then the option buyer will earn immediate profit by entering into the transaction.

Option 1 is true, Put and call parity

present value of strike price + call = stock + put