Question

Let C be the price of a call option to purchase a security whose present price is S. Argue that C <= S. .

Answer 1

Solution:

The options are a derivative instrument and they derive the price from the underlying assets. The call option gives the right to by security at a given exercise price.

If the price of the security is S and the call option premium is C then C should always be less than S. This can be explained by the fact that the option derives the price from the underlying assets. It can be understood by the example- If the price of the security is $200 then the price of the call option can not be more than $200 because if the call option is more than $200 then it means that there will be an arbitrage. Sell the call option and buy the security to get the profit.

Hence C <= S