Consider two six-month American calls at strikes 90 and 100 on a non-dividend paying stock.The risk free rate is 2%.The difference between the two call prices at any time before maturity will always be
A)Less than $10.
B)Equal to $10.
C)Greater than $10.
D)One cannot be sure of which of the preceding three choices is valid and more information may be required.

Question

Quizplus · Accepted Answer

The difference between the two call prices will always be less than $10 because the call with the lower strike price (90) will always be worth more than the call with the higher strike price (100), but the maximum difference in intrinsic value at expiration is $10. Before expiration, the time value and the possibility of early exercise for American options will ensure the difference is less than $10.

Consider Two Six-Month American Calls at Strikes 90 and 100