The current price of a stock is $100. The stock pays a dividend of $2 in three months. The risk free rate of interest for all maturities in annualized and continuously-compounded terms is 2%. What is the minimum price of an at-the-money American call option on the stock with six months maturity?
A) $- \$ 1$
B) $0
C) $1
D) $2

Question

Quizplus · Accepted Answer

The minimum price of an at-the-money American call option cannot be negative, as the option gives the holder the right but not the obligation to buy the stock. Therefore, the worst-case scenario is that the option expires worthless, making its minimum value $0.

The Current Price of a Stock Is $100 −$1- \$ 1−$1

The Current Price of a Stock Is $100 $- \$ 1$