The formula C₀= 0 if (S₀- E) correctly describes the boundary values for an American call option.

Question

The formula C₀>= 0 if (S₀- E) correctly describes the boundary values for an American call option.

Quizplus · Accepted Answer

The formula C₀>= 0 if (S₀- E) correctly describes the boundary values for an American call option because the American call option gives the holder the right to exercise the option at any time before the expiration date. If the stock price is greater than or equal to the strike price, then the holder can exercise the option and receive the difference between the stock price and the strike price. If the stock price is less than the strike price, then the holder will not exercise the option and will lose the premium paid for the option.

The Formula C0 >= 0 If (S0 - E) Correctly

The Formula C₀>= 0 If (S₀- E) Correctly