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

Name: The formula C0 >= 0 if (S0 - E) correctly describes the boundary values for an American call option.
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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 means that the value of the American call option at time 0 (when the option is purchased) must be non-negative. This makes sense, as an option that has negative value at the time of purchase would not be a profitable investment. Therefore, option prices must satisfy C0 >= 0.

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