A European 3-month call has a strike price of $35. The stock price is currently $34.30. What is the lower price bound on this call?

Question

Quizplus · Accepted Answer

The lower price bound of a European call option is the maximum of 0 and S - X/(1+r)^t, where S is the current stock price, X is the strike price, r is the risk-free rate, and t is the time to expiration. Without the risk-free rate provided, we simplify to the intrinsic value, which is max(0, S - X). Since the stock price ($34.30) is less than the strike price ($35), the intrinsic value is 0, making the lower price bound $0.

A European 3-Month Call Has a Strike Price of $35