The lower bound of a put option premium is the greater of zero and the difference between the exercise price and the spot rate; the upper bound of a currency put option is the exercise price.

Question

Quizplus · Accepted Answer

This statement is true. The lower bound of a put option premium is never negative, so it is either zero or positive. The difference between the exercise price and the spot rate represents the intrinsic value of the option, so it is the minimum amount the option should be worth. On the other hand, the upper bound of a currency put option is the maximum possible payout for the buyer, which is the exercise price.

The Lower Bound of a Put Option Premium Is the Greater