The following quotes were observed for options on a given stock on November 1 of a given year. These are American calls except where indicated. Use the information to answer questions 7 through 20.

The stock price was 113.25. The risk-free rates were 7.30 percent (November), 7.50 percent (December) and 7.62 percent (January). The times to expiration were 0.0384 (November), 0.1342 (December), and 0.211 (January). Assume no dividends unless indicated.
-What is the European lower bound of the November 115 call?
A)1.44
B)0.00
C)1.75
D)2.06
E)none of the above

Question

The following quotes were observed for options on a given stock on November 1 of a given year. These are American calls except where indicated. Use the information to answer questions 7 through 20.

The stock price was 113.25. The risk-free rates were 7.30 percent (November), 7.50 percent (December) and 7.62 percent (January). The times to expiration were 0.0384 (November), 0.1342 (December), and 0.211 (January). Assume no dividends unless indicated.
-What is the European lower bound of the November 115 call?
A)1.44 
B)0.00 
C)1.75 
D)2.06 
E)none of the above

Quizplus · Accepted Answer

The European lower bound of the November 115 call option is 0.00. This is because the option gives the holder the right, but not the obligation, to buy an underlying asset at a strike price of 115, and if the market price is lower than the strike price at expiration, the option will expire worthless. Therefore, the lowest possible value for the option is 0.00.

The Following Quotes Were Observed for Options on a Given