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What is a lower bound for the price of a 4-month call option on a non-dividend-paying stock when the stock price is $28, the strike price is $25, and the risk-free interest rate is 8% per annum?

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Karabo99

Answer:

The lower bound for the price of a 4-month call option on a non-dividend-paying stock is 3.66

Explanation:

Lower bound = Stock Price - Strike Price*exp[-rt]

                       = 28 - 25*exp[-8%*4/12]

                       = 3.66

Therefore, The lower bound for the price of a 4-month call option on a non-dividend-paying stock is 3.66

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