The Price of a Stock,which Pays No Dividends,is $30 and the Strike

question 11

Multiple Choice

The price of a stock,which pays no dividends,is $30 and the strike price of a one year European call option on the stock is $25.The risk-free rate is 4% (continuously compounded) .Which of the following is a lower bound for the option such that there are arbitrage opportunities if the price is below the lower bound and no arbitrage opportunities if it is above the lower bound?

• A) $5.00
• B) $5.98
• C) $4.98
• D) $3.98

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Definitions:

Cold War

A period of geopolitical tension between the Soviet Union and the United States and their respective allies, which lasted from the end of World War II until the dissolution of the Soviet Union in 1991.

Monroe Doctrine

A principle of US foreign policy that opposed European colonialism in the Americas and stated that any intervention by external powers in the politics of the Americas is a potentially hostile act against the US.

Western Hemisphere

The Western Hemisphere encompasses all territories located west of the Prime Meridian to the International Date Line, including both the Americas and surrounding waters.

Mutually Assured Destruction

A military doctrine holding that full-scale use of nuclear weapons by opposing sides would result in the destruction of both the attacker and the defender.