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:

Marked To The Market

Refers to the daily settling of gains and losses due to changes in the market value of a security, particularly relevant for futures contracts.

Forward Contracts

A financial derivative agreement between two parties to buy or to sell an asset at a future date for a price agreed upon today.

Market Interest Rates

The prevailing rates at which borrowers and lenders conduct transactions in the open market.