Ássume all rates are per annum continuously compounded. Assume no arbitrage. The spot price of an asset is $27.00 and the risk-free rate is 6.1%. Consider the following three European call options, all expiring in 14 months. Option A has strike $20.00 and premium $6.00; Option B has strike $26.003; Option C has strike $32.00 and premium $1.00. (a) What is the least (known) upper bound on the premium of call option B? (b) What is the least upper bound on the premium of the corresponding European put option with strike $26.00 expiring in 14 months?
Ássume all rates are per annum continuously compounded. Assume no arbitrage. The spot price of an asset is $27.00 and the risk-free rate is 6.1%. Consider the following three European call options, all expiring in 14 months. Option A has strike $20.00 and premium $6.00; Option B has strike $26.003; Option C has strike $32.00 and premium $1.00. (a) What is the least (known) upper bound on the premium of call option B? (b) What is the least upper bound on the premium of the corresponding European put option with strike $26.00 expiring in 14 months?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Transcribed Image Text:Assume all rates are per annum continuously
compounded. Assume no arbitrage. The spot
price of an asset is $27.00 and the risk-free
rate is 6.1%. Consider the following three
European call options, all expiring in 14
months. Option A has strike $20.00 and
premium $6.00; Option B has strike $26.00;
Option C has strike $32.00 and premium
$1.00. (a) What is the least (known) upper
bound on the premium of call option B? (b)
What is the least upper bound on the
premium of the corresponding European put
option with strike $26.00 expiring in 14
months?
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