Fill This Form To Receive Instant Help
Fill This Form To Receive Instant Help
Homework answers / question archive / What is a lower bound for the price of a three-month European put option on a non-dividend-paying stock when the stock price is $12, the strike price is $21, and the risk-free interest rate is 7% per annum?
What is a lower bound for the price of a three-month European put option on a non-dividend-paying stock when the stock price is $12, the strike price is $21, and the risk-free interest rate is 7% per annum?
Given,
Stock price = $12
Strike price = $21
Risk free rate = 7% = 0.07
time period in years = 3/12 = 0.25
A European put option is the right to sell the option at a predetermined price on a specific day.
The lower bound is given by the formula,
lower bound = (strike price*e^(-rt)) - stock price
= (21*(e^(-0.07*0.25))) - 12
= 21*e(-0.0175) - 12
= 21*0.9826 - 12
= 20.6346 - 12
= 8.6346
Therefore the lower bound on a 3 month European put option is 8.63
