Explanation

The correct answer is B because the lower and upper bounds for American options can be derived from the put-call parity inequality:

$S_0 - K \leq (C - P) \leq S_0 - Ke^{-rT}$

Where:

• $S_0 = 40$ (current stock price)
• $K = 35$ (strike price)
• $r = 1.5\% = 0.015$ (risk-free rate)
• $T = 3/12 = 0.25$ years (time to maturity)

Calculations:

• Lower bound: $S_0 - K = 40 - 35 = 5$
• Upper bound: $S_0 - Ke^{-rT} = 40 - 35e^{-0.015 \cdot 0.25} = 40 - 35e^{-0.00375} = 40 - 35 \cdot 0.99626 = 40 - 34.87 = 5.13$

Therefore, the bounds are: $`$5` \leq (C - P) \leq 5.13 $$

Alternative approach using American option bounds:

Subtracting the put values from the call values:

• Minimum difference: $5.13 - 35 = -29.87$ (but this is not meaningful)
• Maximum difference: $40 - 0 = 40$ (but this is not meaningful)

The correct approach is to use the put-call parity bounds for American options, which gives us the range $5 \leq (C - P) \leq 5.13$.