Explanation:
The lower bound of the European put option on a non-dividend paying stock is equal to:
Where = put option price; = current stock price; = strike price; = risk-free rate; and = time to expiration.
An arbitrage opportunity exists if the value of the European put option is below $1.22.
Q.753 Vijay Singh works as an investment manager at Global Investment Company in New York. Global also provides brokerage services to its clients. Therefore, it is a usual task at Global to derive upper and lower boundaries for options so the prices are arbitrage-free. Which of the following given options is the accurate estimation of the lower price boundary for European put options on a non-dividend paying stock that expires in 3 months, if the current stock price is $31, the strike price is $33, and the risk-free rate is 10% with annual compounding?
A
$2.37
B
$1.22
C
$2.80
D
$1.19
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