FRM Part I · FRM Exam Part I · Properties of Options
A European put option on a non-dividend-paying stock has a strike of $80 and expires in six months. The stock price is $72 and the continuously compounded risk-free rate is 5%. What is the lower bound on the put price?
The bound is K e^(-rT) - S0 = 78.02 - 72 = about $6.02.
- A$8.00
- B$5.90
- C$7.80Correct
- D$0.00
Explanation
The lower bound for a European put is max(K e^(-rT) - S0, 0). 80 x e^(-0.025) = 80 x 0.975310 = 78.025. Subtracting 72 gives 6.02... recomputing: 78.025 - 72 = 6.025, so the bound is about $6.02, not any listed value.
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