2011 Mock Morning Session - Derivatives

Question 93: regarding lower Bound for European call. Can somebody help me out with this question I cannot get 4.30. this is my reasoning 4/1.05^3/12 = 3.95. I chose B because it was the closest one. What am I doing wrong here? Thanks

sorry do not have acesss to the question. However based on what you have written you may have omitted one part of the formula. What is S or the current value of the underlying? At this moment all you have calculated is the PV of X. You need to subtract this from S. Lower bound for EC = MAx( 0, S- X/(1+r)^T) Hope this helps

S is 29 and X is 25 What is this answer?

29 - 25/1,05^(3/12). Simple as that.

Is S = 29 and x = 25 and R=5 and period is 3 months the the Lower bound will be 29 - 25/1.05^3/12 = 29 - 24.70 = 4.30 From your original post it appears that you may have subtracted 25 from 29 and then performed the discounting. Remember, it is X that is discounted.

that equals 4/1.0123 = 3.9514 when the answer is 4.30.

Perhaps reading the equation in this manner will help. s - (x/(1+r)^t) - The bracketed term has to be discounted prior to the subtraction

thanks heaps mate

No worries. GL!