I have couple of questions on the following problem 1. How is this call assumed as European call to divide with (1+RFR) rather than mulitplying with that factor? 2. why it is multiplication for American vs European? 3 Why RFR 5% is not divided with 60/365 to get that fraction of rate? Appreciate for any elaboration. ------------------------------- Consider a call option expiring in 60 days on a non-dividend-paying stock trading at 53 when the risk-free rate is 5%. The lower bound for a call option with an exercise price of 50 is: A) $3.00. B) $0. C) $3.55. D) $3.40. Your answer: A was incorrect. The correct answer was D) $3.40. 53 - 50/(1.05)60/365 = 3.40. ------------------- Option Minimum Value Maximum Value European call ct ³ [0, St - X / (1 + RFR)T - t] St American call Ct ³ Max [0, St - X (1 + RFR)T - t] St
exercise price is a future price, we need to firn out present value --> divide in the formula we raise (1+rfr) to the 60/365 power