- CFA Exams
- CFA Level I Exam
- Study Session 16. Derivatives
- Reading 49. Basics of Derivative Pricing and Valuation
- Subject 8. Factors that Affect the Value of an Option

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**CFA Practice Question**

A European stock index call option has a strike price of $1,160 and a time to expiration of 0.25 years. Given a risk-free rate of 4 percent, if the underlying index is trading at $1,200 and has a multiplier of 1, then the lower bound for the option price is closest to ______.

B. $40.00

C. $51.32

A. $28.29

B. $40.00

C. $51.32

Correct Answer: C

The lower bound on a European call is either zero or the underlying asset's price minus the present value of the exercise price, whichever is greater.

$1200 - ($1160 / 1.04

^{0.25}) = $51.32###
**User Contributed Comments**
2

User |
Comment |
---|---|

Inaganti6 |
In reality they won't be nice enough in the real test to give you .25 directly no way they'll be that kind. |

dbedford |
Because it's super hard to know that you should divide the number of days by 365? |