CFA Practice Question

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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 ______.

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 / 1.040.25) = $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?
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