Upper & lower bound

AMITAG1990
Finance Junkie
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Upper & lower bound

Postby AMITAG1990 » Fri Nov 09, 2012 1:13 pm

Consider an American Call and a Put option of 4-months duration, written on an underlying stock currently priced at $40. The Strike price for the options is $35 and the risk-free rate is 4.5% (continuously compounded). Determine the Lower and Upper pricing bounds for the difference between the prices of the Call and Put options.
Choose one answer.

a. (5.21, 40)

b. (5, 5.21)

c. (34.48, 40)

d. (0.21, 34.48)

PLease solve this.

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swarnendupathak
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Re: Upper & lower bound

Postby swarnendupathak » Fri Nov 09, 2012 1:58 pm

What i guess is that the question is asking for difference between upper bound of CALL & PUT & lower bound of CALL & PUT.
So, if above is true, then apper bound of CALL & PUT is So & X respectively, which is 40-35 = 5.
Lower bound of Call is 5.52 & PUT is 0, hence the closer value is option B.
If its wrong then please correct me...


Swarnendu

AMITAG1990
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Posts: 89
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Re: Upper & lower bound

Postby AMITAG1990 » Fri Nov 09, 2012 2:02 pm

thanks swarnendu.. yes i was just looking for the interpretation of que.

content.pristine
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Posts: 356
Joined: Wed Apr 11, 2012 11:26 am

Re: Upper & lower bound

Postby content.pristine » Sat Nov 10, 2012 11:59 am

Good Interpretation Swarnendu!
8-)


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