A stock price (which pays no dividends) is $50 and the strike price of a two year European put option is $54 . The risk-free rate is 3% (continuously compounded)
Which of the following is a lower bound for the option such that there are arbitrage opportunities if the price is below the lower bound and no arbitrage opportunities if it is above the lower bound?
A. $4.00
B. $3.86
C. $2.86
D. $0.86
D
The lower bound in Ke-rT −S0 In this case it is 54e−0.03×2 – 50= $0.86 .
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