21.2 Restrictions on Option Values

Question 1

List

restrictions on the value of an option

Option Valuation

Answer 1

• its value cannot be negative
• because the option need not be exercised, it confers no liability on its holder
• its payoff is zero at worst

Option Valuation

Question 2

equation

The value of a call must be greater than

Option Valuation

Answer 2

C >= S₀ - PV(X) - PV(D)

Option Valuation

Question 3

What is the upper bound on the possible value of the call

Option Valuation

Answer 3

• This bound is simply the stock price.
• Non one would pay more than S₀ dollars for the right to purchase stock worth S₀ dollars.
• C <= S₀

Option Valuation