A call option premium has a lower bound that is equal to the greater of zero and the difference between the underlying ____ prices. The upper bound of a call option premium is the ____ price.
A) spot and exercise; exercise
B) spot and exercise; spot
C) exercise and spot; exercise
D) exercise and spot; spot

Question

Quizplus · Accepted Answer

The lower bound of a call option premium is equal to the greater of zero and the difference between the underlying spot and exercise prices. This is because if the spot price is below the exercise price, the option will not be exercised, so the lower bound is zero. But if the spot price is above the exercise price, the option has some intrinsic value equal to the difference between the two prices. The upper bound of a call option premium is the spot price, since the option holder can always just buy the stock in the market at the spot price and exercise the option to sell it at the higher exercise price. Therefore, the best choice is B.

A Call Option Premium Has a Lower Bound That Is