Which of the following statements is true of American options?
A) The lower bound on the price of a call option on stock is the price of the stock.
B) The lower bound on the price of a call option on stock could be zero.
C) To prevent arbitrage, the value of the call today must be less than the stock price minus the exercise price.
D) After expiration, an option on stock will be worth more than the option's intrinsic value.
E) The upper bound on the price of a call option is its intrinsic value.

Question

Quizplus · Accepted Answer

The lower bound on the price of a call option on a stock could indeed be zero, as a call option gives the holder the right but not the obligation to buy the stock at a certain price. If the market conditions make it unfavorable to exercise this option, its value could theoretically drop to zero, especially before its expiration. Other options provided contain inaccuracies regarding the pricing and value of American options.

Which of the Following Statements Is True of American Options