The lower limit of a warrant's value is defined as:
A)zero.
B)MIN(0,Exercise price − Stock price).
C)MAX(0,Stock price − Exercise price).
D)MAX(0,Exercise price − Stock price).
E)MIN(0,Stock price − Exercise price).

Question

Quizplus · Accepted Answer

C) MAX(0,Stock price − Exercise price) is the correct answer because the value of a warrant (similar to a call option) cannot be negative. The lower limit of its value is either zero (if the stock price is below the exercise price, making the warrant out of the money) or the difference between the stock price and the exercise price (if the stock price is above the exercise price, making the warrant in the money). This ensures that the warrant's value reflects the potential profit from exercising it without falling below zero.

The Lower Limit of a Warrant's Value Is Defined As