Consider a European put option with strike price $30 and time to expiration 1 month. Assume the underlying stock price does not pay a dividend and is currently $22. The risk free rate is 4%. What is a lower bound on the current value of the European put option

$7.90

Explanation:

Calculation for lower bound on the current value of the European put option

Using this formula

Lower bound current value for European put option = Ke^–rt –So

Where,

Rf represent risk free rate 4%

K represent (Strike price) = $30

(t) represent Time = 1 month = 1/12 year

(So) represent Stock price = $22

Let plug in the formula

Lower bound current value for European put option = [30e^–0.04 x (1/12) ] – 22

Lower bound current value for European put option = $29.90 – $22

Lower bound current value for European put option = $7.90

Therefore the lower bound on the current value of the European put option will be $7.90

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