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Calculate the minimum value of the European call when the stock price is 50, the strike...

Calculate the minimum value of the European call when the stock price is 50, the strike price is 50. The call is for 1 year and the annual rate is 5%

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Answer #1

Minimum value of European call can be calculated with following equation:

= Max(So -70)

where,

S0 = Current stock price

X = Strike price

r = risk free rate

t = maturity

putting the values.

= Max(50 – 20050) 50

= Ματ(50 - 47.56, 0)

= Mar(2.44, 0)

- $2.44

Please note: In above calculation we considered continuous compounding. However, if we solve with normal compounding then we will get minimum value of call of $2.38.

Hope this will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.

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