[6]. A stock price (which pays no dividends) is $50 and the strike price of a two-year European put option written on the stock is $60. The risk-free rate is 5% per annum (continuously compounded). Which of the following is a lower bound for the option such that there are arbitrage opportunities if the price is below the lower bound and no arbitrage opportunities if it is above the lower bound?

Answer: _______

A. $4.29

B. $6.54

C. $8.81

D. $10.00

[7]. Which of the following is NOT true? (Assume that present values are calculated from the end of the life of the option to today.)

Answer: _______

A. An American call option is always worth less than the stock price

B. A European call option is always worth less than the stock price

C. An American put option is always worth less than the present value of the strike price

D. A European put option is always worth less than the present value of the strike price

[8]. The current price of a stock is $51. A dividend of $1 is expected in one year. A European call option on the stock with a strike price of $50 and a maturity of one year is worth $7. A European put option on the stock with a strike price of $50 and a maturity of one year is worth $6. Interest rates are zero. Which of the following is true?

Answer: _______

A. The call price is low relative to the put price

B. The put price is low relative to the call price

C. None of the above

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