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A European call option with exercise price of $5.00 currently has a premium of $0.40. Another European call option on the same non-dividend paying stock,

A European call option with exercise price of $5.00 currently has a premium of $0.40. Another European call option on the same non-dividend paying stock, with the same expiry date but with an exercise price of $5.25 must have a premium of less than $0.15.

TRUE OR FALSE?

You must provide a short (one or two sentence) explanation for your answer. No explanation means no marks.

Start your answer with "The statement is TRUE/FALSE." Then go on to answer why. You may wish to describe the relationship between the call price and the strike price in words, because you will not be able to plot the graph in your answer.

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