1. Suppose IcyFresh is a publicly-traded company headquartered in Claremont, CA that has frozen yogurt and ice cream chains. For this question, consider European call options that expire in one year (T=1) with a strike price of $5 per share. Assume the risk-free rate is 10.5%.
   1. What are the upper and lower bounds on the call option price (give the equations)?

2. Plot the upper and lower bounds, along with intrinsic value, in a diagram such as:

3. Suppose the current stock price (S₀) is $6 per share and the call option premium is $1.75
   1. Identify the point on your plot above and label it c*.
   2. Is there arbitrage? Why or why not?
   3. Decompose the call option premium into Intrinsic Value and Time Value. Identify the components of your plot above.

Answer rating: 100% (QA)

Answer Upper and Lower Bounds on the Call Option Price The upper and lower bounds on the call option price are calculated using the BlackScholes formula which is given by Call Value S0Nd1 XerT Nd2 whe... View the full answer