7.6 Lower bound for European Call Prices (NO Dividends) Consider the following positions t=0 S<X S>X Portfolio a Buy ci S-X Lend Xe-rT at r -Xe-TT Ⅹ Net flows -C-Xe Ⅹ T Portfolio b Buy one share A is worth more than b, so it must cost more to set it up initially. So c+ Xe-IT> So c> max[So Xe-r, 0] Options, Futures, and Other Derivatives, 4th edition@ 2000 by John C. Hull Tang Yincai, Shanghai Normal UniversityOptions, Futures, and Other Derivatives, 4th edition © 2000 by John C. Hull Tang Yincai, Shanghai Normal University 7.6 Lower Bound for European Call Prices (NO Dividends) • Consider the following positions t = 0 ST <X ST >X Portfolio A Buy Call -c 0 ST - X Lend Xe-rT at r -Xe-rT X X Net Flows -c-Xe-rT X ST Portfolio B Buy one share -S0 ST ST • A is worth more than B, so it must cost more to set it up initially. So c + Xe-rT > S0 c > max[S0 -Xe -rT , 0]