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Unformatted text preview: Suppose that S = $101, E = $100, r = . 06, t = 1. Then C ≥ max(0 , 101-94 . 18) = 6 . 82 . Note: $5.82 of the $6.82 minimum value comes from the time value of money, and $1.00 comes from the intrinsic value. Question : Can the minimum value be used to show why you would never exercise an American call option on a non-dividend paying stock prior to expiration? Both put-call parity, and the minimum value of a call are arbitrage relations, in the sense that if they do not hold, it is possible to construct a strategy that makes positive gains and has no possibility of losing money. If such a strategy were to exist, traders would exploit it immediately, and the relations would be restored....
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