Let S = $100,K = $95, r = 8%, T = 0.5, and = 0. Let

Question:

Let S = $100,K = $95, r = 8%, T = 0.5, and δ = 0. Let u = 1.3, d = 0.8, and n = 1.
a. Verify that the price of a European put is $7.471.
b. Suppose you observe a put price of $8. What is the arbitrage?
c. Suppose you observe a put price of $6. What is the arbitrage?