1-A European call option with strike $40 expiring in 6 months is priced at $3.25. The underlying is a dividend paying stock, currently priced at $39.50. The stock is expected to pay dividends of $0.75 in 2 and 5 months. The risk-free rate is 3% per year. What is the price of a 6 month European put option with strike $40?

a) If the market value of a put option on the same underlying, having the same strike and expiring in 6 months is $3.5, what arbitrage opportunities exist?

b) If the market value of a put option on the same underlying and having same strike and expiring in 6 months is $6, what arbitrage opportunities exist?

Answer rating: 100% (QA)

To price the put option we can use the putcall parity formula Put price Stock price Call price Prese... View the full answer