- a) Using no-arbitrage arguments and a suitably chosen notional portfolio(s), one can show that the...

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- a) Using no-arbitrage arguments and a suitably chosen notional portfolio(s), one can show that the price pt of a European put option exercisable at time T with a strike price K on an underly- ing non-dividend-paying share with price S, at time t satisfies the inequality p K e (T-t) St, where r is the continuously-compounded risk-free rate of interest per annum. How would you modify the chosen portfolio(s) and the inequality if you knew that holders of the share on the day before option expires are entitled to receive a cash dividend of 0.1 ST payable at time T? Explain carefully your reasoning. - a) Using no-arbitrage arguments and a suitably chosen notional portfolio(s), one can show that the price pt of a European put option exercisable at time T with a strike price K on an underly- ing non-dividend-paying share with price S, at time t satisfies the inequality p K e (T-t) St, where r is the continuously-compounded risk-free rate of interest per annum. How would you modify the chosen portfolio(s) and the inequality if you knew that holders of the share on the day before option expires are entitled to receive a cash dividend of 0.1 ST payable at time T? Explain carefully your reasoning.