Question: Let S = $100, K = $95, r = 8%, T = 0.5, and delta = 0. Also let u = 1.2, d = 0.8,

Let S = $100, K = $95, r = 8%, T = 0.5, and delta = 0. Also let u = 1.2, d = 0.8, n = 1.

a) Verify the price of a EUROPEAN PUT is $7.471

b) Observe a put price of $8. What is arbitrage?

-- For this question: I know we do reverse cash and carry since the put price $8 > $7.471

however, are the steps 1) Buy Put Option ( - $8) or (+ $8) ??

2) Buy DELTA shares ( - DELTA x 100)

3) Borrow B dollars ( + B) or (-B) ??

c) Observe a put price $6. What is arbitrage?

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