Question: Let S = 100, K = 95, r = 8%, T = 0.5 and = 0. Let u = 1.3 and d = 0.8. (a)

Let S = 100, K = 95, r = 8%, T = 0.5 and = 0. Let u = 1.3 and d = 0.8.

(a) What are , B, and the premium for a European put?

(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?

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