Question: Let S = $100, K = $95, r = 8%, T = 0.5,and = 0.Let u = 1.3, d = 0.8,and n = 1. a.

Let

S

=

$100,

K

=

$95,

r

=

8%,

T

=

0.5,and

=

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?

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