Question: Let S0 = 110, K = $98 and r = 8% cont compounded, T = 0.5, = 0. Let u = 1.3, d = 0.8

Let S0 = 110, K = $98 and r = 8% cont compounded, T = 0.5, = 0. Let u = 1.3, d = 0.8 and n = 1 (1-period binomial tree model) a) Verify that the Premium of a European Put with above strike/maturity is $4.98. b) Suppose you observe a Put price of $6. Construct an arbitrage strategy. c) Suppose you observe a Put price of $4. Construct an arbitrage strategy.

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