The current price of an asset is $100 and the asset pays continuous dividend at an...
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The current price of an asset is $100 and the asset pays continuous dividend at an annual dividend yield rate q = 3%. The future price movement of this asset in the coming year is simulated by 2-period binomial tree model (1 period = 6 months) with u = 1.1 and d = 0.8 (they are the adjusted growth rate due to the effect of dividend). The annual riskfree interest rate is r = 6%. Question Suppose that a 1-year European put option on this asset is currently sold at $9.6 and the strike price of the put option is $95, identify an arbitrage opportunity if any. Provide full justification to your answer. The current price of an asset is $100 and the asset pays continuous dividend at an annual dividend yield rate q = 3%. The future price movement of this asset in the coming year is simulated by 2-period binomial tree model (1 period = 6 months) with u = 1.1 and d = 0.8 (they are the adjusted growth rate due to the effect of dividend). The annual riskfree interest rate is r = 6%. Question Suppose that a 1-year European put option on this asset is currently sold at $9.6 and the strike price of the put option is $95, identify an arbitrage opportunity if any. Provide full justification to your answer.
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To determine if there is an arbitrage opportunity we need to compare the price of the put option to ... View the full answer
Related Book For
Foundations Of Finance
ISBN: 9780135160619
10th Edition
Authors: Arthur J. Keown, John H. Martin, J. William Petty
Posted Date:
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