This is a problem that has THREE questions. Therefore, please choose THREE answers (one choice for each question) to get full credit for this questions, otherwise you will only get partial points.

A 15-month European put option's underlying stock price is $38, while the strike price is $45 and a dividend of $2 is expected in 7 months. Assume that the risk-free interest rate is 9% per annum with continuous compounding for all maturities.

1) What should be the lower bound for a 15-month European put option on a dividend-paying stock for no arbitrage?

2) If the put option is currently selling for $5, what arbitrage strategy should be implemented?

3) With the above arbitrage strategy, how much profit does the arbitrageur generate?

		1) lower bound = $3.58
		1) lower bound = $3.11
		1) lower bound = $4.11
		1) lower bound = $4.58
		2) arbitrage strategy = short the put and buy the stock
		2) arbitrage strategy = short the put and short the stock
		2) arbitrage strategy = buy the put and short the stock
		2) arbitrage strategy = buy the put and buy the stock
		3) arbitrageur gain = $1.11 in present value terms
		3) arbitrageur gain = $2.11 in present value terms
		3) arbitrageur gain = $2.58 in present value terms
		3) arbitrageur gain = $1.58 in present value terms