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1. Contact Energy shares are trading at $8.21 per share. In one month's time, they will pay a 21 cent dividend. Interest rates (with continuous
1. Contact Energy shares are trading at $8.21 per share. In one month's time, they will pay a 21 cent dividend. Interest rates (with continuous compounding) are 0.5% per annum. A European put option is trading with strike price $8.40, maturing in 6 months time. (a) If the put option has a price of 40 cents, what is the arbitrage opportunity? (b) A European call option with strike price $7.80 and maturity in 6 months trades at 30 cents. What must the price of the put option be to avoid arbitrage opportunities? How would you trade if the put's price was 28 cents
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