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3. A 6-month European put option with a strike price of $20 sells for $1.44. The stock is priced at $17.50 and the risk-free rate
3. A 6-month European put option with a strike price of $20 sells for $1.44. The stock is priced at $17.50 and the risk-free rate is 10% per annum. (a) (5 points) What are the upper and lower bounds for this option? (b) (10 points) Is there an arbitrage opportunity in part (a)? If so, conduct an arbitrage with 100 shares of stock (clearly illustrate the steps of an arbitrage). What is the arbitrage profit?
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