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a) A European call option and put option on a stock both have a strike price of $20 and an expiration date in six months.
a) A European call option and put option on a stock both have a strike price of $20 and an expiration date in six months. The call option sells for $1.50 and the put has a premium of $1.80. The risk free rate is 8.5% per annum (continuously compounded), and the current stock price is $18.50. Outline the procedure for a trader to exploit any arbitrage opportunity that is present. [10 marks ] b) Using the data from Part A, describe what happens if the stock pays out a dividend of $0.3 in 1 months' time. [15 marks]
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