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A nine-month European put option on a dividend-paying stock is currently selling for $2. The stock price is $23, the strike price is $25, and
A nine-month European put option on a dividend-paying stock is currently selling for $2. The stock price is $23, the strike price is $25, and the risk-free interest rate is 8% per annum. The stock is expected to pay a dividend of $1 two month later and another dividend of $1 eight months later. Explain the arbitrage opportunities available to the arbitrageur by clearly demonstrating what would happen under different scenarios.
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