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A non-dividend paying stock currently trades at 100 Kenya Shillings. Your market forecasts lead you to conclude that after three months the stock price may

A non-dividend paying stock currently trades at 100 Kenya Shillings. Your market forecasts

lead you to conclude that after three months the stock price may either increase to 110 Kenya Shillings with a 60% probability or decrease to 85 Kenya Shillings with a probability of 40%.

The continuously compounded risk free rate is 12% p.a. A European Call option

could be written on the stock with maturity is 6 months and the strike price is

99 Kenya Shillings.

(i) Explain whether there is arbitrage in the market

(ii) Using the Binomial Option Pricing Model (BOPM) and the concept of Put

Call Parity Calculate the price of a standard European Put option written

on the underlying with a similar maturity and strike price to the Call Option

described above

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