(a) The minimum price that a six-month European put option should sell for in a rational market is?

(b) The minimum price that a six-month American put option should sell for in a rational market is?

(c) Can you come up with a replicating portfolio to borrow or lend some pounds and some dollars, to perfectly mimic the payoffs of this put option?

(d) How much is the cost of this put option?

(e) Show how to use the risk neutral probability to figure out the cost of put option.

(f) If currently a put option is already being sold at $0.05/, can you design an arbitrage strategy based on this price? Be specific.

(12 points) An investor is wondering if he should enter the option market for speculation or hedging purposes. Assume that the dollar-pound spot rate is $1.8/, and it might go up to $1.9/ or down to $1.7/ in the next 6 months. The annual U.S. dollar rate is 4% and the pound rate is 6%. The Strike price is $1.79/. (12 points) An investor is wondering if he should enter the option market for speculation or hedging purposes. Assume that the dollar-pound spot rate is $1.8/, and it might go up to $1.9/ or down to $1.7/ in the next 6 months. The annual U.S. dollar rate is 4% and the pound rate is 6%. The Strike price is $1.79/