Question
An American option to buy PBA Ltd shares for $8.40 in exactly three months is priced at 46c. The next dividend of 50c will be
An American option to buy PBA Ltd shares for $8.40 in exactly three months is priced at 46c. The next dividend of 50c will be paid in six months, and PBA’s shares are currently trading for $8.55. Interest rates are 8% p.a. compounded quarterly.
i) What are the lower and upper bounds on the price of an American option to sell PBA’s shares for $8.40 in three months?
ii) If the price of the put option was 35c, what initial position would produce an arbitrage profit?
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Financial management theory and practice
Authors: Eugene F. Brigham and Michael C. Ehrhardt
12th Edition
978-0030243998, 30243998, 324422695, 978-0324422696
