Question
An American option to buy PBA Ltd shares for $8.50 in exactly three months is priced at 48c.The next dividend of 50c will be paid
An American option to buy PBA Ltd shares for $8.50 in exactly three months is priced at 48c.The next dividend of 50c will be paid in six months, and PBA's shares are currently trading for $8.70.Interest rates are 10% 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 $8.50 in three months?
ii)If the price of the put option was 35c, what initial position would exploit the arbitrage opportunity?
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Fundamentals of Investment Management
Authors: Geoffrey Hirt, Stanley Block
10th edition
0078034620, 978-0078034626
