Cannabis/Marijuana and hemp have a long cultural history in China. While the consumption of Marijuana is currently illegal in China, it has recently been legalized in Canada. 2020 was a tough year for Canadian Marijuana growers, though. High expectations around the legalization in October 2018 lead to initial strong market performance in 2018 and 2019. However, due to Health Canadas well documented screw-up in providing licenses, some growers failures to adhere to the regulation (good summary here) and the subsequent drop in customer demand due to COVID19-restrictions, many of the former high-flyers in the market (no pun intended) have woken up with a hangover in 2020. Overall industry performance has been dismal for 2020. Several companies are planning or have already performed reverse stock splits to satisfy listing requirements. Here we will focus on HEXO, a Canadian cannabis producer.

(a) (5 points) In September of 2020 you bought 120 HEXO stock put option contracts traded at the Montreal Exchange with strike price of $3 and an expiration date of February 12, 2021. Based on this article how would your option contract change, if the companys proposal as mentioned in the article would have been approved at the shareholder meeting in December 2020? What was the split ratio finally approved by the shareholders, when did your option contract get adjusted and how did your position look like on the date of expiration? Company Press Releases.

(b) (2 points) Suppose you are now planning to purchase another put option and after checking out option prices you find a European put with strike price $11 and expiration in 9 months for a price of $0.14. HEXOs stock currently trades at $10.65. Show that the option price violates the put option bounds.

(c) (7 points) Describe an arbitrage strategy and calculate its profit using one put option contract