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Let S = $100, K = $95, r = 8%, T = 0.5,and = 0.Let u = 1.3, d = 0.8,and n = 1. a.
Let
S
=
$100,
K
=
$95,
r
=
8%,
T
=
0.5,and
=
0.Let
u
=
1.3,
d
=
0.8,and
n
=
1.
a.
Verify that the price of a European put is $7.471.
b.
Suppose you observe a put price of $8. What is the arbitrage?
c.
Suppose you observe a put price of $6. What is the arbitrage?
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