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Part C: Properties of options and valuation (47 marks) Problem C1: Properties of options (10 marks) The price of a European call that expires in
Part C: Properties of options and valuation (47 marks) Problem C1: Properties of options (10 marks) The price of a European call that expires in six months and has a strike price of $72 is $3.73. The underlying stock price is $75, and a dividend of $2 is expected in four months. The risk-free interest rate is 5% per annum (cont. comp.). a. What is the price of a European put option on the same stock that expires in six months and has a strike price of $72 ? [1 mark] b. Let us assume some mispricing now. Show in detail the arbitrage strategies and the arbitrage profit for the following two scenarios for the European put option price in tabular form: [9 marks] 1) Scenario 1: The European put price is $2.0. 2) Scenario 2: The European put price is $0.4. Note: Presenting the solution in a text form and not in a tabular form will attract a penalty
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