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Question 3. - Part (A) Lower Bound of European Call Option Prices Part A is based on the following information: European call option price (c)

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Question 3. - Part (A) Lower Bound of European Call Option Prices Part A is based on the following information: European call option price (c) Spot price (SO) 20 Strike price (K) 15 Risk-free rate (r) 4% Time-to-maturity (1) Assume no dividend. Given the above information, apply the Lower Bound for European Call and verify if there is an arbitrage opportunity. If there is an arbitrage opportunity, discuss how you can construct an arbitrage strategy using the above information. Hint: review Class #6 Presentation, pp. 23 to 24. Question 3. - Part (B) Lower Bound of European Put Option Prices) Part B is based on the following information: European put option price (p) 12 Spot price (So) 100 Strike price (K) 120 Risk-free rate (0) 4% Time-to-maturity (1) Assume no dividend. Given the above information, apply the Lower Bound for European Put and verify if there is an arbitrage opportunity. If there is an arbitrage opportunity, discuss how you can construct an arbitrage strategy using the above information. Hint: review Class #6 Presentation, p. 25 to 26

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