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The price of a European call option on a stock with a strike price of $50 is $6. The stock price is $51, the continuously
The price of a European call option on a stock with a strike price of $50 is $6. The stock price is $51, the continuously compounded risk-free rate (all maturities) is 6% and the time to maturity is one year. A dividend of $1 is expected in six months. The fair price of a one-year European put option on the stock with a strike price of $50 is thus $3.06. If the put currently sells for $5, what should an investor do? [Hint: describe the steps to take advantage of any potential arbitrage opportunity and calculate the arbitrage profit if any]
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