This is a problem that has THREE questions.Therefore,pleasechoose THREE answers(one choice for each question)to get full credit for this questions,otherwise you will only get partial points.

A15-month European put option's underlying stock price is$38,while the strike price is$45and a dividend of$2is expected in7months.Assume that the risk-free interest rate is9%per annum with continuous compounding for all maturities.

1)What should be the lower boundfor a15-month European put option on a dividend-paying stock for no arbitrage?

2)If the put option is currently selling for$5,what arbitrage strategy should be implemented?

3)With the above arbitrage strategy,how much profit does the arbitrageur generate?

1)lower bound=$3.58

1)lower bound=$3.11

1)lower bound=$4.11

1)lower bound=$4.58

2) arbitrage strategy = short the put and buy the stock

2)arbitragestrategy=short the put and shortthe stock

2)arbitragestrategy=buythe put and shortthe stock

2)arbitragestrategy=buythe put and buythe stock

3)arbitrageur gain=$1.11in present value terms

3)arbitrageur gain=$2.11in present value terms

3)arbitrageur gain=$2.58in present value terms

3)arbitrageur gain=$1.58in present value terms