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Calculate the upper and the lower bounds

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Reference no: EM132908243

You are provided with the following information on a put can a call option Put option contract contract Expiration = 6 months. Stock spot price = $53 Strike price = $50. Risk free rate (continuous compounding) = 6%. Expiration = 9 months. Stock spot price= $45. Strike price = $49. Risk free rate (continuous compounding) = 5%

1. Use the information provided and for both the call and put option contracts, calculate the upper and the lower bounds for:

a) European option contract

b) American option contract

2. What arbitrage opportunity exist if the 6-month European call option price is $2. Explain what profit can be made if St is higher than the strike price at maturity.

3. What arbitrage opportunity exist if the 9-month European put option price is $2. Explain what profit can be made if St is higher than the strike price at maturity.

Reference no: EM132908243

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