Construct a portfolio and show that your portfolio

Reference no: EM132717561

Problem - Consider a European put option with strike price X = $50 and expiry in 5 months. The current stock price is S(0) = $40, the continuously compounded interest rate is r = 12%. One dividend of $5 is expected in two months and the other dividend of $6 is expected in four months.

Required -

(a) Which interval should P_E lie in so that there is no arbitrage opportunity?

(b) If P_E = $10, construct a portfolio and show that your portfolio gives an arbitrage opportunity.

Reference no: EM132717561

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