European put option on dividend-paying stock for arbitrage

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Reference no: EM131917082

A 15-month European put option's underlying stock price is $38, while the strike price is $45 and a dividend of $2 is expected in 7 months. Assume that the risk-free interest rate is 9% per annum with continuous compounding for all maturities. 1) What should be the lower bound for a 15-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?

Reference no: EM131917082

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