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What is the no-arbitrage price of an option

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Reference no: EM132898689

A European option to sell PBA Ltd shares for $8.50 in exactly three months is priced at 20c. The next dividend of 50c will be paid in six months, and PBA's shares are currently trading for $8.65.

i) If interest rates are 4% p.a. compounded quarterly, what is the no-arbitrage price of an option to buy PBA's shares for $8.50 in three months?

ii) What profit would be made if a put option was purchased at current prices and shares were priced at $8.13 in exactly three months' time?

Reference no: EM132898689

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