00:01
In this question, we have been given following data for a stock.
00:04
The strike price for the stock is given to be $80.
00:09
Then we have exploration year is given to be 3 year and we have the spot price equals to $80.
00:19
Risk free interest rate.
00:22
So, this free rate which is denoted by small r, it is given as 2%.
00:28
Dividend is given to be dividend is $5 and put price we have been given equals to 4.
00:38
We have to check whether there is an arbitrage.
00:41
Correct.
00:42
So, first of all, we try to find what is the lower bound of the put option.
00:51
It is given by the following formula x e raised to r t plus the dividend over e raised to r t.
01:06
We know all the values calculating this, we get the lower bound as 5 .05 dollar.
01:13
Now we write down the arbitrage strategy because there is an arbitrage.
01:22
So, this is the first part...