Question

Thanks anyway!

For a stock, you are given:

•The stock’s price is 40.

•The continuously compounded risk-free interest rate is 5%.

•The stock’s continuous dividend rate is 2%.

•A one-year 35-strike European call option has premium of 10.

•A one-year 45-strike European call option has premium of 2.

Determine the lowest and highest arbitrage-free premiums for a one-year 40-strike European put option on the stock.

Answer 1

max{0, S0−P V0,T (Div)−P V0,T (K)}

Where,

S0 is Price of stock today = 40

PV0 (Div)is present value = 1.90

PV0 (K)is present value = 38.10

T is time to mature

K strike price

lower bound would be 4.08508

and higher bound would be 4.84123