The price of a stock, which pays no dividends, is $76 and the strike price ofa10-month European put option on the stock is $90. The risk-free rate is 3.5%(continuously compounded). (1) Compute the lower bound for the option.(2) If the European put option price is $10, is there an arbitrage opportunity? How to takeadvantage of this arbitrage opportunity? What is the profit? (Please detail the actionsto be taken today and at the maturity of the option and include all the relatedcomputations)

The price of a stock, which pays no dividends, is $76 and the strike price ofa10-month European put option on the stock is $90. The risk-free rate is 3.5%(continuously compounded). (1) Compute the lower bound for the option.(2) If the European put option price is $10, is there an arbitrage opportunity? How to takeadvantage of this arbitrage opportunity? What is the profit? (Please detail the actionsto be taken today and at the maturity of the option and include all the relatedcomputations)

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter7: Corporate Valuation And Stock Valuation

Section: Chapter Questions

Problem 16P: Crisp Cookware’s common stock is expected to pay a dividend of $3 a share at the end of this year...

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Crisp Cookware’s common stock is expected to pay a dividend of $3 a share at the end of this year (D1 = $3.00); its beta is 0.8. The risk-free rate is 5.2%, and the market risk premium is 6%. The dividend is expected to grow at some constant rate g, and the stock currently sells for $40 a share. Assuming the market is in equilibrium, what does the market believe will be the stock’s price at the end of 3 years (i.e., what is )?
The price of a stock, which pays no dividends, is $30 and the strike price of a three-year European call option on the stock is $27. The risk-free rate is 8% (continuously compounded). Which of the following is a precise lower bound for the option such that there are arbitrage opportunities if the price is below the lower bound and no arbitrage opportunities if it is above the lower bound? Round your answer to 2 decimal places. Question 12Answer a. $8.76 b. $8.42 c. $8.57 d. $8.70
The price of a stock, which pays no dividends, is $30 and the strike price of a three-year European call option on the stock is $27. The risk-free rate is 8% (continuously compounded). Which of the following is a precise lower bound for the option such that there are arbitrage opportunities if the price is below the lower bound and no arbitrage opportunities if it is above the lower bound? Round your answer to 2 decimal places. a. $8.76 b. $8.70 c. $8.42 d. $8.57
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