1 Suppose A Stock Currently Trades At A Price Of K150 The Stock Price Can Go Up 33 P 2717504

1. Suppose a stock currently trades at a price of K150.The stock price can go up 33 percentor down 15 percent. The risk-free rate is4.5 percent.

i. Use aone-period binomial model to calculate the price of a put option with exercisepriceof K150.

ii. Suppose the putprice is currently K14. Show how to execute an arbitrage transaction that willearn more than the risk-free rate. Use 10,000 put options.

iii. Suppose the putprice is currently K11. Show how to execute an arbitrage transaction that willearn more than the risk-free rate. Use 10,000 put options.

 

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