A ten-month European put option on a dividend-paying stock is
currently selling for $4. The stock
price is $40, the strike price is $43, and the risk-free interest
rate is 6% per annum. The stock is expected
to pay a dividend of $2 two months later and another dividend of $2
eight months later. Explain the
arbitrage opportunities available to the arbitrageur by
demonstrating what would happen under
different scenarios.
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