A stock is currently selling for $30 and is expected to pay a dividend of...
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Finance
A stock is currently selling for $30 and is expected to pay a dividend of $2.50 in two months. At-the-money European call and put options with an expiration date of three months are both selling for $1. The continuously compounded risk-free rate is 5% per annum.
a) Using put-call parity, identify the arbitrage opportunity and describe the transactions a trader would have to carry out to make a riskless profit
b) Calculate the present value of the profit the trader would earn, assuming that at the maturity date of the options the stock price goes to (i) $31 and (ii) $29.
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