Consider a four month European call option on a dividend
Subject: Business / Finance
Question
Consider a four month European call option on a dividend paying stock. The stock price is $70, the strike price is $65, and a dividend of $1.00 is expected in two months. The risk free interest rate is 9% per annum for all maturities.
a. What is the lower bound for the price of this call?
b.Assume that the call is currently selling for $3. Describe in detail with which strategy you can gain an arbitrage profit and how much this profit will be.
