For a European put option on an index,the index level is 1,000,the strike price is 1050,the time to maturity is six months,the risk-free rate is 4% per annum,and the dividend yield on the index is 2% per annum.How low can the option price be without there being an arbitrage opportunity?
A) $50.00
B) $43.11
C) $29.21
D) $39.16

Question

Quizplus · Accepted Answer

A lower bound for the put option price is Ke^-rT-S₀e^-qT.In this case,K=1050,S₀=1000,T=0.5,r=0.04 and q=0.02.The lower bound is therefore 1050e^-0.04×0.5−1000e^-0.02×0.5=39.16.The put price cannot fall below this without there being an arbitrage opportunity.

For a European Put Option on an Index,the Index Level