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Lower and upper bounds on the price of an american option

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An American option to buy PBA Ltd shares for $8.50 in exactly three months is priced at 48c. The next dividend of 50c will be paid in six months, and PBA's shares are currently trading for $8.70. Interest rates are 10% p.a. compounded quarterly.

i) What are the lower and upper bounds on the price of an American option to sell PBA's shares for $8.50 in three months?

ii) If the price of the put option was 35c, what initial position would exploit the arbitrage opportunity?

Reference no: EM132594451

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