Suppose a stock currently trades at a price of K150. The stock price can go up 33 percentor down 15 percent. The risk-free rate is 4.5 percent.
i. Use a one-period binomial model to calculate the price of a put option with exerciseprice of K150.
ii. Suppose the put price is currently K14. Show how to execute an arbitrage transaction that will earn more than the risk-free rate. Use 10,000 put options.
iii. Suppose the put price is currently K11. Show how to execute an arbitrage transaction that will earn more than the risk-free rate. Use 10,000 put options.