Suppose that the premium on a european put option p 3. the, Ask an Expert

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Suppose that the premium on a European put option, p = $3. The time to maturity, T = 1 year. The strike price is $20. The stock price of the underlying common stock is $12 today. The risk-free interest rate is 8% per annum. The stock does not pay dividends.

Observe that there is an arbitrage opportunity.

Clearly state what the trader would do to make a profit.

Make sure that you demonstrate the relation that must be satisfied to eliminate the arbitrage opportunity

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