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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.

Basic Finance, Finance

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