The default free 3-month pure discount bond is traded at 98


The spot price of an asset is $2,500. The European call option on the asset with strike price $2,400 that expires in 6 months is traded at $225. The asset will pay a dividend in 3 months of $200. The default free 3-month pure discount bond is traded at $98 and the 6-month pure discount bond is traded at $95, both with face value $100. There is also a forward contract and a European put option on the asset with the same strike price as the call, both expiring in 6 months.

Answer the following:

(a) What should the forward price be and why?

(b) What should the price of the put option be?

(c) Describe the strategy you will follow and compute the profit of your strategy if the put option is traded at $205.

(d) Suppose that there are no 6-month pure discount bonds. How can you borrow synthetically over 6 months and at what interest rate if the put option is traded at $205?

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Business Management: The default free 3-month pure discount bond is traded at 98
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