Question: A European option to sell PBA Ltd shares for $6.50 in exactly three months is priced at 16c. The next dividend of 40c will be paid in six months, and PBA's shares are currently trading for $8.60.
i) If interest rates are 4% p.a. compounded quarterly, what is the no-arbitrage price of an option to buy PBA's shares for $3.50 in three months?
ii) What profit would be made if a put option was purchased at current prices and shares were priced at $8.13 in exactly three months' time?