For a European Put Option on an Index,the Index Level

question 11

Multiple Choice

For a European put option on an index,the index level is 1,000,the strike price is 1050,the time to maturity is six months,the risk-free rate is 4% per annum,and the dividend yield on the index is 2% per annum.How low can the option price be without there being an arbitrage opportunity?

• A) $50.00
• B) $43.11
• C) $29.21
• D) $39.16

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Definitions:

Market Power

The ability of a firm or group of firms to control prices and total market output, often as a result of monopoly or oligopoly market structures.

Average Total Cost

The total cost of production divided by the quantity of output produced.

Long-Run Equilibrium

A state in a market where supply equals demand, all firms are earning normal profits, and no firm has an incentive to change its output or price.

Profit-Maximizing Level

The profit-maximizing level is the point at which a firm achieves the highest possible profit, determined by analyzing costs and revenue to find the most efficient production volume.