A stock trades at 14. The interest rate is 12% continuously compounded. A one year European put option with a strike price of 18 trades. The stock pays no dividends. (a)Compute the lower bound on the European put and the lower bound on the otherwise identical American put (b) If interest rates rose, but everything else remained the same, what would happen to the bounds in (a). Would they increase of decrease? (c) Assume the stock paid a dividend after six months. Relative to your answer in (a) would the lower bound of the European and American puts increase or decrease.
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