1. [8 marks} Noarbitrage option pricing. Suppose the Current price of a stock is $15. Consider a two state tree model dened such that after 3 months, the stock prioe may increase to $1? with a 25% probability or decrease to $113 with a T5533: probability. Consider a European call option, based on this stock, 1with strike price K=$14 and expiry time T = 3 months. Assume the riskfree interest rate is 1%. {a} [3 marks} Constmct a riskfree portfolio and use it to determine the Current noarbitrage 1value [fair Tmlue} of the option [i.e., at time t = D}. [b] {5 marks} Suppose such an option is priced on the market at I\" = 2.5 [i.e., higher than the noarbitrage prioe). Describe a strategy that 1will result in a guaranteed prot of oppmmimotsly \"1.25 per Option [in present value, i.e., at t = D}