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1. Consider contracts on natural gas maturing in 2 months with strike price $3/MMbtu. The call price is 0.3245 and the put price is 0.2625.

1. Consider contracts on natural gas maturing in 2 months with strike price $3/MMbtu. The call price is 0.3245 and the put price is 0.2625. The current futures price of a contract maturing in 2 months is 3.062.

a) What is the implied risk-free interest rate to avoid arbitrage? Hint: c0 - p0 = PV[ST] - PV[X] = (PV[ST] - PV[F0]) + (PV[F0] - PV[X]).

b) Suppose the risk-free rate is 3% per year. Describe an arbitrage opportunity.

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