1 Question 1 . Suppose the market price of a stock is So at time to- . The stock does not pay dividends . The interest rate is r >0 (a constant) . All the options below have strike K >0 and expiration time T> te- 1.1 European call Assume that the value of the stock price is S>0.1. . Assume that the value of the strike price is K>O.leT-) .A European call trades today (time to) at a market price So-0.1 . We formulate a trading strategy as follows: (a) buy the call, (b) short sell one share of stock (c) save money in a bank. . The initial value of our portfolio is zero. Find a scenario where this strategy leads to a profit. Find a scenario where this strategy leads to a loss. .Note: if we do not exercise the option, we must buy back the stock, to cover the short sale. 1.2 American call . Assume that the value of the stock price is S1. * Assume that the value of the strike price is K > 0.1er(T-6) * An American call trades today (time to) at a market price = S,-0.1. We formulate a trading strategy as follows: (a) buy the call, (b) short sell one share of stock (c) save money in a bank. .The initial value of our portfolio is zero. Find a scenario where this strategy leads to a profit. .Find a scenario where this strategy leads to a loss. .Note: if we do not exercise the option, we must buy back the stock, to cover the short sale