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> to. 1.1 European call .Assume that the value of the stock price is So >0.1 . Assume that the value of the strike price is K> 0.le"T-to). 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 So >0.1 . Assume that the value of the strike price is K>0.le (T-to) An American 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