1. Suppose the S&R index is 4,200, the continuously compounding risk-free rate is 5%, and the dividend yield is 0%. A 1-year 4,250-strike European call costs $275 and a 1-year 4,250-strike European put costs $110. Consider the strategy of buying the index, selling the 4,250-strike call, and buying the 4,250-strike put.

(a) What is the rate of return on this position held until the expiration of options?

(b) What is the arbitrage implied by your answer to part (a)?

(c) What difference between the call and put prices would eliminate arbitrage?