1. The current price of a non-dividend paying stock is $2600. The volatility of the stock is 20% per annum: o[R = 20%. The annually compounded risk-free interest rate is r = 2%. For this question, assume that European options on the stock exist and you will be considering the European options with a maturity T of one year and a strike price X = $2650. (a) Assuming that the assumptions underlying the Black-Scholes formula holds, compute the no-arbitrage prices of a European call option and a European put option on the stock. Show your steps. (b) Suppose that the market prices for the call and the put options in (a) are: C = 210, and P = 203. Assume there are no transaction costs. Using the put-call parity, show that arbitrage profits exist under these conditions and explain how you would exploit the opportunity to earn such a risk-free profit. 1. The current price of a non-dividend paying stock is $2600. The volatility of the stock is 20% per annum: o[R = 20%. The annually compounded risk-free interest rate is r = 2%. For this question, assume that European options on the stock exist and you will be considering the European options with a maturity T of one year and a strike price X = $2650. (a) Assuming that the assumptions underlying the Black-Scholes formula holds, compute the no-arbitrage prices of a European call option and a European put option on the stock. Show your steps. (b) Suppose that the market prices for the call and the put options in (a) are: C = 210, and P = 203. Assume there are no transaction costs. Using the put-call parity, show that arbitrage profits exist under these conditions and explain how you would exploit the opportunity to earn such a risk-free profit