1.1 The price of a European call that expires in 1 year has a strike price of $30 and a price of $3. The underlying stock price is $29. The risk free interest rate with continuous compounding is 10%.

What is the price of a European put option contract that expires in 1 year with a strike price of $30? (1)

1.2 If the European put price that is quoted in the financial markets are $6, explain the arbitrage opportunity that exist. (2)

1.3 Use portfolio A and portfolio C to explain what transactions will be put in place immediately to make a riskless profit? (2)

1.4 At expiration of the option explain what the profit would be:

a) If the underlying spot price is higher than the strike price of $30 (2)

b) If the underlying spot price is lower than the strike price of $30 (2)