(2) Suppose that you observe the following: The price of a call option on the SF is 0.05 $/SF. The price of a put option on the SF is 0.035 $/SF. Both options have 9 months left to expiration and a strike price of 0.5 $/SF. The current spot rate is 0.49 $/SF. The $-risk free rate is 3.5% and the SF-risk free rate is 4.75%.

a) Is there an arbitrage opportunity? Why?

b) Calculate the arbitrage profits.

c) Show how you would set up the arbitrage positions up-front (at t=0) and the cash flows of these positions at the options expiration date (at t=9 months).