3.1. The time 0 stock price is S(0) = 100 and the interest rate over each time step is R = 1.5%. (a) Suppose that European puts with strike price K = 100 to be exer- cised at time step T = 10 trade at the price of 1.3503 at time 0, while European calls with the same strike price and exercise time trade at 15.0952 at time 0. Construct an arbitrage strategy if one exists. (20 marks) (b) Suppose that European calls with strike price K = 120 to be ex- ercised at time step T = 9 trade at a price of 14.7685 at time 0. Compute the arbitrage-free time 0 price of a European option whose payoff is S(T) - K| (a straddle) with the same strike price K = 120 and exercise time T = 9. (15 marks) 3.1. The time 0 stock price is S(0) = 100 and the interest rate over each time step is R = 1.5%. (a) Suppose that European puts with strike price K = 100 to be exer- cised at time step T = 10 trade at the price of 1.3503 at time 0, while European calls with the same strike price and exercise time trade at 15.0952 at time 0. Construct an arbitrage strategy if one exists. (20 marks) (b) Suppose that European calls with strike price K = 120 to be ex- ercised at time step T = 9 trade at a price of 14.7685 at time 0. Compute the arbitrage-free time 0 price of a European option whose payoff is S(T) - K| (a straddle) with the same strike price K = 120 and exercise time T = 9. (15 marks)