5) Suppose that you observe the following:

The price of a call option on the is 0.00125$/. The option has 3 months left to expiration and a strike price of 0.00900 $/. A put with identical characteristics has a price of 0.00025$/. The current spot rate is 0.00950 $/. The $ risk free rate is 2.5% and the -risk free rate is 0.5%.

a) Is there an arbitrage opportunity? Why?

b) Calculate the arbitrage profits.

c) Show how you would set up the arbitrage position up-front (at t=0) and the cash flows of these positions at the options expiration date (at t=5months).