8. You observe that the price of a stock is $100 while the price of a call option at $100 is $9, with an expiration date one year from now. The price of an identical put on the stock is $4. The rate of interest is 8% pa, continuously compounded.

Do these prices indicate that the financial markets are in equilibrium? Show how you derived your answer. An arbitrage opportunity should exist, and if you set up the position correctly, you will always sustain profits. Verify that if you do set up a correct arbitrage, you will always sustain a profit. Use prices of the stock at $90 and $110 as of the expiration date of the options.