A 1-year call option sells for $4.50, with a strike price of $120. If the stock price is $117 per share, and the continuously compounded risk-free interest rate is 5%.

a. Explain why put-call parity must hold by illustrating the outcomes for the portfolios that make up the put-call parity equation. (3 marks)

b. What is the arbitrage strategy if a put option with a $120 strike price and 1-year until expiry sells for $1? (2 marks)c. What is the arbitrage strategy if a put option with a $120 strike price and 1-year until expiry sells for $2?