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A one-year European call option with a strike(exercise) price of $40 is selling for $10. A one-year European put option on this stock with a

A one-year European call option with a strike(exercise) price of $40 is selling for $10.

A one-year European put option on this stock with a strike(exercise) price of $40 is selling for $3.

Both options are on the same stock.

The annually compounded risk-free rate is 5%.

a. Explain clearly how you would create a synthetic forward contract, today, to sell the stock in six months for a price of $50.

b. Explain clearly how you would create a synthetic forward contract, today, to buy the stock in six months for a price of $50.

c. Explain clearly how you would set up an arbitrage to profit from the prices and interest rate provided at the beginning of this problem.

d. Calculate the arbitrage profit from your strategy in part c.

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